99-01: Year 2000 (Y2K) Coverage and Endorsement
**This bulletin is no longer applicable, effective 10/1/2000**
*Please see the notice of modifications to this bulletin.
To: All Insurance Companies Licensed to Write Property & Casualty Insurance in Missouri
From: Susan M. Schulte, Property & Casualty Section Chief
Re: Year 2000 (Y2K) Coverage and Endorsements
Date: January 15, 1999
This Bulletin is designed first, to provide insurers with guidance regarding the filing of rules, endorsements and coverage forms relating to the Year 2000 (Y2K) exposure, and second, to help ensure that Missouri consumers are treated fairly by insurers regarding their Y2K coverage.
To date, the Missouri Department of Insurance (Department) has received numerous insurance filings from the Insurance Services Office, Inc. (ISO) regarding Y2K computer issues. These filings have included endorsements and amendments to ISO's manual rules relating to coverage for the following lines of insurance: businessowners property and liability, commercial automobile garage liability, farm and inland marine coverage, commercial property, commercial general liability, and medical professional liability.
It is unclear to the Department whether individual insurers will adopt ISO's Y2K endorsements, draft their own Y2K endorsements, or continue to renew their policies without any changes. Where Y2K endorsements are adopted, it is also unclear to the Department under what underwriting conditions and other circumstances they will be issued.
The Department does not encourage insurers to use endorsements to limit coverage to insureds for Y2K losses. If, however, an insurer uses such endorsements, the Department strongly recommends the insurer follow the guidelines set forth in parts II and III of this bulletin in order to comply with Missouri statutes and to help consumers make informed, rational decisions when purchasing coverage.
I. DATA REPORTING
Currently, major efforts are being undertaken world-wide to upgrade computer systems to avoid failures due to the Y2K problem, but at this stage, we cannot know how successful these efforts will be. Given the potential impact of uncorrected computer problems and the high level of public interest in this unique, one-time event, the Department has decided to ask insurers to begin collecting and reporting certain data on the extent of the coverage, or absence thereof, for Y2K-related policies and losses. Our request is that such data be provided to the Department bi-annually until the concern over this issue has diminished. The first data report should be submitted on July 30, 1999, for the first half of 1999 and the second report should be submitted on January 30, 2000, for the second half of 1999. This same reporting schedule will be observed for at least one additional year, unless insurers are otherwise notified by the Department. This report should be sent to: Missouri Department of Insurance, Attn: Susan Schulte, P&C Section Chief, P.O. Box 690, Jefferson City, MO 65102. The report may be submitted on a disk in Excel format or on paper. This report set forth in Exhibit I may also be found on our website. Failure to file the reports in a timely manner may result in the issuance of an administrative subpoena to an officer of the insurer for the officer's personal appearance at the Department's offices in Jefferson City, Missouri, to answer questions regarding the insurer's plans regarding Y2K issues. See Section 374.190, RSMo.
II. POLICYHOLDER DISCLOSURE
(a) Missouri's Unfair Trade Practice Act makes it unlawful for an insurance company to make any statement or omission which misrepresents the benefits, advantages, conditions or terms of a policy. See section 375.936(6)(a), RSMo. The Department may find one or more of the following acts or omissions to be unlawful under this Act: 1) failing to notify applicants or insureds of a Y2K exclusion or limitation; 2) waiting until the applicant or insured cannot as a practical matter look for other insurance before informing the applicant or insured of a Y2K exclusion or limitation; or 3) making an inadequate disclosure of a Y2K exclusion or limitation to an applicant or insured. Accordingly, the Department strongly recommends that insurers follow the guidelines in subparts (b) and (c) below; proof of compliance with these guidelines will be a safe harbor from a charge of an unfair act or practice for misrepresentation and false advertising of insurance policies relating to the issuance or renewal of a policy with Y2K exclusions or limitations.
(b) An insurer should notify its insureds, in writing, at either the issue date of a new policy or at least sixty (60) days before the renewal of an existing policy, whenever a policy is issued or renewed with a Y2K exclusion endorsement or Y2K limiting endorsement (i.e. an endorsement allowing a "buy-back" of coverage.) The Department has decided that ISO's "Policyholder Notification" contains the minimum disclosure language for such notification to the insured. This or a comparable notice should be mailed to the insured and an exact copy thereof mailed to the insured's broker, if known, or the agent of record. Proof of such notice should be retained in the insurer's underwriting files on the insured. It is preferred that the notice be sent to the insured using "certified mail"; however, "proof of mailing" will be acceptable. (Note: For policies issued or renewed after January 1, 1999, but before an insurer has received this Bulletin, the prior notification suggested in this paragraph will not be possible. Under this scenario, an insurer can nevertheless come within the Department's safe harbor by notifying the policyholder of the existence of any Y2K exclusion or limitation endorsement, through a separate follow-up correspondence, as soon as possible after receiving this Bulletin. While such an after-the-fact disclosure is less than ideal, from the Department's perspective, it will be worth the effort if it helps reduce the frequency of subsequent coverage disputes and litigation.)
(c) Y2K exclusion endorsements should only become effective at the renewal date of the policy. These types of endorsements should not be added mid-term. In addition to constituting a possible unfair trade practice, inserting a Y2K endorsement mid-term may also be deemed a failure to carry out contracts in good faith, in violation of Section 375.445, RSMo.
III. POLICY FORM FILINGS
The Department is concerned that wholesale or indiscriminate use of Y2K exclusions or limitations, (such as issuing Y2K exclusions or limitations without a case-by-case assessment of the loss characteristics of each insured), may be unfairly discriminatory under Section 379.318 and 379.470, RSMo. In addition, using Y2K exclusions or endorsements in connection with personal lines may not be "reasonably adequate to meet the needed requirements of those insured," as required by Section 375.920, RSMo. Because of these concerns, the Department strongly recommends insurers comply with subparts (a) - (e) below, regarding form filings and underwriting practices.
(a) Insurers should avoid "blanket" filings which exclude or limit coverage on all policies.
(b) Insurers should, instead, underwrite their various books of business to determine the appropriate use of the Y2K endorsements, and should discuss this underwriting analysis in the documentation supporting their filings. Insurer form filings should specify the lines of coverage affected by the exclusion, the specific types of insureds the insurer is targeting for exclusion and specify the reasons the exclusions are needed.
(c) Y2K endorsements on residential or automobile policies should be avoided, except for certain business-related risks where the insurer can identify and justify the need for such an endorsement.
(d) The insurer should maintain documentation in its files which supports each decision that concludes an individual risk warrants the exclusion or limiting endorsement based on the exposure presented by that particular risk.
(e) Reference filings by insurers of the ISO Y2K endorsements or individual insurer filings of Y2K endorsements will be given priority status for review by the Department. Failure by an insurer to provide the information required by this Bulletin may result in the return of the filing to the insurer stamped "Incomplete."
The Department recognizes that individual Y2K exclusion or limitation endorsements which fail to comply with the guidelines set forth in this bulletin may not necessarily violate the laws cited. Before making any determination that issuance of a Y2K exclusion or limitation endorsement violates a law enforced by the Department, the Department will evaluate all relevant facts. However, noncompliance with the guidelines set forth in this Bulletin will receive the Department's close scrutiny.
Questions regarding this Bulletin should be directed to the Property & Casualty Section, telephone (573) 751-3365, or fax (573) 526-4839.