By: Michael F. Chazkel and Charles W. Miller III

A bill has been introduced to the State Assembly (A-3408) and to the State Senate (S-2169) which would exclude commercial lines fire insurance policies with annual premiums of more than $10,000 from the requirement that they include the statutory language provisions of the standard fire insurance policy found in N.J.S.A. 17:36-5.20. The law requiring that property insurance policies contain this standard fire insurance policy language was adopted in New Jersey in 1954. The purpose of the law was to provide uniformity and to make insurance contracts clear and intelligible to the ordinary understanding of a policyholder. Up until the adoption of that statute, insurers prepared their own forms which often contained confusing, difficult to understand, and restrictive wording.

The language required by the statute includes some very basic and essential rights of the insured, including the right to notice of cancellation of the policy, the right to appraisal, and the specifics of the insured’s obligations in the event of a loss.

The rationale behind the pending legislation is that excluding the provision’s application to certain commercial insureds will allow flexibility to the insurers and their insureds to “develop insurance products tailored to the specific needs of their insureds” and that it will “encourage competition in this specialized segment of the commercial lines insurance market.”

The Insurance Law Group at Norris McLaughlin, P.A. wishes to bring this pending legislation to your attention as we are concerned that, should it become law, it may markedly impact on the insurance coverage that you will be able to obtain in the future and may lead to a further, insidious erosion of insureds’ rights under contracts of insurance. The statute passed in 1954 allowed the insurance companies to use, upon approval by the Insurance Commissioner, a different form of fire insurance policy, so long as that policy provided fire insurance coverage that was “substantially equivalent to or more favorable to the insured than that contained in the standard fire insurance policy established by this section.” Therefore, since 1954, if an insurer wanted to “develop insurance products tailored to the specific needs of their insureds” — as is claimed as the rationale for the pending legislation — they could do so under the statutory provisions already in effect. The new insurance product would just have to provide the insured with fire insurance coverage that was “substantially equivalent to or more favorable to the insured” than the statutory language.

We are concerned that insurance companies may use the pending legislation, should it become law, as an opportunity to re-write fire insurance coverage for medium to large commercial insureds in such a way that it will reduce the coverage provided under the standard fire insurance policy. An annual fire insurance premium of $10,000 is not a very high premium. It is not so high a premium as to guarantee a level of sophistication of the insured that it can negotiate with the insurer on an equal basis. Nor does it demonstrate a level of understanding of insurance such that it is no longer necessary for the insured to have the protection of the rights set out in the statutory language.

If your business paid a fire insurance premium close to or in excess of $10,000 this year, please be warned: this pending legislation may seriously impact on your fire insurance coverage if it becomes law.

It is important that you pre-plan your insurance program with your Risk Manager and/or Insurance Broker so that you are adequately protected in the event of a catastrophic event. Our Insurance Law Group stands ready to assist you and your insurance professionals to find effective ways to close any gaps in your coverage that might be created by this proposed legislation.

November 2006