AAI Asks Mich. to Limit Insurers’ Exposure Under Standard Fire Policy

The Alliance of American Insurers (AAI) is urging the Michigan Legislature to change the Standard Fire Policy Act related to commercial insurance policies, a move that would reportedly make the state’s commercial insurance market more stable.

Under the bill, HB 4432, commercial property/casualty insurance policies would not be required to cover a fire loss that ensues from a certified act of terrorism if the insured has refused coverage offered as mandated by the federal Terrorism Risk Insurance Act.

“Following the events of Sept. 11, 2001, insurers realized that terrorist acts had the capability of producing not only horrific initial damage, but also could result in fires that followed the initial event – fires that could potentially be even more devastating than the primary act,” said John Lobert, Alliance senior vice president of state government affairs, in testimony before the House Insurance Committee.

“While the federal government passed the terrorism backstop, it did not preempt laws regarding fire losses that could follow an act of terrorism. The proposed changes in HB 4432 would allow insurers to exclude coverage of such fire damage following a terrorism act if the insured has turned down terrorism coverage under the federal program. This, in turn, would ensure the stability of the state’s commercial insurance marketplace.”

The New York Standard Fire Policy, as it is commonly referred to, was passed in the 1940s to set a floor of basic fire coverage, Lobert explained. “This is an antiquated concept that no longer serves a useful purpose because competition ensures that insurers offer much more than basic coverage. Competition is measured by how much you can offer someone, not how little. However, it creates a conflict with the federal TRIA that is potentially dangerous for the financial health of insurers. For this reason, the Alliance asks that the legislature move quickly to enact this bill.”

Lobert noted that Virginia became the first state to enact changes to the Standard Fire Policy earlier this week, and similar bills have been introduced in Connecticut, Massachusetts, Minnesota, Nebraska, New Hampshire and Oklahoma.

In addition, industry efforts to change the law are underway in Illinois, Louisiana, New Jersey, Pennsylvania and Washington as well as the other 15 states that require the New York Standard Fire Policy.