INSURANCE REGULATORY OBSERVER

Transcription

1 INSURANCE REGULATORY OBSERVER NEWS ON CONTEMPORARY ISSUES THE TERRORISM RISK INSURANCE EXTENSION ACT OF 2005 The Terrorism Risk Insurance Act of 2002 (TRIA) went into effect on November 26, , to provide a federal government backstop for insurance losses caused by acts of terrorism in the United States and to make coverage for terrorism losses more widely available at a reasonable premium level. Almost upon the expiration of TRIA, the House and Senate agreed on a two-year extension of TRIA with an expiration date of December 31, The measure was signed by President Bush on December 22, A fundamental provision of TRIA that remains in effect is the requirement that insurers make terrorism insurance coverage available for certified acts of terrorism on the same terms and conditions as for other covered risks. The TRIA Extension Act retains TRIA s basic formula for the federal government backstop for terrorism losses. There are, however, significant changes in the dollar amounts that are applied to the formula. TRIA is triggered when the Secretary of the Treasury certifies that an act of terrorism has caused property and casualty insurance losses exceeding $5 million. The trigger amount jumps to $50 million for the period April 1, 2006 to December 31, 2006 and climbs to $100 million for The TRIA Extension Act adds some exclusions that were not in the original TRIA. Now, commercial automobile, burglary and theft, surety, professional liability and farm owners multiple peril insurance are excluded from TRIA coverage, in addition to the crop and livestock, private mortgage and title insurance, monoline financial guaranty, medical malpractice, health and life, including group life, national flood insurance, reinsurance and retrocessional reinsurance exclusions under the original TRIA. Under the original TRIA, the federal government pays 90 percent of all insured losses resulting from acts of terrorism in excess of insurer-paid deductibles. The federal government s share remains at 90 percent throughout 2006 and drops down to COZEN O CONNOR. ALL RIGHTS RESERVED. WINTER 2006 IN THIS ISSUE FEDERAL DEVELOPMENTS The Terrorism Risk Extension Act of 2005 Anti-Money Laundering Programs and Suspicious Activity Reports Required for Insurance Companies STATE REGULATORY DEVELOPMENTS New York West Virginia and Kentucky California Mississippi Pennsylvania and Puerto Rico NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS UPCOMING SPEAKING DATES FOR COZEN O CONNOR INSURANCE CORPORATE AND REGULATORY ATTORNEYS PHILADELPHIA ATLANTA CHARLOTTE SAN DIEGO CHERRY HILL SAN FRANCISCO CHICAGO SANTA FE DALLAS SEATTLE DENVER TORONTO HOUSTON TRENTON LAS VEGAS* WASHINGTON, DC LONDON W. CONSHOHOCKEN LOS ANGELES WICHITA NEW YORK DOWNTOWN WILMINGTON NEW YORK MIDTOWN NEWARK * Affiliated with the offices of J. Goldberg & D. Grossman

2 INSURANCE REGULATORY OBSERVER NEWS ON CONTEMPORARY ISSUES percent for The deductible for each insurer, calculated as a percentage of direct earned premium for commercial property and casualty insurance for the immediately preceding calendar year, increases from the current 15 percent level for 2005, to 17.5 percent for 2006 and to 20 percent for The mandatory market share, the insurance industry s aggregate retention for claims relating to acts of terrorism, has increased for each year of the TRIA program. Currently at $15 billion, that amount moves up to $25 billion for 2006 and to $27.5 billion for TRIA s overall cap on liability stays at $100 billion per year. The TRIA Extension Act also requires that a study be carried out on the long-term availability and affordability of insurance for terrorism risk, including coverage for group life and for chemical, nuclear, biological and radiological events. The study is to be completed by September 30, On December 29, 2005, the National Association of Insurance Commissioners (NAIC) adopted a model bulletin to help state insurance regulators advise insurers about regulatory requirements related to the extension of TRIA. On the same day, the United States Department of the Treasury (Treasury) issued Interim Guidance Concerning the Terrorism Risk Insurance Extension Act of The Interim Guidance was issued to assist insurers in complying with TRIA pending the issuance of regulations by Treasury. States are also issuing guidelines for TRIA compliance. For example: Massachusetts Division of Insurance UPCOMING SPEAKING DATES - MEMBERS OF INSURANCE CORPORATE AND REGULATORY DEPARTMENT FRANCINE L. SEMAYA April 5-6, Scottsdale, Arizona - Moderator, Mealeys Insolvency Roundtable April 28, New York City Bar - Co- Chair and Moderator, Current Issues in Insurance Regulation June 7, Co-Chair and speaker on Insurance Insolvency - Practising Law Institute, New York, New York - Reinsurance Law & Practice 2006 LINDA A. KAISER March 27, American Conference Institute, Speaker on Hurricane Issues April 4, PA Insurance Society- Speaker on Regulatory Update April 25, PA Bar Institute, Course Planner FRANCES R. ROGGENBAUM April 13, Central Pennsylvania I-Day, Harrisburg, Pennsylvania - Moderator for panel on Insurance Privacy Compliance April 27-28, CPCU Society National Leadership Institute, Phoenix, Arizona - Topic- Ethics, Practical Considerations To suggest topics or for questions, please contact: Francine L. Semaya, Esq., Chair, Insurance Corporate and Regulatory Practice Group, at , fsemaya@cozen.com, Linda S. Kaiser, Esq. at , lkaiser@cozen.com or William K. Broudy, Esq. at , wbroudy@cozen.com. Editorial assistance provided by Regulatory Analyst Larry Shapiro and Law Clerk Hilary Levine. Comments in this Insurance Corporate and Regulatory Observer are not intended to provide legal advice. Readers should not act or rely on information in the Observer without seeking specific legal advice. To obtain additional copies, permission to reprint articles, or to change mailing information, please contact: Lori J. Scheetz, Director of Marketing Operations, or or lscheetz@cozen.com WINTER 2006 COZEN O CONNOR S NEWSLETTER ON CONTEMPORARY CORPORATE AND REGULATORY ISSUES PAGE 2

3 Bulletin , dated January 5, 2006; Michigan Office of Financial and Insurance Services Bulletin INS, released January 13, 2006; Maine Bureau of Insurance Bulletin 341, issued January 17, 2006; North Carolina Department of Insurance Bulletin 06-B-02, dated January 19, 2006; North Dakota Department of Insurance Bulletin , dated January 5, 2006; New York Insurance Department Circular Letter No. 1 (2006), dated January 18, 2006; Oklahoma Insurance Department Bulletin PC , dated December 30, 2005; and South Dakota Division of Insurance Bulletin 06-01, dated January 4, 2006 summarize the TRIA Extension Act and review TRIA requirements. 3 New York Circular Letter No. 1 (2006) directs insurers and rate service organizations to make appropriate form and/or rule filings in recognition of the removal of commercial auto insurance, burglary and theft insurance, surety insurance, professional liability insurance and farm owners multi peril insurance from the provisions of TRIA. The Department considers the continued use of terrorism exclusion endorsements previously approved for those lines of insurance to be misleading and an unfair trade practice, if used for new and renewal policies with effective dates on and after January 1, Previously, an insurer was permitted to exclude or limit terrorism coverage if it had first been made available at reasonable rates under TRIA provisions. Those requirements are no longer applicable to those lines of insurance deleted under the TRIA Extension Act and the Department is seeking to insure that new and renewal policies conform to the TRIA Extension Act provisions. TREASURY DEPARTMENT REQUIREMENTS FOR INSURANCE COMPANY ANTI-MONEY LAUNDERING PROGRAMS AND SUSPICIOUS ACTIVITY REPORTING As reported in the November 10, 2005 Insurance Corporate & Regulatory Alert, regulations published by the United States Treasury Department s Financial Crimes Enforcement Network (FinCEN) on November 3, 2005, require insurance companies to establish antimoney laundering (AML) programs and to commence Suspicious Activity Reporting (SAR), by May 2, The regulations, contained in 31 Code of Federal Regulations Part 103, are authorized by the Bank Secrecy Act and were mandated by the USA Patriot Act, signed on October 26, AML requirements for insurance companies were originally proposed in September, 2002 but were not promulgated until November, During that three-year period, the Treasury Department analyzed the potential for the use of insurance products for money laundering and concluded that permanent life insurance contracts, annuity contracts and any other insurance product with features of cash value or investment should be covered by the regulations, whereas guaranteed investment contracts and guaranteed investment-backed notes are not covered. Also not covered are group life insurance contracts, group annuity contracts, term life insurance, property and casualty insurance, health insurance and reinsurance. Only insurance companies are required to establish antimoney laundering policies. Agents and brokers do not have to establish anti-money laundering policies, but insurance companies must make sure that the activities of their agents and brokers who produce their business are covered by their anti-money laundering programs. The basic guideline for an anti-money laundering program is that it be reasonably designed to prevent the insurance company from being used to facilitate money laundering or the financing of terrorist activities. 5 A key aspect of an AML program is that it be tailored to apply to the insurance company s business and products. The program must be approved by senior management of the insurance company and be made available to the Treasury Department upon request. COZEN O CONNOR PAGE 3

4 INSURANCE REGULATORY OBSERVER NEWS ON CONTEMPORARY ISSUES Insurers are required to appoint a compliance officer responsible for overseeing the implementation and updating of the program. Monitoring of compliance by agents and brokers is required along with ongoing inhouse or third-party training. The effectiveness of the program is to be independently tested either by the insurance company or by a third-party on a schedule to be determined by the insurance company, but the compliance officer cannot do such testing. The testing process must include a written report on the results. Brokerdealers within insurance companies will fulfill insurance company AML requirements by complying with preexisting broker-dealer AML requirements. Suspicious activity reporting requires the use of FinCen Form 108. Such reporting must be made within thirty days of the occurrence of a suspicious transaction of $5000 or more if it is relevant to a possible violation of law or regulation. By considering a list of red flags, the insurance company is to be on the lookout for potential money laundering by means of transactions that have no business or apparent lawful purpose and may be carried out to facilitate illegal criminal activity. Among the red flags listed on FinCen Form 108 are cash/unusual premium payment, early/excessive cash borrowing, early policy termination, excessive insurance, little or no product performance concern, the use of multiple money orders or checks, presentation of suspicious documents or ID, unclear or no insurable interest and unusual designation of beneficiary/ assignee. To check against the names of customers, insurance companies will be using a database provided by the Office of Foreign Assets Control (OFAC) of the Treasury Department listing possible terrorism suspects. NEW YORK INSURANCE DEPARTMENT REJECTS PLAN INVOLVING THE USE OF LIFE INSURANCE AS SECURITY FOR LOANS In an Office of General Counsel Opinion Letter, the New York Insurance Department (Department) has found a loan plan involving the use of a life insurance policy on the life of the borrower as security for the loan to be an impermissible transaction under New York Insurance Law. The plan presented to the Department for review involved loans from banks (loan providers) to enable clients to purchase life insurance policies. An option agreement (the put option) established the amount of the premium to be paid and permitted a third-party to purchase the policy on a predetermined date, at least two years after the date of the loan. The loans were secured by the policies. In the event of the death of the client before the maturity date of the loan or before repayment of the loan, the loan would be repaid out of the policy death benefit. Under the facts presented, the put option provider was a hedge fund. If the hedge fund exercised the right to purchase the policy under the put option, the purchase price received by the client would cover repayment of the loan, plus interest. If the put option was not exercised, the client would remain the owner of the policy and would remain liable for making principal and interest payments on the loan and the put option would lapse. In addition, a licensed bank would provide a guarantee to the hedge fund for a fee. If the hedge fund could not exercise its option to buy the policy, the guarantee provider would assume all obligations and receive all benefits of the put option provider. The Department found that it appears that the arrangement is intended to facilitate the procurement of policies solely for resale and concluded that the transaction presented involves the procurement of insurance solely as WINTER 2006 COZEN O CONNOR S NEWSLETTER ON CONTEMPORARY LITIGATION ISSUES AND RECENT COURT DECISIONS PAGE 4

5 a speculative investment for the ultimate benefit of a disinterested third-party. The Department also stated that the plan is contrary to the long established public policy against gaming through life insurance policies. The opinion concludes that potential transferees do not appear to have a legitimate insurable interest in the lives of the clients. The opinion also identifies a potential rebating violation. If the client were to sell the policy upon the exercise of the put option, the client could recoup from the proceeds of the sale the amounts borrowed and paid as policy premiums, in effect receiving a rebate of the premium. Under those facts, an insured could receive cost free coverage for the two-year incontestability period, which is seen by the Department as a possible inducement to acquire the policy. Rebating and inducements are prohibited under New York Insurance Law Section NEW YORK STATE INSURANCE DEPARTMENT CIRCULAR LETTER NO. 22: FILING OF ACTUARIAL OPINION SUMMARY The New York State Insurance Department has issued Circular Letter No. 22 to advise all domestic property/casualty insurers domiciled in New York State of changes made to National Association of Insurance Commissioners (NAIC) 2005 Annual Statement Instructions for Property/Casualty Companies. The Department's Circular Letter specifically notifies insurers that effective with the filing of the 2005 Annual Statement, insurers must also file a document entitled the Actuarial Opinion Summary (AOS). In the Circular Letter, the Department advises that in addition to filing a Statement of Actuarial Opinion with their annual financial statements, insurers must now also file an AOS, to be submitted by March 15, 2006 and on an annual basis by March 15 of each following year. Per the Department, instructions for filing the AOS are in the 2005 Annual Statement Instructions for Property/Casualty Companies promulgated by the NAIC. When filing, the Department suggests that insurers request an exception from disclosure under Section 89(5) of the N.Y. Freedom of Information Law 6 with respect to any information an insurer believes is a trade secret or commercial information that, if disclosed, would cause substantial injury to the insurers competitive position. Additional states that have issued bulletins requiring insurers to file an OAS along with their 2005 Annual Statements include North Carolina (Bulletin 06-B-01), Pennsylvania (Notice ) and Wisconsin (Bulletin dated December 13, 2005). NEW YORK STATE INSURANCE DEPARTMENT OPINION LETTER: MAXIMUM LIFE INSURANCE LIMITS FOR JUVENILES The Office of the General Counsel (OGC) of the New York State Insurance Department recently released an opinion letter regarding juvenile life insurance coverage limits. In the opinion letter, the OGC stated that in the case of a minor over the age of fourteen years and six months of age, the maximum amount of life insurance for which an individual can apply is twenty-five thousand dollars or fifty percent of the life insurance in force upon the life of the applicant, whichever is greater. 7 The OGC further stated that for juveniles under the age of fourteen years and six months, the limit is twenty-five thousand dollars or twenty-five percent of the life insurance in force upon the life of the applicant, whichever is greater. 8 If, however, the prospective juvenile insured is not dependent on the applicant for support and maintenance, an insurer may issue a policy for an amount in excess of these limits. 9 COZEN O CONNOR PAGE 5

6 INSURANCE REGULATORY OBSERVER NEWS ON CONTEMPORARY ISSUES PENNSYLVANIA AND PUERTO RICO ADOPT THE INTERSTATE COMPACT Pennsylvania and Puerto Rico now join Colorado, Hawaii, Idaho, Indiana, Iowa, Kansas, Maine, Maryland, Nebraska, New Hampshire, North Carolina, Rhode Island, Texas, Utah, Vermont, Virginia, Washington and West Virginia to have adopted the Interstate Insurance Product Regulation Compact, 10 a multi-state initiative to develop a uniform process and standards for product filing and approval. When adopted by 26 jurisdictions, the Interstate Compact legislation will create the Interstate Insurance Product Regulation Commission (Commission). Alternatively, the adoption of similar legislation by jurisdictions representing forty percent of the prior year premium volume for life insurance, annuity, disability income and long-term care insurance products will create the Commission. To date, twenty states representing thirty of the required forty-percent of premiums necessary to make the Commission effective have adopted the Compact. The Commission would be comprised of representatives from compacting states and would be charged with developing uniform product standards, receiving and reviewing products filed with the Commission and approving those product filings that satisfy the applicable uniform standards. IRMA IS ADOPTED BY THE NAIC In December, the National Association of Insurance Commissioners (NAIC) unanimously adopted the Insurer Receivership Model Act (IRMA). The model act had been under revision by a working group of the NAIC Receivership and Insolvency (E) Task Force since Although the development of IRMA, which is based in part on the NAIC Insurers Rehabilitation and Liquidation Model Act Model Liquidation Act, 11 involved consideration of various key issues, many issues remain unresolved by the adoption of IRMA. Included among the unresolved issues is the reimbursement of state guaranty funds for large deductible policies, prioritization of guaranty fund defense expenses, mandatory arbitration and the modification of reinsurance recoverables provisions. With respect to the absence of a large deductible provision in IRMA, Commissioner Alfred Gross (Virginia Commissioner of Insurance and Chairman of the NAIC Financial Condition (E) Committee) committed to recommending a charge for the (E) Committee to consider a large deductible provision in Per the NAIC, IRMA is designed to protect the interest of policyholders, claimants and creditors by improving efficiency in the administration of an impaired or insolvent insurer during the stages of conservation, rehabilitation and liquidation of the estate. To date, Texas is the only state to adopt IRMA provisions. 12 EXTENSION OF SUITABILITY STANDARDS IN ANNUITY TRANSACTIONS TO CONSUMERS OF ALL AGES In response to recent concerns expressed by insurance regulators, the American Council of Life Insurers (ACLI) has agreed to pursue the extension of suitability protections in the sales of annuities to consumers of all ages. The most recent request for such protections came from North Dakota Insurance Commissioner Jim Poolman, who also chairs the National Association of Insurance Commissioners (NAIC) Life Insurance and Annuities (A) Committee. While speaking during a recent ACLI meeting, Commissioner Poolman urged the life insurance industry to extend protections in the sale of WINTER 2006 COZEN O CONNOR S NEWSLETTER ON CONTEMPORARY LITIGATION ISSUES AND RECENT COURT DECISIONS PAGE 6

7 annuities that are required for senior purchasers, to consumers of all ages. Commissioner Poolman s request relates to protections governing the suitability of sales of annuity products to seniors, embodied in the NAIC Senior Protection in Annuity Transactions Model Regulation. 13 The model regulation, adopted by the NAIC in late 2003, seeks to protect senior consumers 14 from deceptive sales practices in the purchase or exchange of annuity product by creating standards and procedures to ensure that recommendations for the sale or exchange of such products take into account the needs and objectives of senior purchasers. The North Dakota Commissioner s recent request to extend these protections beyond senior purchasers comes as various states have already applied, 15 or are considering the application of such protections to consumers of all ages. 16 The NAIC, itself having issued a recent bulletin warning of the need for seniors to educate themselves on annuities, 17 explained that the regulators decided to focus first on the area that had been identified as subject to the greatest abuse: the inappropriate sales of annuities to persons over the age of 65. Commissioner Poolman expanded on this, stating that [p]roblems once restricted to seniors are no longer confined to one age group, proving that protections must be expanded. 18 The NAIC and life insurance industry announcements also coincide with a recent statement from the National Association of Securities Dealers (NASD) calling for the various entities involved in the regulation of annuity products to harmonize their efforts. 19 Such entities include state insurance regulators, the NASD and the Securities and Exchange Commission. 20 In its recent statement, the NASD appears skeptical over the protections afforded to consumers of fixed and equity-indexed annuities and raises the concept of a single set of rules to govern the sale of all annuity products. WEST VIRGINIA REAFFIRMS REQUIREMENT OF APPOINTMENT FOR SALE OF INSURANCE BY A PRODUCER, WHILE KENTUCKY RELAXES AGENT APPOINTMENT REQUIREMENTS In 1992, West Virginia eliminated broker licensing and introduced a single producer s license. In response to reports that producers were selling insurance on behalf of insurance companies without receiving an appointment as required by West Virginia law, 21 the West Virginia Insurance Commissioner issued West Virginia Information Letter No. 155 in December, 2005 to all licensed insurance companies stressing that the introduction of a single producer s license did not change the existing appointment requirements. The Letter notes that: the following acts, if done by an individual insurance producer with the knowledge or consent of an insurance company, or if they are subsequently approved or ratified by the company, are considered by the Insurance Commissioner to be determinative as to whether an agency relationship has been established between the individual insurance producer and the insurance company: 1. Using an insurance company s brochures, letterhead, applications, or other company identifying material during a sales presentation or in circumstances relating to performance of professional services by the individual producer; 2. Representing to a prospective buyer of insurance that the individual insurance producer is acting on behalf of a certain insurer; or, in situations in which a reasonable person in the buyer s position would believe that the individual insurance producer is acting on behalf of a specific insurance company, failing to notify a prospective buyer that the individual COZEN O CONNOR PAGE 7

8 INSURANCE REGULATORY OBSERVER NEWS ON CONTEMPORARY ISSUES insurance producer does not represent such company; 3. Presenting, discussing, recommending or explaining specific insurance products offered by a specific company; 4. Binding of coverage with a specific company or taking information for or completing an application for insurance with a specific company; or 5. Giving advice, counsel or recommendations about benefits, terms, features, conditions, exclusions or costs of any specific insurance product offered by a specific insurance company or companies to a prospective buyer during an initial sales presentation. Any individual insurance producer who does any of the acts enumerated above is considered and has been considered since the effective date of House Bill 4497, to be acting as an agent of the insurer and is required to hold a valid appointment from any and all of the insurance companies on whose behalf the individual insurance producer is either selling, soliciting, negotiating, marketing or effecting an insurance contract... Because the appointment requirement applies to all individuals or persons acting on behalf of an insurance company, it has always been the Insurance Commissioner s position that the producer must be appointed personally if engaged in any of the above enumerated activities, regardless of his or her affiliation with any agency. By contrast, with the promulgation in 2005 of a Kentucky Administrative Regulation, 22 agents are permitted to place business with insurers for which the agent holds no appointment, provided that the premium for the insurance placed does not exceed 20 percent of the agent s total premium for the preceding calendar year. The Regulation sets forth the responsibilities of an insurer as follows: (1) An insurer may assume that agents not appointed by the insurer and submitting applications to the insurer have not exceeded the limitations of Section 2 of this administrative regulation. However, an insurer which knows or has reason to know that an agent is in violation of Section 2 of this administrative regulation shall not issue an insurance policy based on an application submitted by this agent. (2) An insurance policy issued in violation of this administrative regulation is valid and enforceable. MANDATORY BINDING ARBITRATION IN PENNSYLVANIA FOR AUTOMOBILE INSURANCE DISPUTES FOUND UNENFORCEABLE The Supreme Court of Pennsylvania recently held the Pennsylvania Insurance Department (Department) does not possess the authority to require mandatory binding arbitration for uninsured motorist (UM) and underinsured motorist (UIM) disputes. This ruling introduces flexibility for insurers to remove arbitration provisions from automobile policies issued under the Motor Vehicle Financial Responsibility Law (MVFRL). 23 In Insurance Federation of Pennsylvania v. Commonwealth of Pennsylvania, 24 the Pennsylvania Supreme Court was presented with two questions: first, whether the Department possessed the statutory authority to require that all UM and UIM disputes be submitted to mandatory, binding arbitration; second, whether the Department s imposition of mandatory, binding arbitration upon UM WINTER 2006 COZEN O CONNOR S NEWSLETTER ON CONTEMPORARY INSURANCE CORPORATE AND REGULATORY ISSUES PAGE 8

9 and UIM disputes violates the constitutional right to a jury trial of both insurance consumers and insurers. The case initially had been decided in an administrative proceeding, wherein the Pennsylvania Insurance Commissioner (Commissioner) determined the Department may disapprove automobile insurance policies that did not require binding arbitration of UM and UIM disputes. Upon appeal to the Pennsylvania Commonwealth Court, the Commissioner s determination was affirmed, in reliance upon Prudential Property and Casualty Insurance Co. v. Muir. 25 In the Prudential case, the Commonwealth Court en banc previously decided the Insurance Department possessed the implied authority to promulgate regulations requiring inclusion of an arbitration clause in insurance policies pursuant to the Uninsured Motorist Clause Act (UM Act). 26 In the Insurance Federation case, the Commonwealth Court reaffirmed the Department s implied authority to provide proper protection to victims injured by uninsured motorists by approving only those policies affording arbitration for UM and UIM claims. On appeal, the Pennsylvania Supreme Court concluded the Department exceeded its authority by requiring mandatory binding arbitration for UM and UIM disputes. The Court noted the Pennsylvania Constitution confers the legislative power in the Commonwealth solely to the General Assembly. The legislative branch may delegate policy making authority to an administrative agency as long as the legislature makes the basic policy choices. The General Assembly, however, did not grant the Department the express authority in either the UM Act or the MVFRL to require mandatory binding arbitration for UM and UIM claims. The Court also considered whether the Department had the implied authority to promulgate a regulation requiring insurance contracts to contain an arbitration provision and found it did not. The Court decided the public policy underlying the enactment of the MVFRL did not create an implied legislative mandate that allowed the Department to require arbitration simply because it would be less costly and less time consuming than litigation. The Court noted neither the MVFRL nor the UM Act contained substantive provisions of the law requiring mandatory binding arbitration and therefore, the regulation by the Department encompassed more than what was needed to implement the statute. In light of its decision, the Court did not need to address the issue as to whether mandatory arbitration requirements would pass constitutional muster. In the dissent, Justice Saylor, joined by Justice Castille, opined that the Department has broad authority under the UM Act to require mandatory arbitration of uninsured motorist disputes, as well as underinsured motorist claims, which are not addressed in the UM Act. The dissent argued the General Assembly left open a wide range of detail to the development and refinement by the Department, indicating legislative acquiescence and approval. The dissent also noted the presence of flaws in the present arbitration practice that warranted consideration of the appropriate regulatory approach, including potential modifications to increase judicial involvement and oversight. Insurers should review their options in light of the new flexibility afforded by this decision. Any form changes will be subject to prior approval for personal lines business, but commercial lines may be eligible for immediate implementation of changes under the applicable deregulation requirements. INSURERS SHARPLY CRITICIZE PROPOSED OVERHAUL OF CALIFORNIA REINSURANCE REGULATORY SCHEME Comprehensive Reinsurance Oversight Regulations, issued for public comment by the California Department of Insurance on November 21, 2005, came under sharp criticism from insurance industry groups at a January 24, 2006 hearing. Published statements point out that the proposed regulations deviate from the existing National COZEN O CONNOR PAGE 9

10 INSURANCE REGULATORY OBSERVER NEWS ON CONTEMPORARY ISSUES Association of Insurance Commissioners Model Credit for Reinsurance Law and Regulation and thereby impose a costly set of California-only standards on the industry without an adequate explanation for the regulatory overhaul. Among the controversial requirements of the proposed regulations are quarterly reporting to the Department of lists of cedents, approval of reinsurance trust funds by the Commissioner and the ability of the Commissioner to declare that reinsurance recoverables that are due more than 90 days from a reinsurer to a domestic insurer must be reported as non-admitted assets. The basic purpose for the new regulations is set forth on the Department website as follows: Quality reinsurance protects the solvency of licensed insurers and thus promotes a healthy insurance market. The proposed regulations are intended to provide a regulatory framework to assess and ensure the quality of a licensee s reinsurance arrangements. MISSISSIPPI ISSUES BULLETINS TO ASSIST VICTIMS OF HURRICANE KATRINA The Mississippi Department of Insurance has issued two Bulletins to benefit insureds who suffered property damage as a result of Hurricane Katrina. Bulletin , issued January 26, 2006, repeals Bulletin , which extended the time limit for submission of any notice of claim or proof of loss to January 31, Bulletin provides that with respect to personal and commercial insurance policies covering structures in Mississippi damaged as a result of Hurricane Katrina, an insurer that requires a proof of loss must notify the policyholder of that requirement, in writing and must provide a proof of loss form, even if the policy does not require a written request by the insurer for a proof of loss. Bulletin further specifies that failure to submit a proof of loss within the time period specified by the insurer will not constitute a bar to recovery under the policy, but might result in a substantial delay in the processing of the claim. Bulletin was amended on January 27, 2006 in response to the delays encountered by Mississippi property owners in having repairs to their property completed after receiving claim payments from their insurance companies. Amended Bulletin specifies that no insurance company shall cancel or nonrenew a personal or commercial property insurance policy covering property located in this State which has been damaged as a result of Hurricane Katrina, for a period of sixty (60) days after the property has been repaired, except for... (1) nonpayment of premium; (2) misstatement or fraud; (3) unreasonable delay in repair of the property; (4) full payment of policy limits, coupled with an offer of a builders risk or similar policy that would cover the property until completion of repairs, which the policyholder has refused; or (5) cancellation or nonrenewal at the request of the policyholder. An insurance company may be exempted from compliance with Bulletin if it can establish that it is in hazardous financial condition. ENDNOTES 1. Public Law The bill designation is S. 467, Public Law , 119 Stat and may be cited as the Terrorism Risk Insurance Extension Act of Virginia Bureau of Insurance Administrative Order No , dated January 3, 2006, withdraws the endorsement for commercial automobile insurance policies relating to a cap on losses from certified acts of terrorism. The endorsement is no longer necessary in light of the elimination of commercial automobile insurance from TRIA coverage. 4. The Bank Secrecy Act, Public Law , as amended, 12 U.S.C and 31 U.S.C , ; the USA PATRIOT Act, Public Law WINTER 2006 COZEN O CONNOR S NEWSLETTER ON CONTEMPORARY INSURANCE CORPORATE AND REGULATORY ISSUES PAGE 10

11 5. 13 CFR (b). 6. N.Y. PUB. OFF. LAW 89(5) (McKinney 2005). 7. Insurers includes all domestic property/casualty insurers that are licensed under NYIL 4104(a) and required to file a Statement of Actuarial Opinion with the National Association of Insurance Commissioners (NAIC). 8. N.Y. Ins. Law 3207(b). 9. Id. These limits were amended in 2003, from a maximum of ten thousand dollars or the limit of fifty percent of the amount of life insurance in force upon the life of the person effectuating the insurance at the date of issue of the policy on the life of the minor (five thousand dollars and twenty five percent, for minors under the age of fourteen and a half). L c. 284 (N.Y. 2003). 10. N.Y. Ins. Law 3207(c). 11. IV NAIC Model Laws, Regulations and Guidelines, 692-1, Interstate Insurance Product Regulation Compact (Jan. 2004). 12. III NAIC Model Laws, Regulations and Guidelines, 555-1, Insurers Rehabilitation and Liquidation Model Act (April 2005). This model was originally adopted by the NAIC in December, II NAIC Model Laws, Regulations and Guidelines, 275-1, Senior Protection In Annuity Transactions Model Regulation (Oct. 2003). 14 A senior consumer means a person 65 years of age or older. Id. 5(E). 15. KAN. ADMIN. REGS a (Life insurance and annuities; recommendation standards) (effective 12/2/05). 16. States considering the extension of the NAIC Senior Protection in Annuity Transaction model regulation to all ages, as of January 1, 2006, include Maryland, Massachusetts and Nevada. 17. News release, National Association of Insurance Commissioners, Consumer Alert: Seniors: Educate Yourself on Annuities (Dec. 23, 2005) (on file with author). 18. News release, National Association of Insurance Commissioners, NAIC Commends ACLI For Policy Change, (Jan. 24, 2006), 19 Robert Glauber, Chairman, National Association of Securities Dealers, Address to the North American Securities Administrators Association (Jan. 9, 2006). 20. Traditionally, state insurance regulators maintain jurisdiction over life insurance products, including fixed and variable annuity products. The securities components of variable products, however, are also subject to federal securities regulation. For example, the separate accounts of variable annuities and the products funded by the separate accounts, are subject to registration requirements of the Investment Company Act of 1940 and the Securities Act of 1933; disclosures in variable products prospectuses and advertising are regulated by the SEC; and the sale of variable contracts (with registered products) must be completed by an NASD broker/dealer, or its registered representative. 21. West Virginia Insurance Code Section KAR 9: Motor Vehicle Financial Responsibility Law (MVFRL), 75 Pa. C.S. 1701, sets the standards for provision that must be included in an automobile insurance policy in Pennsylvania. 24. Insurance Federation of Pennsylvania, Inc. v. Commonwealth of Pennsylvania, 2005 Pa. Lexis 3209 (Pa. 2005). 25. Prudential Property and Casualty Insurance Co. v. Muir, 513 A.2d 1129 (Pa. Cmwlth. 1986) P.S COZEN O CONNOR PAGE 11

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