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Bulletin No. 80-01
Market value or repair cost homeowners policies
Issued and entered January 7, 1980 by E.C. Mackey, Acting Commissioner of Insurance
In March 1978, the Michigan Insurance Bureau issued Bulletin 78-3, which established interpretive guidelines for the evaluation and approval of "market-value" homeowner policies. More recently, the Michigan legislature has enacted Public Act 145 of 1979, which specifies loss settlement standards and underwriting and rating constraints for such policies. This bulletin is being issued to incorporate these statutory changes into the previous guidelines.
"Market-value" or "repair-cost" homeowner policies provide coverages similar to those provided under conventional replacement cost homeowner policies, but also typically include special repair-cost settlement provisions on limitations on the total amount of coverage offered by the policy based on property market value. For purposes of this bulletin, the following definitions shall apply:
(1) "Home insurance" means either of the following, but does not include insurance intended to insure commercial, industrial, professional, or business property, obligations, or liabilities:
(a) Insurance for an insured's owner-occupied dwelling, including multiple-unit dwellings of not more than 4 residential units, provided by a Michigan standard policy as described in section 2832.
(b) When contained in or indorsed to a Michigan standard policy providing insurance for the insured's residence, other insurance intended primarily to insure nonbusiness property, obligations, and liabilities.
(2) "Market-value policy" means a home insurance policy for which the amount of coverage under the policy is based substantially on the market value of the property, and which provides for repair, rebuilding or replacement of losses or damages to real property with materials of like kind and quality without depreciation, pursuant to section 2826 or with conventional materials and construction methods pursuant to the standards of section 2827.
(3) "Replacement cost policy" means a home insurance policy for which the amount of coverage under the policy is based substantially on the replacement cost of the property, and which provides for settlement of losses to real property pursuant to the standards prescribed in section 2826.
(4) "Market-value homeowner endorsement" means an endorsement which, when used in conjunction with a conventional replacement cost policy,
produces a policy/endorsement combination which is equivalent to the market value policy defined in (2), above.
Unless otherwise specified, all guidelines which apply to market value policies shall also apply to market value homeowner endorsements.
II. POLICY PROVISIONS
Section 2236(3) of the Michigan Insurance Code prohibits the issuance of any insurance policy form which contains exceptions and conditions that unreasonably affect the risk purported to be assumed in the general coverage of the policy. To the extent that market value homeowner policies restrict the amount of coverage or type of loss settlement available to the policyholder, there is a significant change in the coverage normally associated with the homeowner form.
Section 2604 of the Code, which was established by Public Act 145 of 1979, provides additional regulation of the use of market value policies. Section 2604 requires that if an insurer establishes underwriting rules for conventional replacement cost policies based on the ratio of property market value to replacement cost, the insurer must offer a market value policy which satisfies certain coverage standards and rating constraints. Section 2604 expires December 31, 1980, when it is replaced by a similar provision in Section 2117.
In the interest of providing uniform and adequate protection for the home insurance consumer, and of actively enforcing the provisions of Public Act 145 of 1979, the Michigan Insurance Bureau has developed guidelines by which all filings of market value policies and endorsements will be reviewed for approval. To be approved for use, all market value policies and endorsements must comply with the following standards:
1. Coverage: All market value homeowner policies shall provide those of the following coverages which are offered by the conventional replacement cost homeowner policy of the filing company which most closely corresponds to the HO-2 policy form of the principle rating organization in Michigan (Insurance Services Office): insurance for direct physical loss of property; insurance for additional living expenses; medical payments insurance; voluntary property damage insurance; and comprehensive personal liability insurance. Basic limits of coverage and options for higher limits of coverage on the latter three coverages should be equivalent to those normally offered by conventional replacement cost homeowner policies of the filing company.
2. Insured Perils: All market value homeowner policies should cover losses to the structural portions of the insured property from those of the following perils which are normally covered on a named-peril basis by the conventional replacement cost homeowner policy of the filing company which most closely corresponds to the HO-2 policy form of the principle rating organization in Michigan (Insurance Services Office):
fire; lightning; windstorm or hail; explosion; riot or civil commotion; aircraft; vehicles; sudden and accidental damage from smoke; vandalism or malicious mischief; breakage of glass; theft; falling objects; weight of ice, snow, or sleet; collapse of buildings; sudden and accidental tearing asunder, cracking, burning, or bulging of a steam or hot water heating system; accidental discharge or overflow of water or steam; freezing of plumbing, heating or air conditioning systems and domestic appliances; and sudden and accidental injury from electrical currents artificially generated. The requirement of this section may be satisfied by the filing of a single policy form covering all applicable perils (e.g., the equivalent of an HO-2 or "broad-form" policy), or by the
filing of a policy covering fewer perils together with an endorsement form covering the additional perils necessary to satisfy the requirement (e.g., the equivalent of an HO-1 or "basic" form, together with an HO-2 or "broad-form" endorsement). Companies may, but need not, file other or additional limited homeowner policy forms specified in this section (e.g., HO-1, HO-3, or HO-5 forms or endorsements), provided the basic requirement of the section is satisfied.
3. Limitations on Amounts of Coverage Offered: If the maximum amount of insurance which may be purchased under a market value homeowner policy is restricted to some value substantially less than the full replacement cost of the insured structure, that limit shall be no less than the fair market value of the insured property. The value of the property site may be considered in the determination of market value, provided that such land value does not constitute an extraordinary portion of total market value when compared with similar properties of the same general locale and condition as the insured property. All limitations on coverage amounts and procedures for determination of such limits shall be described in the policy filing.
4. Minimum Coverage Requirements: As a condition of purchase for a market value policy, an insurer may establish requirements for minimum levels of coverage with respect to the market value of the property. (For example, an insurer may require, as a condition of sale, that coverage be purchased in an amount equal to a stated percentage of the estimated market value of the insured property). Such requirements shall be generally and equitably applicable to all purchasers of market value homeowner policies for the insurer, and shall not exceed 100% of the market value of a property. The minimum purchase requirement and the amount of coverage purchased may be linked to an automatic inflation escalator endorsement, which increases the amount of coverage purchased or required each year, provided that such an escalator accurately reflects changes in the relevant coverage base (i.e., market value), and is not merely an index of changes in current full-replacement cost. All minimum coverage requirements shall be stated in the policy filing.
5. Loss settlement Provisions: Market value policies shall provide for settlement of losses and damages of insured real property based on either of the following standards:
a). Repair, rebuilding, or replacement of lost or damaged real property using materials of like kind and quality, without depreciation, pursuant to Section 2826 of the Code.
b). Repair, rebuilding, or replacement of lost or damaged real property using conventional materials and construction methods which are currently available without extraordinary expense, pursuant to Section 2827 of the Code.
A market value policy shall not, under either settlement standard, impose a co-payment requirement as a condition or qualification of loss settlement, such as the 80%-to-value coverage rule that is a condition of full replacement cost settlement in most conventional replacement cost homeowners policies.
III. RATING AND UNDERWRITING REQUIREMENTS
Section 2604 and 2117 of the Insurance Code require that if an insurer utilizes an underwriting rule for replacement cost policies based on the relationship between market value and replacement cost, then certain rating and underwriting restrictions apply to market value policies. The following filing requirements and approval are established with regard to market value policies:
1. Underwriting Restrictions: A filing for a market value policy shall specify the underwriting rules, if any, of the insurer for replacement cost homeowner policies which are based on the relationship or ratio of property market value to replacement cost. The filing shall also indicate whether any such market value-replacement cost underwriting rules are applied to market value policies. It should be noted that Sections 2604 and 2117 prohibit the use of market value-replacement cost underwriting rules for market value homeowner policies if such rules are used for replacement cost homeowner policies
of the insurer. Information regarding underwriting restrictions shall not be considered in evaluation of the market value policy form, but shall be considered in the evaluation and analysis of rates for such policies.
2. Rating Restrictions: If an insurer uses a market value-replacement cost underwriting rule for its conventional replacement cost homeowners policy, Sections 2604 and 2117 of the Insurance Code establish rating constraints for the market value policy of that insurer. In particular, the Code specifies that rates for the market value policy must be established so that, with respect to any particular property, the premium for the market value policy is no more than 105% for the premium of the insurer's equivalent replacement cost policy, if the property were insured at 80%-to-value under the replacement cost policy. If an insurer used a market value-replacement cost underwriting rule of 60%, for example, then the cost of $59,999 of coverage on a $100,000 (replacement cost) house under a market value policy could not be more than 105% of the cost for $80,000 of coverage under a conventional replacement cost policy. Similarly, if the full replacement cost of a house were $60,000, then the cost of a $35,999 market value policy
cannot exceed 105% of a $48,000 replacement cost policy. This constraint can be expressed more generally as follows: The premium for a market value policy of amount [($R) X (U%) = $1] must be less than 105% of the premium for a replacement cost policy of amount [($R) (.80)], where R is the replacement cost of a property and U is the market value-replacement cost cut-off for the sale of replacement cost policies.
Review of rates will consider the type of loss settlement (e.g., similar or like materials) offered by the policy. Rate filings shall provide credible statistical evidence to justify a rate, based on actual experience for the policy form. Where actual credible evidence does not exist for lack of experience with a policy form, anticipated experience may be used to justify a rate, provided that the filing specifies all assumptions and procedures used to derive that anticipated experience.
3. Rating Factors: After January 1, 1981, market value policies are subject to the same restrictions as other types of home insurance policies under Public Act 145 of 1979. In particular, it should be noted that market value replacement cost ratios are not authorized rating factors under P.A. 145. Market value policies are also subject to the territorial constraints of Section 2111.
IV. POLICY FORM REQUIREMENTS
Section 2005 of the Insurance Code prohibits the use of a policy title or name which misrepresents the true nature of that policy form, except that policies approved by the Commissioner are presumed not to be misrepresentative. That same section also forbids the use of statements which, by omission of material facts, misrepresent the benefits and conditions of an insurance policy. Because a market value homeowner policy may depart significantly from the level of coverage and method of loss settlement typically offered by conventional replacement cost homeowner policies, forms for market value homeowner policies and endorsements shall comply with the following standards of approval:
1. Policy Name: No market value homeowner policy form shall be approved which does not prominently display an appropriate title or title modification which reflects the limitation on policy coverage, if any. Acceptable titles or modifications are those which indicate the coverage limitation in a simple and objective manner, such as "Limited Homeowners," "Market-Value Homeowners," or "Repair Cost Homeowners." Titles which fail to convey the coverage limitation, such as "Specialized Homeowners" or "Customized Homeowners," are not acceptable for approval. The approved name or modification should be used everywhere the title appears on the policy form, including on the policy jacket, on the declarations page, on the endorsement page(s), if applicable, and on any renewal certificates subsequently issued in conjunction with such a policy. The title or modification may be printed as part of a new jacket or page, or may appear as an overprint on a pre-printed form.
2. Notification of Modifications: The policy jacket or subsequent renewal certificate should display a notification to the policyholder of the modifications of the conventional replacement cost homeowner policy found in the market value homeowner policy. This notification should be displayed prominently on the policy jacket or renewal certificate, and may be printed as part of the complete jacket or certificate, or may be an overprint of contrasting color applied to a preprinted form. Below is an example of acceptable notification wording:
This policy provides for the repair [or replacement] of damaged or lost property in amounts up to a limit on total coverage related to the market value of your property. Please read the policy carefully to understand the basis on which claims will be settled. Please note also that because the amount of coverage under this policy is based on your property's market value, rather than its full replacement cost, coverage under this policy may be insufficient to pay for full repairs in the event of total loss. (Optional: this notification shall not constitute a modification of the loss settlement provisions contained in the policy.)
V. EFFECTIVE DATE
This bulletin becomes effective January 15, 1980 and supersedes the operation of Bulletin 78-3, which was issued March 17, 1978. All filings of market value homeowner policies shall be reviewed for approval pursuant to the guidelines of this bulletin. The guidelines of this bulletin may also be considered in subsequently reviewing market value homeowner policies previously filed or approved, as provided by Chapters 20, 21, or 22 of the Insurance Code.
Any policy filing which fails to meet the requirements of Chapters 20, 21, or 22, or any other applicable provision of the Insurance Code shall be disapproved pursuant to Section 2236. The operation of this bulletin does not abrogate the rights of an insurer to hearing and appeal of a disapproval as provided in that section, nor does the bulletin suspend the applicability of any general guidelines pertaining to the filing of policy forms as required by bulletins other than Bulletin 78-3.