TO:All property and casualty insurers
FROM: Kathleen Sebelius, Commissioner of Insurance
SUBJECT: Y2K Endorsement Bulletin Clarifications – Applicability to Property policies
DATE: December 1, 1998
It has come to my attention that insurers have filed a number of endorsements for approval, seeking to exclude coverage on property policies because of Year 2000 (Y2K) problems. In addition, insurers have sought clarification as to whether Bulletin 1998-12 applies to property, as well as liability coverages. This bulletin will clarify that point and clarify concerns about industry compliance with Bulletin 1998-12.
First, any approval of exclusion endorsements for property policies because of alleged problems with Y2K problems is subject to the following rules:
- Property exclusion endorsements may not be used on a blanket basis; each property risk should be individually underwritten. Exclusion endorsements should not be used where the insured has made a good faith effort to resolve any Y2K problems on their property.
- Unlike liability exposures, any alleged Y2K problem for property exposures is a more definable and measurable hazard. Therefore, specific data or actuarial support must support any exclusion endorsement submitted for approval. Many property policies, such as "all risk" property policies, clearly insure the Y2K exposure. Thus, any insurer seeking approval of an exclusion for such policies must actuarially support the conclusion there is no effect on premium, or the insurer must specify premium reductions to be given insureds in return for excluding the exposure.
- Exclusion endorsements defining the exclusion very broadly or too vaguely will not be approved. The Department has approved an exclusion endorsement filed by ISO that carefully defines the exposure and confines the exclusion to a narrowly defined set of circumstances. Endorsements that seek much broader exclusion of coverage than the ISO approach will not be approved without substantial actuarial and other justification.
- Companies must follow the same disclosure, notice, consent and limitations on use of these endorsements on personal lines exposures as required under Bulletin 1998-12. Basically, such endorsements should not used for personal lines policies, except for isolated business exposures.
- The Commissioner strongly urges companies using Y2K exclusion endorsements to offer insureds the opportunity to buy limited coverage for this exposure for a reasonable additional premium, as cautioned for liability exposures in Bulletin 1998-12.
- Any exclusion which excludes more coverage than provided in the ISO exclusions already approved by this Department, will not be approved unless the language is very narrowly confined to exclude only the specific exposure caused by Y2K defects. In particular, endorsements which use broad language excluding all damage "regardless of other causes" or other similar language broadening the scope of the exclusion, without also stating in the endorsement that "ensuing perils" in the policy will continue to be insured, are not in the best interests of insureds and will not be approved.
- All insurers who obtained approval of a Y2K property exclusion endorsement prior to issuance of this Bulletin shall submit a written plan immediately, explaining how use of the exclusion complies with this bulletin or what amendments they will file with the Department to make their exclusion comply.
Update to Bulletin 1998-12
- The Department has received several communications from agents that some companies continue to apply Y2K exclusions on a blanket basis. In addition, there appears to be no attempt on the part of many companies to offer "buy back" coverage for Y2K exposures. Companies are cautioned that the Commissioner will take appropriate action, to include introduction of legislation to require compliance, if the majority of the market in Kansas is left unprotected because of the failure of companies to address these problems.
The Department has received several filings seeking approval of endorsements excluding coverage for "Date Recognition" problems attributable to defects in the Global Positioning System (GPS) software. These defects consist of the possibility of computers malfunctioning on August 22 of 1999 because of the Global Positioning System (GPS) time roll over at midnight 21-22 August, 1999. Without too much elaboration, the problem appears to be that on 22 August, unless fixed beforehand, some GPS receivers will claim that it is 6 January 1980, which may affect the accuracy of navigation.
In most cases, the Department considers this "defect" to be merely a subset to the Y2K problem. The same rules imposed on use of Y2K exclusion endorsements by Bulletin 1998-12 shall apply to "Date Recognition" exclusion endorsements. In some cases, insurers are filing exclusion endorsements that are very broadly worded to exclude a wide range of computer defect problems, we assume to address anomalies like the GPS defect or other defects yet unknown. The Department will not approve any such filings, as they are far too broad in scope and imprecise in their impact on insureds.
- Two Kansas insurers have advised us that reinsurers are insisting they attach the exclusion endorsements to all policies, as a condition to receiving reinsurance. Bulletin 1998-12 applies to reinsurers as well as direct insurers in this state. If any insurer encounters difficulty procuring reinsurance based on the reinsurer’s misguided understanding of this Bulletin, we encourage you to refer that reinsurer to the Department.