department of insurance

18 Delaware Code, Sections 3311(a) and (2304) (18 Del.C. §§3311(a) and (2304)
18 DE Admin. Code 702




A public hearing was held on May 25, 2005 to receive comments on proposed Regulation 702 relating to Required Disclosures for Residential Homeowners. Public notice of the hearing and publication of proposed Regulation 702 in the Register of Regulations and two newspapers of general circulation was in conformity with Delaware law. By my order, Deputy Insurance Commissioner Michael L. Vild was appointed hearing officer to receive comments and testimony on the proposed amendments to the regulation. Westfield Group, the American Association of Insurance Services, State Farm Insurance Companies, Allstate Insurance Company, the Property Casualty Insurers Association of America (“PCI”), Assurant Solutions Nationwide Insurance, and the Delaware Community Reinvestment Action Council, Inc. (“DCRAC”) filed written comments with respect to the proposed regulation. Deputy Attorney General Michael J. Rich represented the Delaware Insurance Department in support of the proposed regulation.

Summary of the Evidence and Information Submitted

The oral testimony relating to the proposed regulation can be summarized as follows:

Richard Stokes of PCIAA stated that there was no need for the proposed regulation since the consumers were already receiving the disclosures required by the proposed regulation and suggested that it would be better for the Department to prepare a form of disclosure rather than leaving it to the insurers to do so. He suggested that the only disclosure that might be helpful to the consumer was the one related to flood insurance.

Sally Estvanic of Westfield Group incorporated the two previously filed written submissions submitted by the Westfield Group. Because of Delaware’s small volume market, compared to all of the other states who don’t require this type of disclosure on personal property coverage, she suggested that the Department follow California’s version and not include section 5.1.2. She said that section 5.2 would be very costly for the insurer in terms of the computer programming necessary to track the consumers’ policies so that the appropriate notice could be provided to each consumer.

Mary Rowland of the IIAD (the independent producers in Delaware) stated that the proposal is a good one but creates unnecessary costs and difficulties for the companies in terms of the nature of the specific disclosures and the programming costs to statistically track whether each consumer was getting the correct form of notice. She pointed out that there was a difference between full replacement and guaranteed replacement which was not addressed by the regulation. Mr. Rich noted that one of the reasons for the annual notice was to assure that consumers would be notified of such replacement coverage limitations, especially where inflation might result in less than full replacement coverage if a policy doesn’t have an inflation protection feature.

Mr. Rich noted that the regulation was proposed because there was sufficient reason to believe that disclosures with respect to flood damage were insufficient to put consumers on notice about what a consumer needs to do to obtain flood coverage under circumstances where such coverage isn’t required by the mortgagee but the community participates in the National Flood Program.

While supporting the goals of full disclosure to consumers, the insurers’ overall written comments were concerned about the difficulties, the costs and the workability or the proposed regulation. The primary concerns enumerated in the written comments included:

the flood program is subject to national standards and they are concerned that the regulation will impose an affirmative burden not required by the National Flood Program
the form should only be used at initial issue
the nonrenewal provisions require the disclosure of underwriting guidelines that are not subject to filing or approval in Delaware
potential liability if an insurer doesn’t include all items that may be a factor in nonrenewal
the required language is misleading for customers who already have elected to have maximum or special coverages
the notices required by sections 5.1.2 and 5.1.3 should use the phrase “may not cover” instead of “does not cover”

Findings of Fact

In promulgating the regulation, the Department has correctly concluded that as good as some of the disclosure practices may be, by and large, consumers are not getting adequate disclosures when they buy homeowners protection. In too many instances, there is little or no information provided about flood coverage and how to obtain it, theft coverage limitations and personal property protection and the factors that affect renewal. The purpose of the proposed regulation is to assure that the consumer gets the best possible information in advance and that the consumer’s final decision is as informed as it can be.

The insurers’ concerns are more technical than substantive. They express concerns about the potential complexity of the notice and the associated costs required by a disclosure but provide no specifics with respect to those costs. Nevertheless, it was acknowledged that the insurers and the agents bear the responsibility to fully disclose the extent and/or the limitations of coverage to the consumer.

In large part the insurers’ concerns can be met through the form approval process. Section 6.0 of the proposed regulation requires advance approval of the forms to be used. This accomplishes two purposes: it allows the insurer to tailor the form to its customers without having to do exactly what another insurer is doing and the approval gives the insurer a “safe harbor” against future claims (other than breach of contract) by the consumer in the event of a dispute about the disclosure form. There is nothing in the proposed regulation that makes the disclosure a part of the insurance contract. There is nothing in the proposed regulation that requires an insurer to disclose proprietary or trade secret information with respect to events that could contribute to nonrenewal. The form approval process would allow for such concerns to be addressed as part of the form filing and it should be noted that 18 Del.C. Chapter 25 has appeal provisions if a company believes that Department has erred in reviewing a form for use. Section 8.0 specifically denies a cause of action to all but the Department for a violation of the regulation.

I am persuaded that the word “may” instead of “does” and “will” in sections 5.1.2 and 5.1.3 of the proposed regulation is more appropriate and does not represent a substantial change in the proposed regulation to require a re-hearing of this regulation under 29 Del.C. §10113. The change in that wording would not alter the disclosure requirement embodied in the proposed regulation.

Decision and Effective Date

A copy of the amended regulation and a clean copy of the final regulation are appended hereto. I hereby adopt Regulation 702 as modified by the changes noted above to be effective on January 1, 2006.

Text and Citation

The text of the proposed amendments to Regulation 702 last appeared in the Register of Regulations Vol. 8, Issue 11, pages 1566-68.

IT IS SO ORDERED this 14th day of July, 2005

Matthew Denn, Insurance Commissioner

Regulation 702 Required Disclosures For Residential Homeowners Policies

1.0 Authority

This regulation is adopted by the Commissioner pursuant to 18 Del.C. §§311(a) and 2304(1). It is promulgated in accordance with 29 Del.C. Chapter 101.

2.0 Purpose

The purpose of this regulation is to ensure that homeowners insurance policyholders are aware that they are not insured for certain types risks or claims, to the extent that they do not have such coverage. This regulation does not mandate any coverage by any carrier issuing homeowners insurance in the State of Delaware.

3.0 Applicability

This regulation shall apply to homeowners insurance policies. A homeowners insurance policy for purposes of this regulation means a property or casualty contract of insurance covering residential properties as defined by 18 Del.C. §4120.

4.0 Requirement of Disclosure

Insurers, upon initial delivery of a homeowners policy terms and declaration page, and not less than once annually after delivery, shall provide a form to the policyholder entitled “Important Information About Your Homeowners Insurance.” The title of the document shall be in at least 30 point type.

5.0 Content of Disclosure

5.1 Each form presented pursuant to Section 4.0 of this Regulation shall make the following disclosures:

5.1.1 Disclosure that the policy does not cover damage caused by flooding, and sufficient information to allow the policyholder to contact the National Flood Insurance Program in order to purchase flood insurance if so desired. The following language shall be sufficient to ensure compliance with this subsection 5.1: “This policy does not cover damage to your property caused by flooding. Flood insurance is available for communities and property that participate in the National Flood Insurance Program (“NFIP”). Not all communities participate in the NFIP.  Flood insurance may be available even if you do not live in a flood hazard area as defined by the NFIP. Please call the NFIP at 1-800-427-4661 to see if your community and property are eligible for coverage. If your community does not participate in the NFIP, you may contact your insurance agent or broker to see if there is other flood insurance coverage available to you.” The disclosure may also inform the policyholder that the insurer offers flood insurance as a participant in the NFIP’s “Write Your Own” program. The disclosure required by this subsection shall be entitled “Flood Insurance,” and the subsection title shall be in at least 18 point type.

5.1.2 Disclosure that the policy [may does] not cover the full cost of replacement without depreciation of the property, and sufficient information to allow the policyholder to purchase such coverage from the carrier if it is offered by the carrier. The following language shall be sufficient to ensure compliance with this subsection 5.2: “This policy [may will] not cover the full cost of replacing your home if your home should be destroyed in an event otherwise covered by this policy. You may purchase additional coverage from us sufficient to cover the full cost of replacing your home, at an additional cost.” The disclosure required by this subsection shall be entitled “Replacing Your Home,” and the subsection title shall be in at least 18 point type.

5.1.3 Disclosure of any limitations in the policy regarding reimbursement for items stolen from the property, including but not limited to jewelry, furs, fine art, etc. and sufficient information to allow the policyholder to purchase insurance which would not contain such limitation if such coverage is offered by the insurer. The following language shall be sufficient to ensure compliance with this subsection 5.3: “This policy [may does] not cover the value of all items stolen from your home. Please carefully review your policy to determine which items stolen from your home are not covered by this policy.” The disclosure required by this subsection shall be entitled “Reimbursement for Stolen Items,” and the subsection title shall be in at least 18 point type.

5.1.4 Disclosure of any formal practice followed by the insurer regarding non-renewal of the policy on the occurrence of certain factors or on the basis of claims asserted by the policyholder. The following language shall be sufficient to ensure compliance with this subsection 5.4: “We have a policy of declining to renew homeowners insurance policies under the following circumstances: (list the claim activities or occurrences that are likely to cause non-renewal of a policyholder’s policy).” The disclosure required by this subsection shall be entitled “Non-Renewal of Your Policy,” and the subsection title shall be in at least 18 point type.

5.2 Where a policy provides full coverage for any of the items required by sections 5.1.1 through 5.1.3, the insurer may indicate that the disclosure, as to each such item, is not applicable or “N/A.”

6.0 Review and Approval of Forms

All forms required by this regulation shall be submitted to and approved by the Commissioner, or his representative, pursuant to 18 Del. C. §2712 et seq.

7.0 [Severability Separability]

If any provision of this regulation, or the application of any such provision to any person or circumstances, shall be held invalid, the remainder of such provisions, and the application of such provisions to any person or circumstance other than those as to which it is held invalid, shall not be affected.

8.0 Causes of Action

This regulation shall not create, nor form the basis for, a cause of action for any person or entity, other than the Delaware Department of Insurance, against any insurer for violation of the provisions hereof.

9.0 Effective Date

The effective date of this regulation shall be January 1, 2006.

9 DE Reg. 437 (9/1/05)