In a ritual which has occurred 149 previous times since its formation in 1859, the oldest independent regulatory agency in the United States has issued its 2008 Annual Report to the Governor and the State Legislature. In his letter to the Legislature, Superintendent Eric Dinallo heralded the Department’s 150th annual report as a “major milestone” in its proud history. The opening page of the report contains a photographic image of the “First Annual Report of the Superintendent of the Insurance Department, State of New York”, and was dated March 1, 1860. According to the annual report, 2008 was another year of protecting the insurance consumer as the Department ordered over a hundred million dollars in credits to policyholders for various insurer violations. Life insurers paid more than $9 million in fines and penalties, health insurers paid over $3 million, and the Department’s Frauds Bureau saw to it that wrongdoers paid over $36.5 million in restitution, fines and refunds.
The Consumer Services Bureau reported that Bureau personnel responded to approximately 205,000 calls from its information phone lines. In addition the Bureau closed a total of 62,896 consumer complaint cases while opening 68,522 new cases. Of the complaints that were closed last year, by far the greatest number involved accident and health insurance (28,849). The Bureau announced that it began to track the dollar amount of recovery to complainants due to the filing of complaints in 2008. For the last four months of the year Bureau examiners were successful in obtaining a total of $8,813,322 in recoveries to consumers. I have always been impressed with the value of the Consumer Services Bureau to New York’s citizens. Consumers who often feel powerless against large insurance corporations in an area which is highly complex and confusing always have the comfort of knowing that they have someone to talk to who is able to at the very least explain what is happening to them, and can intercede for them when a violation exists. When one takes into account the Bureau’s role in enforcing the “prompt pay” provisions for health insurance contracts and the external review program which hears appeals from health insurer medical service denials I’m sure many of you will agree that, dollar for dollar, the Bureau is the best value in state service.
On a general Department-wide basis, the report again touts the Department’s roles in the AIG and bond insurance situations. On the regulatory reform front, the Department reported its efforts to provide for contract certainty, consideration of Agent and Broker compensation disclosure, proposed life settlement protections, and continued success in the area of implementation of provisions of the 2007 Worker’s Compensation Reform Legislation.
On the consumer protection front, the Department reported that progress was made in 2008 on development of proposals, in conjunction with the Health Department, for universal health insurance coverage. In addition, the Department warned agents and brokers that it will penalize them for attempting to mislead senior citizens with unsupported titles such as “retirement planner” or “senior advisor”. The Department also reported the following:
• Protection of persons who travel to Israel from denial of life insurance on that basis Direction that insurance companies treat same-sex couples legally married outside New York the same way as other validly married couples.
• Hearing held on “out-of-network coverage and consideration of regulatory action to protect consumers in this area.
• Implementation of a program to help minority and women-owned firms obtain surety bonds required to compete for government and private construction work.
• Protection of policyholders from cancellation of homeowners insurance on the basis that the dwelling is unoccupied.
• Requiring Oxford to refund approximately $50 million to 37,000 small businesses in downstate New York due to overcharges in 2006 that occurred when the company’s loss ratio fell below a required 75% minimum. The Superintendent also announced that the Department will have a number of upcoming regulatory and legislative initiatives stating “especially in this difficult economy, we will keep working to make sure New Yorkers get the protection they deserve.” Those new initiatives are:
• A proposed fee schedule for acupuncture services performed by licensed acupuncturists to their patients under the no-fault automobile insurance system, resulting in a more uniform, efficient and cost effective system for processing payment, and a reduction of disputes.
• Proposal of a rule to increase the number of circumstances in which an insurer may waive the mandatory inspection of vehicles to alleviate the cost and burden to insurers and consumers.
• Proposed regulation of the life settlement market.
• Continued work to increase broker compensation transparency.
• Introduction of a joint Insurance/Health department bill that will permit the Superintendent to prohibit a health care provider from demanding or requesting pay-no-fault insurance system for up to three years if that provider has engaged in improper activities.
• Proposal for licensure of title insurance agents by the Department.
• Proposal to modernize the licensing process by creating three new lines of authority, credit, crop and surety insurance; requiring entities seeking to provide insurance agent and broker licensing courses to file for approval; requiring independent adjusters to complete prelicensing and continuing education courses; requiring an applicant for an Article 21 license to submit his/her fingerprints; permitting the licensing of non-resident adjusters on a reciprocal basis. I have often thought that any federal regulator who thinks he or she can adequately regulate the business of insurance should sit down and read all 248 pages of the Departments annual report to see the entirety of the sphere of authority for which a state insurance regulator must be responsible each year. After reading the report, a rational person would have to conclude the following, “why on earth would I ever want to take all of this on?”
New York’s Highest Court Continues to Rewrite Insurance Policies
In my last column, I wrote about the Bi-Economy case in which the New York Court of Appeals used a “bad faith” approach to essentially find that an insurer was liable to the insured for consequential damages in spite of the fact that the language of the policy specifically excluded that class of damages. At that time I wrote that insurers should be contacting their state government officials to clarify for the courts how an insurance policy may be interpreted to prevent the hindsight restructuring of the insurer/insured contractual relationship. Just as that column was coming out in print, I have been informed of another case in which the State’s highest court has chosen to rewrite the terms of coverage of a property casualty policy to ensure the “right” outcome between a property owner and its insurer. On April 30, 2009, the Court of Appeals issued a decision in the case of Pioneer Tower Owners Association v. State Farm Fire & Casualty, slip opinion No. 63, in which ruled that a property policy exclusion for damages which are the result of “earth movement”, and “settling [or] cracking”, was inapplicable in cases in which that earth movement was the result of negligent and improper underpinning and excavation and excavation activities on an adjacent site. These excavation cases are particularly prevalent in New York City due the close proximity of the buildings there and the complicated precautions that must be taken by engineers and contractors during the excavation of earth from an adjoining site. While the problem is not unique to New York City, very few places in this country can have the sheer number and size of the property liabilities that exist here. Thus, this issue would have to be of major concern of all companies writing property coverage in New York City.
According to the Court’s decision, the plaintiff (insured) is the owner of a condominium apartment building. After cracks appeared in the building during the progress of extensive excavation that was occurring on the property next door, a structural engineer was consulted. The engineer found a number of cracks, separations and open joints and concluded that they were caused by movement of the earth under the condominium due to the excavation of earth from the lot next door. It was undisputed in the case that the underpinning, which was built by the contractor performing the excavation work next door, was flawed, and did not prevent the movement of the earth under plaintiffs building.1 Plaintiff submitted a claim for the damages to its building to its insurer, State Farm. State Farm denied coverage, citing the “earth movement” exclusion in its policy which reads:
We do not insure under any coverage for any loss which would not have occurred in the absence of one or more of the following excluded events. We do not insure for such loss regardless of: (a) the cause of the excluded event; or (b) other causes of the loss; or (c) whether other causes acted concurrently or in any sequence with the excluded event to produce the loss. (See Slip op. No. 63, page 2) Further, the actual “earth movement” exclusion reads as follow: b. earth movement, meaning the sinking, rising, shifting, expanding or contracting of earth, all whether combined with water or not. Earth movement includes but is not limited to earthquake, landslide, erosion, and subsidence but does not include sinkhole collapse.
But if accidental direct physical loss by fire, explosion other than explosion of a volcano, theft or building glass breakage results, we will pay for that resulting loss.
There is another exclusion cited by State Farm to support its denial of coverage, the “settling or cracking” exclusion:
We do not insure for loss either consisting of, or directly and immediately caused by, one or more of the following: f. settling, cracking, shrinking, bulging or expansion. But if accidental direct physical loss by any of the ‘Specified Causes of Loss’ or building glass breakage results, we will pay for that resulting loss.
The Court acknowledges that none of the fourteen items in the list of “Specified Causes of Loss”, including fire, windstorm and water damage is present in this case. Thus, on its face, an insurance attorney would read the policy and reasonably conclude that there was no coverage for this loss based on the language of the policy. Since the loss was caused by the negligence of the contractor and, ultimately, the owner of the adjoining property, the plaintiff should seek redress there.  
However, the Court of Appeals in this day and age does not appear to be satisfied with that result. This should concern insurers greatly. The high Court reasoned that any exclusion in the policy must be construed strictly against the insurer and that any ambiguity be interpreted against the insurer. This, of course, is hornbook law to all of us in the insurance field, but the Court seems intent on breathing new life into these old and oft cited rules. My reading of the relevant policy provisions indicates that no matter how undesirable the result from the policyholder’s perspective, the policy language is clear that earth movement is not covered, even if caused by an intentional or negligent act.
The Court believes differently. While acknowledging that the “case is a close one”, the Court further states that “we cannot say that the event that caused plaintiff ’s loss was unambiguously excluded from the coverage of this policy.” The Court even stated that “both plaintiff ’s and defendant’s readings of the clauses are reasonable”.
Ultimately, based upon the precedent which requires the court to read the exclusions narrowly, the Court found no precedent applying the “earth movement” exclusion to intentional earth removal. Thus the insurer must pay the claim according to the policy. The potential import of this case is troubling. I had always thought that only losses specifically covered by a policy qualified for payment. The high Court has essentially held that if the loss is not specifically excluded it is covered under the policy. This development places enormous burden on insurers to specifically list all potential causes for loss in a list of exclusions in order to properly rely on the exclusion. Such a task would be impossible.
Even more troubling is the trend taking place in the Court of Appeals embodied in this and the Bi-Economy case in which the court bends over backwards to find that an insurance policy covers a particular loss – even if the express provisions of the policy are contrary to that finding. Insurers should meet to discuss this trend and should approach the legislature for a solution which gives both insurers and policyholders a sufficient level of certainty as to which losses are covered and which are not. When Courts are free to read coverages into policies, insurers will not be able to properly rate those policies. The costs of such recoveries will be borne by all policyholders regardless of fault.
It is time for the insurance industry to take serious notice about what is happening at the Court of Appeals.
Health Insurance Issues Will Dominate the End of Session
As we round the final turn and head for the stretch run of the 2009 legislative session it is apparent that health insurance issues will move to the forefront among insurance issues to be considered in the last few weeks. Governor Paterson and Superintendent Dinallo have made two announcements in the past several weeks stating that legislation has been introduced to re-establish prior approval for health insurance rates and making Timothy’s Law permanent. Timothy’s Law, which was signed into law by Governor George Pataki on December 22, 2006 as Chapter 748 of the Laws of 2006 requires insurers issuing group or school blanket health insurance policies or contracts in New York to provide a minimum of 30 inpatient days and 20 outpatient visits for the treatment of mental health conditions. Timothy’s Law also requires large group health insurance policies (more than 50 employees) to provide coverage for adults and children diagnosed with biologically based mental illnesses and children diagnosed with serious emotional disturbances at the same level of coverage as is provided for other health conditions.
The Governor stated that “the impact of Timothy’s Law has been far reaching, going beyond the requirement that health insurance cover treatment for mental health conditions, to help eliminate the stigma surrounding mental illness and those with mental health conditions that too often cause people to go without the care and treatment we know is effective.” The Governor also accepted a report prepared by the Superintendent of Insurance in consultation with the Office of Mental Health which found that access to the benefits increased from 42 percent to 100 percent in the combined large and small group markets.
Further, the report found that access to coverage for biologically based mental illness and serious emotional disturbances in children increased from 9.6 percent to 43.7 percent in the small group market, and from 11 percent to 100 percent in the large group market. The costs of the basic benefit increased, on a monthly basis, by approximately $1.04 per member, per month, in the small group market, amounting to 1/2 of 1 percent of the total monthly cost.
On the other front, the Governor and the Superintendent have asked the legislature to restore the Insurance Department’s prior approval authority over health insurance rates. The bill (S.5470/A.8280) is sponsored by Senator Breslin in the Senate and Chairman Morelle in the Assembly. The operative language of the bill involves an amendment of Section 3231(e)(1) to provide that the Superintendent may modify or disapprove a rate filing for a premium rate adjustment if the Superintendent finds that the premiums are unreasonable, excessive, inadequate or unfairly discriminatory. The Superintendent is permitted to consider the financial condition of the insurer before approving, modifying or disapproving any premium rate adjustment.
The Department has been telling the legislature for some time now that even though the current file and use mechanism contains and objective minimum loss ratio standard of 80 percent for individual policies and 75 percent for small group policies, the filings are subject to manipulation making it difficult for the Department to always ensure that an adequate rate is being charged. Carriers apparently are not self-regulating as health plans refunded only about $49 million in overcharged premiums between 2000 and 2007, without any Insurance Department intervention. However, during that same period, Insurance Department investigations found that during that same period insurers and HMOs overcharged policy holders an additional $105 million, more than twice what was “self-reported”. Thus, the Department feels that post implementation review of rates is not adequately protecting the consumer.
We in the prior administration proposed the restoration of prior approval several times and were met with a very lukewarm greeting in the legislature. However, this is the first time I can recall that the proposal has come from the Governor himself. It will be axiomatic to say that the health insurers and HMOs will not like this proposal, but the high profile of a Governor’s introduction should set the stage for some fireworks as this session winds down.