The Office of General Counsel issued the following informal opinion on May 17, 2002, representing the position of the New York State Insurance Department.

Re: Terrorism Exclusions in Excess Line and Free Trade Zone Policies

Questions Presented:

1. May the ISO terrorism exclusion be included in an insurance policy written on a special risk insurance basis?

2. May a terrorism exclusion be included in an insurance policy written on an excess line basis covering property risks located in New York?

Conclusion:

1. A special risk insurer is subject to all of the requirements applicable to any other authorized insurer in regard to terms and conditions of policies. No exclusion is permissible in regard to the peril of fire and certain statutorily required coverages. For any other risk, an exclusion that is misleading or violative of public policy is not permissible. The ISO exclusion has been disapproved by the Superintendent as being misleading and against public policy.

2. There is no general prohibition against a terrorism exclusion in a policy written on an excess line basis but such an exclusion would not be permissible in regard to the peril of fire and certain statutorily required coverages.

Facts:

This was a general inquiry and no specific facts were provided. The inquirer specifically inquired about public entity coverage. However, this answer is not limited to such coverage. Additionally, we note that while the inquirer used the term "surplus lines", New York uses the term "excess line" instead.

Analysis:

1. Special risk insurance ("Free Trade Zone"): Under Article 63, the Superintendent may permit exemption from filing requirements only with respect to rates and policy forms, in regard to special risks. The Superintendent implemented Article 63 in promulgating Regulation 86. "Special risk" is defined in § 16.1 of Regulation 86, and establishes two classes of special risks. A Class 1 risk is one that has a premium of a size specified in § 16.1(f)(1) and a Class 2 risk is one that is included on the list contained in § 16.12(e) or added by the Superintendent pursuant to § 16.8(f). An insurer must be issued a special risk insurance license by the Superintendent under § 6302 in order for the insurer to utilize such exemption. Special risk insurance is commonly referred to as "Free Trade Zone".

The Article 63 exemption relates only to rate and form filing requirements and an insurer must comply with all other requirements of the Insurance law, including, among other things, minimum standard policy provisions, which is specifically emphasized in § 16.4 of Regulation 86. Section 16.10 affirmatively provides that a special risk insurer shall be subject to all other provisions of the Insurance Law and regulations thereunder that are not inconsistent with Insurance Law Article 63 or Regulation 86.

The Insurance Law and regulations issued thereunder do not expressly address terrorism exclusions. However, N.Y. Ins. Law § 3404 (McKinney 2000), provides that "[n]o policy or contract of fire insurance shall be made, issued or delivered on any property in this state unless it conforms as to all provisions, stipulations, agreements and conditions with such form of policy…" that is set forth in Section 3404 ¹ Fire insurance coverage today is not usually provided on a stand-alone fire insurance policy, but rather as part of a multi-peril policy, that provides coverages in combination with other kinds of insurance. In either the stand-alone or multi-peril case, § 3404(f)(1) permits an insurer to deviate from the specific language of the standard fire policy; provided however that, among other things, "(A) the policy contains, with respect to the peril of fire, terms and conditions no less favorable to the insured than those contained in the standard fire policy."

Even though the specific language of the standard fire policy is not mandated, no insurance policy may provide coverage with respect to the peril of fire that is not at least as favorable to the insured as provided in the standard fire policy. Accordingly, in regard to the peril of fire, no insurer may issue a policy on any property in this state containing an exclusion not specifically permitted under § 3404.

A terrorism exclusion is not one of the permissible exclusions that are specified in the standard fire policy and the addition of such exclusion would have the effect of narrowing the coverage otherwise provided under the standard fire policy. Therefore, no policy of fire insurance made, issued or delivered on any property in this state may contain a terrorism exclusion with respect to the peril of fire. ²

In addition there are certain statutorily mandated coverages, such as certain types of motor vehicle insurance (including statutory automobile liability, no-fault insurance and uninsured motorist coverage) and workers’ compensation insurance³ where a terrorism exclusion is not permitted.

In regard to perils other than fire, there is nothing in the Insurance Law that specifically restricts or otherwise limits the exclusions that may be contained in a property insurance policy in this regard or that would otherwise require special risk insurer to provide coverage for damage or loss resulting from acts of terrorism. However, N.Y. Ins. Law § 2307(b) (McKinney 2000) states that a policy may not be misleading or violative of public policy and, although a special risk insurer is exempt from filing policy forms for approval by the Superintendent, these standards are nonetheless applicable since, as noted, Article 63 exempts special risk insurers from only filing requirements, not compliance and standards requirements as expressed in the Insurance Law and regulations promulgated thereunder.

Pursuant to Article 23, the Superintendent has rejected certain filings containing terrorism exclusions on the grounds that the policy forms were misleading and against public policy. Most notably, the Superintendent rejected the Insurance Services Office (ISO) terrorism form filings pursuant to § 2307(b), stating that, among other considerations, the definition of terrorism was overly broad and may result in exclusion of losses from destructive acts that fall well outside the public’s perception of what constitutes an act of terrorism. Accordingly, a special risk insurer may not utilize the ISO filing.

While Articles 23 and 63 do not contain a specific administrative procedure for the Superintendent to require a special risk insurer to withdraw a policy form, the Superintendent, pursuant to N.Y. Ins. Law Art. 24 (McKinney 2000) may conclude, after a hearing, that an insurer is engaged in a "determined violation", which is defined in N.Y. Ins. Law § 2402(c) (McKinney 2000) to be "any unfair method of competition or any unfair or deceptive act or practice, which is not a defined violation but is determined by the superintendent pursuant to section [2405] of this article to be such method, act or practice." The use of a policy form that is misleading or against public policy would clearly come within the scope of such article. In addition, the Superintendent may penalize an insurer under N.Y. Ins. Law § 109 (McKinney 2000) for any violation of Article 23 or 63, or of Regulation 86.

2. Excess line insurance: While New York authorized insurers are generally required to obtain the Superintendent’s approval to use its insurance policy forms in this state (special risk insurance being a notable exception), insurance policy forms for policies issued by unauthorized insurers through a New York licensed excess line broker, in accordance with the provisions of N.Y. Ins. Law § 2105 (McKinney 2000 & Supp. 2001-2002), N.Y. Ins. Law § 2118 (McKinney 2000 & Supp. 2001-2002) and N.Y. Comp. Codes R. & Regs. tit. 11, Part 27 (1999) (Regulation 41), are not approved by the Superintendent of Insurance.

This does not mean that excess line policies may provide any kinds of terms and conditions that the insurer wants since a particular statute or regulation may be applicable to such policies. For example, N.Y. Comp. Codes R. & Regs. tit. 11, § 27.11(a) (1999) of Regulation 41 provides:

As noted above, a terrorism exclusion is not one of the permissible exclusions that are specified in the standard fire policy and the addition of such exclusion would have the effect of narrowing the coverage otherwise provided under the standard fire policy. Therefore, no policy of fire insurance made, issued or delivered on any property in this state may contain a terrorism exclusion with respect to the peril of fire. Since a policy of insurance procured by an excess line broker in New York is a policy that is made, issued or delivered in this state, § 3404 would apply. Accordingly, no such policy may contain a terrorism exclusion with respect to the peril of fire on any property in this state.

In regard to perils other than fire, there is nothing in the Insurance Law that specifically restricts or otherwise limits the exclusions that may be contained in a property insurance policy in this regard or that would otherwise require an excess line insurer to provide coverage for damage or loss resulting from acts of terrorism. Hence, absent an amendment to the law or regulations, a terrorism exclusion would be permissible in an excess line policy in regard to perils other than fire.

Additionally, as noted above, no terrorism exclusion would be permissible for certain statutorily mandated coverages. This opinion should not be construed to limit the Superintendent's authority to determine that a terrorism exclusion would be misleading or against public policy.

For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.

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¹ The one exception is for a policy issued pursuant to N.Y. Ins. Law § 3102 (McKinney 2000), which mandates the use of readable and understandable insurance policies. Such policies are nonetheless required to comply with § 3404(f)(1), discussed below.

² In all respects in which a provision of an insurance policy violates the requirements or prohibitions of the Insurance Law, the policy is enforceable as if it conformed to such requirements or prohibitions. See N.Y. Ins. Law § 3103 (McKinney 2000); Bersani v. General Accident Fire & Life Assurance Corp., 36 N.Y.2d 457, N.Y.S.2d 108 (1975).

³ Workers’ compensation may not be written as a special risk.