INSURANCE

DEPARTMENT OF BANKING AND INSURANCE

DIVISION OF INSURANCE

Commercial Lines Insurance

Proposed Readoption with Amendments: N.J.A.C. 11:13

Authorized By: Holly C. Bakke, Commissioner, Department of Banking and Insurance

Authority: N.J.S.A. 17:1-8.1, 17:1-15e, and 17:29AA-1 et seq., and 17:19AA-29

Proposal Number: PRN 2002-272

Submit comments by October 18, 2002 to:

Karen Garfing, Assistant Commissioner

Legislative and Regulatory Affairs

Department of Banking and Insurance

20 West State Street

PO Box 325

Trenton, NJ 08625-0325

Fax: (609) 292-0896

Email: legsregs@dobi.nj.gov

The agency proposal follows:

Pursuant to Executive Order No. 66 (1978), the Commissioner of Banking and Insurance ("Commissioner") proposes to readopt N.J.A.C. 11:13, Commercial Lines Insurance. This chapter is due to expire on May 9, 2003, pursuant to N.J.S.A. 52:14B-5.1c.

The Department has undertaken a review of these rules at several levels and finds that these rules continue to be necessary to implement and interpret the Commercial Lines Deregulation Act of 1982 ("Act"), N.J.S.A. 17:29AA-1 et seq. The Act establishes a rating law for commercial lines separate from the provisions of the existing property/liability rating law except as specifically provided in the Act. By establishing a separate rating law for commercial lines insurance, the Act affords insurers greater flexibility in the underwriting and rating of commercial risks while maintaining appropriate regulatory oversight by the Department. The Commissioner is empowered under the Act to promulgate rules and regulations in order to implement and enforce its provisions, N.J.S.A. 17:29AA-29.

As required by the Executive Order No. 66, the Department has reviewed these rules and has determined them to be necessary, reasonable and proper for the purpose for which they were originally promulgated.

This chapter includes rules related to commercial lines insurance. The Department of Banking and Insurance ("Department") has established rules concerning the following subjects codified in this chapter, listed by subchapter.

The Department is amending Chapter 13 to include "advisory organizations" in order to clarify that these rules apply to both rating organizations or "advisory organizations." Currently, advisory organizations filings are filed in accordance with these rules.

The Department is amending N.J.A.C. 11:13-1.3 to include a definition of "advisory organization".

N.J.A.C. 11:13-2.3(a) is being amended to establish what a filing should state when the filer wishes to delay the effective date or non-adopt filings of rate or supplementary information. This provision is also being amended to require that the filing clearly identify the rating organization’s or advisory’s file number.

N.J.A.C. 11:13-3.1 and 5.1 are being amended to reflect the correct address for the Department.

N.J.A.C. 11:13.7.3(a)1 is being amended to provide that "no defense cost" applies to all commercial policies. The Department is amending N.J.A.C. 11:13-7.3(b) to permit medical malpractice polices to include provisions that include defense costs within policy limits

N.J.A.C. 11:13-7.4(a), contains requirements which relate to the Department’s disapproval of policy forms for use prior to January 1, 1999. This provision also includes a sublimit of $50,000. The Department is deleting this provision because it is outdated and no longer necessary. Current policy provisions are subject to N.J.A.C. 11:13-7.4(b) which the Department is recodifying as (a). The amendment N.J.A.C. 11:13-7.4(b) which requires insurers to offer liability coverage for lead paint or lead contamination if the premium meets the requirements of this provision.

The Department believes that these rules, implementing the Commercial Insurance Deregulation Act of 1982, enhance the ability of commercial insureds and insurers to effectively negotiate contracts, thereby stimulating competition and encouraging efficient rating and marketing practices.

These rules also set standards for individual premium risk modification plans filed by insurers of commercial risks and thus impact both insurers and insurance purchasers. Risk premium modification plans provide limited flexibility to vary the price of a policy based on the characteristics of a specific risk.

Although the Department recognizes that many commercial insurers do not require the same degree of regulatory protection afforded to individual personal insureds, the requirements of the Act and the rules herein proposed for readoption with amendments ensure that the rights of commercial insureds are adequately protected.

The Department is amending Chapter 13 to include "advisory organizations" in order to clarify that these rules apply to both rating organizations and advisory organizations.

The readoption of these rules will permit insurers to continue pricing individual policies in a more accurate manner, within specified limits above and below their filed rates, based upon the actual risk undertaken. The readoption of these rules will continue to promote market competition, availability of commercial insurance and lower premiums.

Insurance companies will incur no additional expenses because the proposed readoption with amendments does not change the scope of the current rules. The Department similarly will not incur additional expenses in connection with the proposed readoption with amendments.

The filing and statistical reporting requirements in subchapters 2, 3, 4 and 5 continue to impose some economic cost upon insurers. However, the Department believes that these costs are necessary to provide for the Department’s limited oversight of commercial lines insurance as required by the Act. The Department believes that the costs imposed by these rules are negligible when compared to the volume of business to which they apply. All commercial lines insurers currently maintain staff or outside organizations to fulfill such requirements.

The standards for commercial insurance rating plans in subchapter 6 continue to impose some minimal economic costs upon insurers to comply with the filing requirements. These costs are similarly minimal when compared to the volume of commercial lines insurance business to which they apply, and are reasonable in consideration of the public purposes which they serve.

The standards for commercial insurance policy forms in subchapter 7 do not impose any direct costs. These provisions establish what policy forms are acceptable, or not acceptable, for filing and use in this State pursuant to N.J.S.A. 17:29AA-6.

The Department believes that the Commercial Lines Insurance Prospective Loss Costs Filing Procedures, which introduced loss costs filings by rating organizations, has helped encourage competition in commercial lines based on the cost of providing services.

The Department believes that the addition of medical malpractice to N.J.A.C. 11:13-7.3(b) and (c) which permits a policy provision to include defense costs within policy limits should help the availability of medical malpractice policies.

A Federal standards analysis is not required because the rules proposed for readoption with amendments relate to the business of commercial lines insurance and are not subject to any Federal requirements or standards.

The Department does not anticipate that any jobs will be either generated or lost as a consequence of the rules proposed for readoption with amendments.

The Department does not expect any impact on the agriculture industry on these rules proposed for readoption with amendments.

The rules proposed for readoption with amendments will affect only commercial lines insurers.

If there are "small businesses" in the commercial lines insurance industry as that term is defined in the Regulatory Flexibility Act, N.J.S.A. 52:14B-1 et seq., they can expect to incur no added costs because the proposed readoption with amendments does not change the current rules. Costs are discussed more fully in the Economic Impact above.

To the extent that insurers qualify as "small businesses," they use the services of rating organizations or advisory organizations for rate and form filings. Nevertheless, there may be insurers that independently file rates and forms that qualify as "small businesses" according to the statutory definition.

The rules for commercial lines rating plans make no distinction between plans filed by small businesses and those filed by other insurers. The filing requirements are minimal and are currently being met by insurers of all sizes that wish to provide the rate flexibility available through such plans.

Since the purpose of the rules regarding commercial policy forms is to establish minimum standards for policy forms used by an insurer, it would be inconsistent with these rules and the Act to establish different standards based upon company size.

The rules proposed for readoption with amendments have no impact on the achievement of smart growth and implementation of the State Development and Redevelopment Plan.

Full text of the proposed readoption may be found in the New Jersey Administrative Code at N.J.A.C. 11:13.

Full text of the proposed amendments follows (additions indicated in boldface thus; deletions indicated in brackets [thus]):

11:13-1.3 Definitions

The following words and terms, when used in this chapter, have the following meanings unless the context clearly indicates otherwise:

11:13-2.1 Filing of rates, supplementary rate information, and policies

1. (No change.)
2. Pursuant to N.J.S.A. 17:29AA-5, every insurer and rating organization or advisory organization shall file with the Commissioner all rates and supplementary rate information and all changes and amendments thereof no later than 30 days after becoming effective.

11:13-2.3 Adoption or rates, supplementary rate information or policies of other filers

1. If a filer adopts rates or supplementary rate information used by other filers or proposes to adopt policy forms or endorsements previously approved (or deemed approved) for other filers in New Jersey, the filing shall clearly identify such reference including the name of the filer and, if applicable, the date such filings were approved in this State, including any amendments thereof. The Department staff will give reasonable assistance to a filer in obtaining such information to the extent that it is a public record:

1. If the proponent only wishes to adopt [exactly and without any change filings of rate or supplementary rate information used by or policies and endorsements approved for rating organizations or accepted for reference purposes on behalf of advisory organizations in New Jersey,] the filing with a different effective date, the filing shall clearly identify [such reference]the rating organization’s or advisory organization’s file number but shall not include a copy of the material referred to.

1. (No change.)

[2.] 3. If the proponent wishes to adopt filings approved in New Jersey for other filers acting independently of rating organizations or advisory organizations, the material made reference to must be filed[,] with any modifications identified as outlined under N.J.A.C. 11:13-2.2.

11:13-2.5 Source Developments

(a) The Filing Source Documents, MARS001 and MARS002, herein incorporated by reference as Exhibits A and B in the Appendix of N.J.A.C. 11:1-2, shall be used in conjunction with the procedures and requirements set forth in N.J.A.C.11:13-2.1 through 2.5 by all insurers and rating organizations or advisory organizations in submitting filings required pursuant to the Commercial Deregulation Act of 1982 and this chapter.

1. Every insurer and every rating organization or advisory organization submitting filings of policy forms, rules, rates or supplementary rate information shall complete and submit with the filing the Filing Source Documents, MARS001 and MARS002.
2. (No change.)

11:13-3.1 Expense experience

(a) N.J.A.C. 11:4-10.1 and 10.2 including all subsequent amendments and supplements are hereby adopted as rules with the modifications indicated in (b) below.

1. This document is available for review at or may be purchased from the New Jersey Department of Banking and Insurance, [201 East] 20 West State Street, PO Box 325, Trenton, New Jersey 08625.

3. (No change.)

11:13-5.1 Higher rate filings

(a) N.J.A.C. 11:4-7 including all subsequent amendments and supplements is hereby adopted as a rule with the modification indicated in (b) below.

1. This document is available for review at or may be purchased from the New Jersey Department of Banking and Insurance, [201 East] 20 West State Street, PO Box 325, Trenton, New Jersey 08625

SUBCHAPTER 6. COMMERCIAL INSURANCE RATING PLANS

11:13-6.1 Purpose and scope

(a) - (b) (No change.)

(c) This subchapter applies to all insurers and rating organizations or advisory organizations that file rates for commercial lines insurance.

11:13-6.2 Definitions

The following words and terms, when used in this subchapter, shall have the following meanings unless the context clearly indicates otherwise.

"Filer" means a rating organization or advisory organization or any insurer making its own rates and proposing to establish a new rate, a rate change, or a rating rule.

11:13-7.3 Defense costs within policy limits

(a) No commercial insurance policy shall be issued or renewed on a form required to be filed pursuant to N.J.S.A. 17:29AA-6 which contains a provision that includes defense costs within policy limits, except as provided in this section.

1. No defense costs shall be charged against any deductible amount.

(b) Lawyers and medical malpractice professional liability insurance policies may contain a provision that includes defense costs within policy limits provided it conforms to the standards set forth in (c) below

(c) Lawyers and medical malpractice professional liability insurance policy forms including the defense costs within policy limits shall contain policy provisions, which may be in the form of a mandatory endorsement, so as to incorporate the standards set forth below into the term of each policy:

1. – 3. (No change.)

[4. No defense costs shall be charged against any deductible amount.]

11:13-7.4 Exclusions from coverage

[(a) The Department shall disapprove for use prior to January 1, 1999 policy forms subject to the requirements of this subchapter that exclude coverage for any bodily injury caused in whole or in part, either directly or indirectly, by lead paint or lead contamination, or arising out of or incidental to the inhalation, ingestion, use, handling, or contact with lead paint or lead contamination.

1. The Department shall approve for use prior to January 1, 1999 policy forms providing the coverage set forth in (a) above that provide reduced (sublimit) coverage of $50,000 per occurrence in liability policies written with basic liability limits in excess of $50,000, and any defense costs that are supplemental to the $50,000 sublimit.

2. Policy forms filed pursuant to this chapter limiting or excluding coverage for liability caused by "pollution" or "pollutants" shall not limit or exclude coverage for liability for lead paint or lead contamination unless they include a limitation or exclusion filed pursuant to this rule.]

[(b)] (a) The Department shall approve [for use on or after January 1, 1999] policy forms [subject to the requirements of this subchapter that exclude coverage otherwise prohibited by (a) above, but only if the] filings [also] that include[s] policy provisions or rating rules as follows:

1. (No change.)
2. That the [insured] insurer be [allowed to secure] required to offer liability coverage for lead paint or lead contamination if the premises covered by such policy has been certified as being free of existing lead hazards pursuant to standards to be established by the Department of Community Affairs.

[(c)] (b) Insurers filing pursuant to [(b)] (a) above shall provide insureds with written notice at least one year prior to renewal of a policy of the change in coverage resulting from the exclusion, which shall include the following statements:

1. – 3. (No change.)

11:13-8.1 Purpose and scope

(a) This subchapter establishes data requirements and procedures for member/subscriber insurers in rating organizations or advisory organizations to adopt or modify a rating organization’s or advisory organization’s prospective loss cost filing for commercial lines insurance made pursuant to N.J.S.A. 17:29AA-1 et seq.

(b) This subchapter applies to all rating organizations or advisory organizations which filed prospective loss costs and all insurer filings which adopt or modify a rating organization’s or advisory organization’s prospective loss cost filing for commercial lines insurance made pursuant to N.J.S.A. 17:29AA-1 et seq.

11:13-8.3 Prospective loss cost filing requirements for rating organization

(a) A rating organization or advisory organization that desires to file prospective loss costs with the Commissioner shall develop a filing containing advisory prospective loss costs and supporting actuarial and statistical data.

(b) Rating organizations or advisory organizations that file advisory prospective loss cost filings with the Commissioner shall:

1. - 2. (No change.)

(c) A rating organization or advisory organization shall provide the Department with printed manuals of loss costs, as well as rules and other supplementary rating information pursuant to N.J.S.A. 17:29AA-1 et seq., and may provide this information to its member/subscribers insurers upon request.

(d) Rating organizations or advisory organizations shall continue to develop and file supplementary rating information on behalf of their member/subscriber insurers.

11:13-8.4 Prospective loss costs filing requirements for insurers

(a) In order for an insurer to incorporate a rating organization’s or advisory organization’s filed prospective loss costs to establish its own rates, an insurer shall:

1. Be a member/subscriber insurer in the rating organization or advisory organization; and

2. File its loss costs multiplier using the Reference Filing Adoption Form (as set forth in Appendix A to this subchapter and incorporated herein by reference). An insurer’s final rates shall be a combination of the prospective loss costs and the loss costs multiplier set forth in its filed Reference Filing Adoption Form.

i. An insurer may file modifications to the rating organization’s or advisory organization’s prospective loss costs filing based on its own anticipated experience by using the Reference Filing Adoption Form. Supporting documentation shall be filed for any modification (upwards or downwards) to the rating organization’s or advisory organization’s prospective loss costs filings.

ii. (No change.)

(b) (No change.)

(c) Any participating insurer of a rating organization or advisory organization shall continue to use all rates and deviations currently in effect for its use until disapproved pursuant to N.J.S.A. 29AA-13, or until the insurer makes a filing to change its rates, either by making an independent filing or by submitting a Reference Filing Adoption Form.

(d) Once an insurer has filed a loss costs multiplier with the Department, such multiplier shall be deemed to be automatically applicable to subsequent rating organizations or advisory organizations prospective loss costs filings, subject to the following requirements:

1. An insurer which intends to use a subsequent revision of prospective loss cost and effective date as filed by the rating organization or advisory organization shall not file anything.

2. An insurer which intends to use prospective loss costs as filed but with a different effective date shall file with the Department its proposed effective date not more than 30 days after the effective date of the rating organization’s or advisory organization’s prospective loss costs;

3. An insurer which intends to use a subsequent revision of the prospective loss costs to change its loss costs multiplier, shall file a revised Reference Filing Adoption Form not more than 30 days after the effective date of the rating organization’s or advisory organization’s prospective loss costs reference filing; and

4. An insurer which does not intend to use a subsequent revision of the prospective loss costs shall notify the Department not more than 30 days after the effective date of the rating organization’s or advisory organization’s prospective loss costs reference filing. The insurer shall file a Non-Adoption of Prospective Lost Cost Form (as set forth in Appendix and incorporated herein by reference) with the Department.

(e) An insurer which has failed to adopt a rating organization’s or advisory organization’s prospective loss cost shall file with the Department, within 30 days of the effective date of the insurer’s rates.

1. A final printed manual page indicating the loss cost modification to be applied to the rating organization’s or advisory organization’s prospective loss costs, including its effective date; or

2. Final printed manual pages indicating the final rates developed by application of the loss cost multiplier to the rating organization’s or advisory organization’s loss costs, including the effective date.

11:13-8.5 Penalties

Rating organizations or advisory organizations and insurers which fail to comply with the filing submission requirements of this subchapter shall be subject to penalties pursuant to N.J.S.A. 17:29AA-26.

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