DEPARTMENT OF BANKING AND INSURANCE
DIVISION OF INSURANCE
Homeowners' Insurance: Standards for Underwriting Guidelines
Proposed New Rules: N.J.A.C. 11:1-40
Authorized By: Karen L. Suter, Commissioner, Department of Banking and Insurance
Authority: N.J.S.A. 17:1-8.1, 17:1C-15e, 17:17-10, 17:22-6.14a1 through a3 and 17:33B-30
Proposal Number: PRN 2001-139
Submit comments by June 6, 2001 to:
Fax: (609) 292-0896
The agency proposal follows:
N.J.S.A. 17:22-6.14al through 3 authorize the Commissioner of Banking and Insurance ("Commissioner") to require that all property and casualty insurers doing business in New Jersey, upon request, file with the Department copies of their current underwriting guidelines and any amendments or modifications thereof; require that such guidelines not be arbitrary, capricious or unfairly discriminatory; provide standards with respect to notices of nonrenewal; and authorize the Commissioner to promulgate and enforce such rules as may be necessary to implement the law.
In 1995, the Department of Banking and Insurance ("Department") had proposed N.J.A.C. 11:1-40 to provide uniform standards applicable to all insurers for the establishment, modification and implementation of underwriting guidelines to assure compliance with the statutory requirements. See 27 N.J.R. 2530(a). As a result of public comments received, and further review of the Department, the rules were reproposed on May 4, 1998. See 30 N.J.R. 1499(a). As a result of public comments received on the reproposed rules, and further review and evaluation of the proposed rules, the Department has determined to propose these new rules governing the requirements for underwriting guidelines for homeowners' insurance to address significant problems and issues relating to the provision of homeowners’ insurance. The Department will continue to monitor complaints and issues that may arise regarding the writing of homeowners’ insurance and will consider appropriate rules or amendments for proposal to address those issues.
The proposed rules thereby provide for the fair and equitable treatment of applicants for coverage and policyholders, and also promote the goal of fair competition among insurers.
Proposed N.J.A.C. 11:1-40.1 sets forth the purpose and scope of the rules and provides that the rules apply to all authorized and admitted property/casualty insurers transacting homeowners' insurance, that is, not to eligible surplus lines insurers, and to all criteria that will be used by an insurer in determining whether to write or renew a risk or to assign a risk to a particular rating plan.
Proposed N.J.A.C. 11:1-40.2 provides definitions of terms used in the subchapter.
Proposed N.J.A.C. 11:1-40.3 sets forth general requirements applicable to underwriting guidelines and specifies that: (1) all guidelines must be maintained by the insurer in writing, with the effective dates of guidelines identified; (2) copies of guidelines must be furnished to the Commissioner and to an applicant, upon request; and (3) all declinations and terminations must identify the specific underwriting guideline and factual basis relied upon by the insurer. In addition, this section requires that an insurer be able to demonstrate that the risk characteristic on which a guideline is based is specifically applicable and related to the writing of homeowners' coverage, and is not a pretext to another purpose.
Proposed N.J.A.C. 11:1-40.4 sets forth standards for underwriting guidelines and requires, for example, that guidelines contain the specific criteria that the insurer will use to accept or reject risks, that the guidelines applicable to specific rating plans be clearly identified and that such rating plans be mutually exclusive with respect to covered risks, and that guidelines be based on verifiable measurements and not subjective judgments.
Proposed N.J.A.C. 11:1-40.5 describes prohibited guidelines and practices including the following: (1) using gender, marital status, race, color, creed, age, or national origin as an underwriting factor; (2) refusing to offer or continue to write a risk based on the fact that the prospective insured was last insured in the residual market; and (3) denying or limiting coverage based solely on the geographical location of the risk, membership in an organization, except where such membership is a uniform requirement of the insurer as a condition of providing insurance, or the presence of above-ground or underground storage tanks when as part of the heating structure or system for the property. In addition, the proposed rule provides that an insurer shall not decline or nonrenew coverage based on claims filed by the insured, unless the insurer’s underwriting guidelines articulate the standards to be utilized. Further, the proposed rule provides that where an insurer fails to apply an existing guideline which the insurer knows or reasonably should have known would permit it to decline or terminate coverage, the insurer shall be prohibited form future application of the guideline, except where the insurer provides adequate prior notice to the insured in accordance with the proposed rule.
Proposed N.J.A.C. 11:1-40.6 allows insurers to apply to the Commissioner for relief from some of the rules' requirements under certain circumstances. Such circumstances may include loss of available insurance capacity, loss of reinsurance or a significant change in the insurer's financial condition. The rule provides specific guidelines with respect to such applications for relief.
Proposed N.J.A.C. 11:1-40.7 sets forth enforcement and penalty provisions.
These proposed new rules provide standards for property and casualty insurers for permissible parameters in developing underwriting guidelines for homeowners' insurance. Insurers shall benefit from these rules by having published standards and prohibitions to assist them in establishing or modifying their underwriting guidelines.
The public will derive a significant benefit from these rules, because the rules will prevent the application by insurers of underwriting factors which are arbitrary, capricious or unfairly discriminatory.
Insurers will realize an economic impact from the implementation of these rules in that they will incur the expense of establishing and maintaining written underwriting guidelines which conform to these proposals. To the extent insurers must alter, if necessary, their underwriting guidelines or manner of transacting business to ensure that practices incompatible with this subchapter do not occur, they will bear expense. However, the overall economic impact to insurers should be minimal for the proposed new rules merely clarify existing law which insurers are already required to address; and any additional expense incurred to alter guidelines or cease unacceptable practices will be a one time initial capital expenditure. There are no additional annual costs of compliance emanating from these proposed new rules.
The Department will incur the costs of the implementation and enforcement of these rules.
These proposed new rules have a positive economic effect on insureds and the public in that they serve to enhance and facilitate the opportunities for obtaining homeowners' insurance coverage.
Federal Standards Statement
A Federal standards analysis is not required because the proposed new rules establish criteria for acceptable underwriting guidelines for homeowners' insurance, and are not subject to any Federal requirements or standards.
The Department does not believe that any jobs should be generated or lost as a result of the proposed new rules. The proposed new rules set forth the standards for acceptable underwriting guidelines for homeowners' insurance. Since insurers currently employ underwriting guidelines in writing homeowners' risks, the Department believes that insurers should currently employ the necessary professional services to comply with these proposed new rules.
To the extent the proposed new rules further uniformity and consistency in the writing of homeowners' insurance in this State, the insurance market may be further stabilized. This, in turn, could contribute to a healthy business climate in New Jersey.
The Department invites commenters to submit any data or studies concerning the jobs impact of these proposed new rules together with their written comments on other aspects of the proposal.
Agriculture Industry Impact
There is no agricultureal industry impact from the proposed new rules.
Regulatory Flexibility Statement
A regulatory flexibility analysis is not required because the proposed new rules will not apply to any "small business" as that term is defined in the Regulatory Flexibility Act, N.J.S.A. 52:14B-16, as there are no insurers resident of this State and subject to these proposed rules that employ fewer than 100 people.
Full text of the proposal follows (additions indicated in boldface thus; deletions indicated in brackets [thus]):l follows:
SUBCHAPTER 40 [(RESERVED)] HOMEOWNERS' INSURANCE: STANDARDS FOR
11:1-40.1 Purpose and scope
(a) The purpose of this subchapter is to implement N.J.S.A. 17:22-6.14a1 and 6.14a2, which require that an insurer's underwriting guidelines not be arbitrary, capricious or unfairly discriminatory, by requiring that each insurer establish and maintain, in writing, all of the underwriting guidelines that it will use to accept or reject new and renewal homeowners' insurance business or to assign a risk to a specific affiliated insurer or rating plan. This subchapter further requires that underwriting guidelines be applied to risks by the insurer in a uniform, objective manner, except as otherwise specifically authorized by law or order of the Commissioner.
(b) This subchapter applies to all property and casualty insurers transacting the business of homeowners' insurance in New Jersey.
(c) These rules are not intended to be exclusive or exhaustive, and the Commissioner may also consider other provisions of statutes and rulesegulations to be applicable. In particular, this subchapter in no way abrogates or limits N.J.A.C. 11:1-20 and 22 in their application to the renewal, cancellation and nonrenewal of homeowners' insurance policies.
The following words and terms, when used in this subchapter, shall have the following meanings unless the context clearly indicates otherwise:.
"Affiliates" means two or more individual insurers that are transacting property and casualty insurance in New Jersey and that are under common ownership and/or common management.
"Applicant" means a person seeking homeowners' insurance or a policyholder.
"Cancellation" means the termination of a homeowners' insurance policy by the insurer on a mid-term basis.
"Commissioner" means the Commissioner of the New Jersey Department of Banking and Insurance.
"Decline(s)," "declination," "denied" or "denial" means:
1. Refusal by an insurer to issue a homeowners' insurance policy to an applicant upon receipt of a written application for homeowners' insurance;
2. The offer of homeowners' insurance coverage with less favorable terms or conditions, including rates, than those terms or conditions for which a written application has been made and which are available to the applicant pursuant to the insurer's rating plan as filed and approved by the Department; or
3. The refusal by an insurer or insurance producer to provide, upon the request of an applicant, an application form or other means of making an application or request for homeowners' insurance coverage.
"Department" means the New Jersey Department of Banking and Insurance.
"Homeowners' insurance" or "policy" means homeowners' insurance as defined at N.J.A.C. 11:2-41.2 and the Plan of Operation approved by the Commissioner pursuant to N.J.A.C. 11:2-41.5.
"Insurer" means any person or persons, corporation, partnership or company authorized by the laws of this State to transact the business of homeowners' insurance in this State.
"Insurance producer" means insurance producer as defined at N.J.S.A. 17:22A-2.
"Nonrenew" means to refuse to issue and deliver at the end of the policy period a policy superseding a policy previously issued and delivered, or to refuse to issue and deliver a certificate or notice extending the term of a policy beyond its policy period or term, by the same insurer, or by another of a group of affiliated insurers, pursuant to a rating plan and underwriting guidelines established by an insurer. An offer of coverage at less favorable terms or conditions, including rates, than that provided under the prior policy, whether made by the same insurer, or by another of a group of affiliated insurers, shall be considered a nonrenewal except where there is clear written notice of the changes which accompanies the renewal offer; the notice contains the standard or reason upon which the change to less favorable terms or conditions was premised and specifies the factual basis relied upon; and the notice advises the insured that he or she may file a written complaint about the change with the Department of Banking and Insurance, Office of Enforcement and Consumer Protection, P.O. Box 329, Trenton, NJ 08625-0329.
"Rating plan" means a schedule of rates, rules and forms filed with the Department for homeowners' coverage.
"Renew" means to issue and deliver at the end of the policy period a policy superseding a policy previously issued and delivered, or to issue and deliver a certificate or notice extending the term of a policy beyond its policy period or term, by the same insurer, or by another of a group of affiliated insurers pursuant to a rating plan and underwriting guidelines established by an insurer. An offer of coverage at less favorable terms or conditions, including rates, than that provided under the prior policy, whether made by the same insurer, or by another of a group of affiliated insurers, shall not be considered a renewal except where there is clear written notice of the changes which accompanies the renewal offer; the notice contains the standard or reason upon which the change to less favorable terms or conditions was premised and specifies the factual basis relied upon; and the notice advises the insured that he or she may file a written complaint with the Department Office of Enforcement and Consumer Protection, P.O. Box 329, Trenton, NJ 08625-0329.
"Terminate" means to cancel or nonrenew a homeowners' policy.
"Underwriting guidelines" or "guidelines" means all criteria that the insurer employs to determine the initial or continuing acceptability of homeowners' risks for coverage, the amount or types of coverage afforded, and the assignment of a risk to a specific rating plan or to a specific affiliate. Underwriting guidelines include those criteria furnished by the insurer to its producers or other representatives, as well as those criteria employed by the insurer itself, as in the case where the insurer requires that its producers refer certain risks directly to the insurer for review prior to binding coverage.
11:1-40.3 General requirements
(a) All insurers which transact the business of homeowners' insurance in New Jersey shall establish and maintain written underwriting guidelines for the writing of homeowners' insurance that comply with the standards set forth in this subchapter.
(b) The guidelines shall clearly identify the effective date.
(c) An insurer shall submit a copy of its homeowners' insurance underwriting guidelines to the Commissioner within 10 days of receipt of a written request therefor.
(d) An insurer or producer that declines to provide homeowners' insurance shall either notify the applicant in writing at the time of declination, as to the particular guideline which precludes its acceptance of the risk and the factual basis upon which said guideline has not been met, or provide the applicant at the time of declination with the information required in this subsection orally, and advise the applicant that, upon written request, he or she may receive the information in writing.
(e) Every insurer shall be able to demonstrate that any guideline that it establishes is based upon evidence which demonstrates that the risk characteristic and the exposure and hazard to be insured against is specifically applicable and related to the writing of homeowners' insurance, although such a showing does not preclude the Commissioner from finding that a guideline as devised or utilized constitutes a violation of N.J.A.C. 11:1-40.5.
(f) To the extent an insurer is utilizing underwriting guidelines that do not satisfy the requirements of this subchapter, the insurer shall establish conforming guidelines and cease utilizing any individual non-conforming guidelines no later than (60 days from the effective date of this subchapter).
(a) An insurer's underwriting guidelines shall satisfy the following requirements:
1. Guidelines shall not be arbitrary, capricious or unfairly discriminatory;
2. Guidelines shall set forth the specific criteria used by the insurer in determining whether an applicant will be accepted or rejected;
3. Where an insurer employs more than one rating plan in its writing of homeowners' insurance, whether through the use of affiliated companies or separate rating plans within one company, its underwriting guidelines shall clearly identify the underwriting rules that will be applied to that rating plan. The underwriting guidelines employed for separate rating plans shall be mutually exclusive, so that the same risk cannot qualify for coverage under more than one plan;
4. All tables used in guidelines shall be clearly labeled;
5. Guidelines shall be based on objective and verifiable measurements. No guideline shall be based on subjective judgments such as, for example, "pride of ownership evident," "poor attitude," "unsatisfactory environment to conduct business;"", etc.;
6. Where applicable, the guidelines shall clearly identify and describe the criteria to be considered in determining whether a risk will be renewed or nonrenewed, if such criteria is different from the criteria employed by the insurer for the acceptance or rejection of new risks; and
7. Where an insurer's guidelines provide for or require that an inspection of the risk be performed prior to binding coverage, such inspection shall be performed by the insurer or by the insurer's designated representative within a reasonable period of time.
(a) No insurer shall employ or establish guidelines which use any of the following as a factor in determining whether to decline or terminate a risk, limit the amount or type of coverage, or apply a particular rating plan:
1. The gender, marital status, race, color, creed, age, or national origin or ancestry of the applicant; or
2. The fact that there was a previous adverse underwriting decision or that the prospective insured was last insured in the residual market, provided that the insurer shall not be precluded from considering the factual basis underlying the previous adverse underwriting decision or prior coverage through the residual market.
(b) No guideline shall be based on whether the insured or a member of the insured's household purchases or continues to purchase other insurance or services from the insurer or its affiliates, agents or other companies under common management or ownership, except that this provision shall not prohibit a rate discount. Further, this subsection shall not preclude an insurer or its affiliates from conditioning the provision or continuation of coverage for a secondary residence, including an additional residence held for rental, on whether the insurer or its affiliates also will provide coverage for the applicant's primary residence.
(c) Guidelines shall not be established or employed which decline or terminate coverage solely on the basis of:
1. Geographic location of the subject property;
2. Membership in an organization, except when membership or qualification for membership in a club, group, or organization, is a uniform requirement of the insurer as a condition of providing insurance, and if the dues or charges, if any, or other conditions for membership or qualifications for membership are applied uniformly throughout this State, are not expressed as a percentage of the insurance premium, and do not vary with respect to the rating classification of the member or potential member except for the purpose of offering a membership fee to family units. Membership fees, if applicable, may vary in accordance with the amount or type of coverage if the purchase of additional coverage, either as to type or amount, is not a condition for reduction of dues or fees; or
3. The presence of above-ground or underground fuel storage tanks, where such tanks are used as part of the heating structure or system for the property, except that a guideline may consider relevant risk factors relating to the heating structure or system, such as age, condition, etc.
(d) An insurer shall not utilize underwriting guidelines which decline or nonrenew a risk based on claims filed by the insured unless the insurer’s underwriting guidelines articulate the standards to be utilized for such action.
1. Unpaid claims that may be used for purposes of (d) above shall be either claims for which the insurer has established a reserve, provided that the liability for loss is reasonably evident, or claims filed but determined not to be covered by the policy after investigation by the insurer. For the purposes of this subsection, an inquiry by a policyholder regarding the policy or coverage for a particular loss shall not be considered a claim unless the insured files a claim.
2. This subsection shall not prohibit an insurer from declining or nonrenewing a risk because of the hazard revealed or evidenced by a claim, or the failure to repair damage from a claim after settlement of the claim.
(e) No insurer may refuse to write or renew any policy except by reference to and reliance on its underwriting guidelines. Insurers shall apply their underwriting guidelines in a uniform, objective manner to all applicants and insureds, except as otherwise specifically authorized by law or order of the Commissioner. For renewal business, an insurer may determine to relax strict application of its underwriting guidelines on a case-by-case basis; provided that where such exceptions are made, similarly situated insureds shall be treated uniformly, and the insurer's file shall include documentation of the reason for the insurer's action.
(f) Where an insurer fails to apply an existing underwriting guideline which the insurer knows or reasonably should have known would permit it to decline a written application for coverage or to terminate a policy, the insurer shall be prohibited from future application of that guideline to the risk, except where the insurer provides adequate prior notice to the insured advising of the application of that guideline to the policy and its effect on the insured's coverage, and affords the insured with a reasonable opportunity to cure the deficiency, if possible. For the purpose of this provision, adequate prior notice shall mean written notice from the insurer to the insured delivered at least one year in advance of any proposed nonrenewal premised on that guideline. This subsection shall not apply to any policy that has been in effect for less than 60 days at the time notice of cancellation is mailed or delivered, unless it is a renewal policy.
(g) Where an insurer is permitted to decline or nonrenew an insured pursuant to its underwriting guidelines that satisfy the requirements of this subchapter, nothing in these rules shall be deemed to prohibit an insurer from filing a rating system that provides that in such a circumstance the insurer may offer to provide or to renew the policy with a higher deductible.
11:1-40.6 Relief from underwriting guideline requirements
(a) An insurer may be granted relief by the Commissioner from the requirements of this subchapter, except as otherwise required by laws of the United States or this State, upon showing that there exists an objective, verifiable and reasonable business purpose which warrants such relief. Such business purposes may include, but need not be limited to:
1. Loss of or reduction in available insurance capacity;
2. Loss of or substantial change in applicable reinsurance;
3. Substantial change in the insurer's financial condition; or
4. Changes in statutory or case law.
(b) In applying for such relief insurers shall provide the information specified at N.J.A.C. 11:1-20.5 to 20.7 and 11:1-22, as applicable, and an evaluation of such factors which shall include, but is not necessarily limited to:
1. The likely impact of the relief on the insurer's participation in the New Jersey market, market share and historical pattern of market penetration in New Jersey;
2. The segments of the market that are likely to be affected; and
3. The likely impact on the insurer's producer force, where applicable.
(c) Where applicable, an insurer shall provide notice pursuant to N.J.A.C. 11:2-29.3(a). Nothing contained in this subchapter shall be construed to limit or to restrict the authority of the Commissioner to require the filing of a formal plan of withdrawal pursuant to N.J.S.A. 17:17-10 and, 17:33B-30 and N.J.A.C. 11:2-29.
11:1-40.7 Enforcement and penalties
(a) An insurer that fails to comply with the requirements of this subchapter shall be subject to penalties as provided by law.
(b) As an alternative or in addition to the penalties referenced in (a) above, the Commissioner, where he or she deems such action will further the purposes of this subchapter, may, after providing notice and an opportunity for a hearing, require immediate reinstatement without lapse of any policy which has been cancelled or nonrenewed, in violation of the provisions of this subchapter.
1. The Commissioner shall not order any reinstatement more than one year after the effective date of the nonrenewal or cancellation, provided, however, that the one year period shall be tolled during the course of any administrative proceedings initiated by the Department and any subsequent judicial review of those proceedings.
(c) If the Commissioner finds that an underwriting guideline of an insurer is arbitrary, capricious or unfairly discriminatory or that any guideline is being applied by the insurer in an arbitrary, capricious or unfairly discriminatory manner, the Commissioner, after providing notice and an opportunity for a hearing, may issue an order prohibiting the insurer from further use of that guideline or from applying any guideline in the proscribed manner, as applicable. The Commissioner shall require that the insurer rescind any notice canceling or nonrenewing coverage, which has not yet become effective, that is premised on any guideline or application of a guideline identified in the order; and may order that an offer of coverage be made to an applicant declined coverage.
(d) Requests for a hearing pursuant to (b) and (c) above shall be as follows:
1. A request for a hearing shall be in writing and shall include:
i. The name, address, and daytime telephone number of a contact person familiar with the matter;
ii. A copy of the order involved;
iii. A statement requesting a hearing; and
iv. A concise statement describing the basis for which the insurer believes that the Commissioner's findings are erroneous.
2. The Commissioner may, after receipt of a properly completed request for a hearing, provide for an informal conference between the insurer and such personnel of the Department as the Commissioner may direct.
3. The Commissioner shall, within 60 days of receipt of a properly completed request for a hearing:
i. Notify the applicant as to the final disposition of the matter; or
ii. Determine that the matter constitutes a contested case, pursuant to the Administrative Procedure Act, N.J.S.A. 52:14B-1 et seq. If the Commissioner finds that the matter constitutes a contested case, the Commissioner shall transmit the matter to the Office of
Administrative Law for a hearing pursuant to the Uniform Administrative
Procedure Rules, N.J.A.C. 1:1.
Date Karen L. Suter