TEXAS DEPARTMENT OF INSURANCENotification Pursuant to the Insurance Code, Chapter 5, Subchapter LAs required by the Insurance Code, Article 5.96 and 5.97, the Texas Register publishes notice of proposed actions by the Texas Board of Insurance. Notice of action proposed under Article 5.96 must be published in the Texas Register not later than the 30th day before the board adopts the proposal. Notice of action proposed under Article 5.97 must be published in the Texas Register not later than the 10th day before the Board of Insurance adopts the proposal. The Administrative Procedure Act, the Government Code, Chapters 2001 and 2002, does not apply to board action under Articles 5.96 and 5.97. The complete text of the proposal summarized here may be examined in the offices of the Texas Department of Insurance, 333 Guadalupe Street, Austin, Texas 78714- 9104.) This notification is made pursuant to the Insurance Code, Article 5.96, which exempts it from the requirements of the Administrative Procedure Act. Adoption of Texas Personal Lines Manual Rules And Rates Governing the Writing of Residential Property Insurance Under the Property Protection Program The Commissioner of Insurance, at a public hearing held on December 9, 1996, under Docket No. 2266, at 9:00 a.m., in Room 102 of the Texas Department of Insurance Building, 333 Guadalupe Street in Austin, Texas, adopted: (1) policy form rules and rating rules in the Homeowners, Dwelling, Farm and Ranch, and Farm and Ranch Owners Sections of the Texas Personal Lines Manual (Manual) to govern the writing of policy forms and endorsements under the Property Protection Program (PPP) enacted by the Texas Legislature under the Insurance Code, Article 5.35-3; and (2) corresponding premium charges and premium reductions for new endorsements adopted solely for use under the PPP and that either increase or decrease the standard coverage offered under the PPP. The adopted rules and rates will be contained in a new subsection VII, entitled "Property Protection Program," in each of the four sections of the Manual. The rules provide general instructions, eligibility requirements, a listing of optional endorsements and explanations for use, and rates and rating methods for the writing of PPP policy forms and endorsements. The rates include premium charges and premium reductions for new endorsements adopted solely for use under the PPP. These charges or reductions correspond either to increases or decreases in the standard coverage offered under the PPP, as designated in each new endorsement. The adoption of these rules and rates do not affect the rules and rates currently in effect that govern the writing of homeowners, dwelling, farm and ranch, and farm and ranch owners policy forms and endorsements adopted under Article 5.35 of the Insurance Code for general use in the entire State of Texas. The Department proposed adoption of these policy form rules, rating rules and rates in a petition filed on October 30, 1996 (Petition). Notice of the proposal (Reference Number P-1096-49-I) was published in the November 5, 1996 issue of the Texas Register (21 TexReg 10916). The Commissioner has determined that it is necessary and appropriate to adopt the Department's proposal, as published, in order to efficiently and effectively implement the PPP. The PPP is authorized by Article 5.35-3 of the Insurance Code, which was enacted by the 74th Legislature in HB 1367 (Acts 1995, 74th Leg., ch 415, Sec. 3, p. 3007, eff. Aug. 28, 1995). Article 5.35-3 provides that the Commissioner, by rule, may determine and designate areas as underserved areas for residential property insurance. In regards to this determination of underserved areas, Article 5.35-3, sec.1(a) directs the Commissioner to consider whether residential property insurance is not reasonably available to a substantial number of owners of insurable property in the underserved area, and also to consider any other factors determined to be relevant by the Commissioner. Subsection 1(a) of the article defines residential property insurance for purposes of the PPP as insurance coverage against loss to real or tangible personal property at a fixed location provided in a homeowners policy, residential fire and allied lines policy, or farm and ranch owners policy. Subsection 1(b) of the article prohibits the PPP from including windstorm and hail insurance coverage for a risk eligible for that coverage under Article 21.49 of the Insurance Code. Under Article 5.35-3, sec.2, all insurers authorized to write property or casualty insurance in this state and writing property or casualty insurance in this state, including those insurers licensed under the Insurance Code, Chapters 18 (Lloyd's plans) and 19 (reciprocal exchanges), are authorized to write insurance on the forms adopted under Article 5.35-3. Article 5.35-3, sec.3 authorizes the Commissioner to adopt policy forms for residential property insurance specifically for use in the designated underserved areas. This authority necessarily also includes the adoption of the manual rules governing the writing of policy forms and endorsements. Section 3 further provides that the policy forms adopted pursuant to Article 5.35-3 shall include a basic policy covering fire and allied lines perils, with endorsements providing that the adopted policy forms may be used by all insurers writing insurance in underserved areas. Article 5.35-3, sec.4 states that the rates for residential property insurance subject to Article 5.35-3 shall be determined in accordance with the provisions of the Insurance Code applicable to each insurer. Article 5.35-3, sec.5 requires all insurers that must participate in the PPP in accordance with section 2 of the article to make available to their agents, who in turn must offer to insureds in underserved areas, the full range of coverages promulgated under Article 5.35-3, subject to applicable rates and underwriting guidelines of each such insurer. Article 5.35, sec.sec.6-7 offer tax and other incentives to encourage insurers to participate actively in the PPP. Pursuant to Article 5.35-3, the Commissioner of Insurance entered Order No. 95- 1285 (December 8, 1995), under which he adopted policy forms and endorsements for use in the writing of insurance for property qualifying for the PPP. These forms and endorsements will be used to provide residential property insurance coverage for residential property located in designated underserved areas, as determined and designated by the Commissioner pursuant to Article 5.35-3, sec.1. The Commissioner made his initial designations of such underserved areas in Order No. 96-1118 (September 24, 1996). Under Order No. 96-1118, property in areas designated as Class 1 underserved areas will be eligible for the PPP. The Commissioner did not adopt the rules and rates governing the writing of PPP policy forms and endorsements at the time he adopted the PPP policy forms and endorsements. Commissioner's Order No. 95-1285 provided that staff would propose the appropriate rules governing the writing of the PPP policy forms and endorsements under a separate rulemaking procedure. Order No. 95-1285 further provided that the rates used to determine addition to or reduction in premium for new endorsements requiring rates or rating methods would be determined at the 1996 Residential Property Benchmark Rate Hearing, which was held before an Administrative Law Judge on December 20-21, 1995 (and the record of which closed on February 21, 1996). However, no one presented evidence at that hearing related to these rates. Accordingly, the Department proposed in the Petition to promulgate such rates under the rulemaking procedures of Article 5.96, as part of the proposed manual rules governing the writing of PPP policy forms and endorsements. The Commissioner has determined that many existing rules under the Homeowners, Dwelling, Farm and Ranch, and Farm and Ranch Owners sections of the Manual will apply to the writing of the PPP, but also has determined that in order to fully implement the PPP, he should adopt the limited additional rules proposed by the Department in the Petition, which include reductions in or additions to premiums necessitated by the increase or decrease in coverage under newly promulgated endorsements. For purposes of organization and clarity, the Commissioner has determined that the additional manual rules and rates applicable to a particular type of policy offered under the PPP shall be included in a subsection within the section of the Manual applicable to that policy. Accordingly, the rules, as adopted, will be placed in new subsections VII of the Homeowners, Dwelling, Farm and Ranch, and Farm and Ranch Owners sections of the Manual. The Commissioner further has determined that the Department has applied acceptable actuarial principals to determine the appropriate rates for the perils and coverages to be added to or excluded from policy forms under the PPP. The Commissioner adopts these rates, which are limited to those not otherwise provided in the existing sections of the Manual. The Commissioner has determined that the rates adopted herein do not affect the benchmark rate applied by an insurer in setting the premium for a PPP policy, because the increase or decrease in premium necessitated by the promulgation of these is tied to a corresponding increase or decrease in coverage. The adopted rules and rates are attached as exhibits to this Order and incorporated into this Commissioner's Order No. 96-1435. The following summarizes these rules and rates: A. Homeowners Section. Rule VII, Property Protection Program. 1. Rule VII-A--General. This rule provides general instructions for the writing of the PPP homeowners policy, which insurers must offer through Homeowners Policy Form HO-A, and for endorsement forms adopted solely for use under the PPP. The rule also provides that in addition to the rules in subsection VII, all other rules contained in the Homeowners Section of the Manual governing the writing of Form HO-A, as well as optional additional coverages and endorsements to Form HO-A that have been adopted for use under the PPP and which are not in conflict with the rules in subsection VII, shall apply to the writing of PPP homeowners policy and endorsement forms. The rule further provides that the flexibility percentages filed by individual companies for Texas Homeowners Policy Form HO-A will apply to the PPP homeowners policy and endorsement forms. 2. Rule VII-B--Eligibility. This rule: (i) provides that a PPP homeowners policy (Form HO-A) may only be issued for property located in a Class 1 underserved area (as initially designated by Commissioner's Order No. 96-1118 (September 24, 1996) pursuant to Article 5.35-3, sec.1), and includes a chart listing the Class 1 areas by ZIP Code, city and county; (ii) states that windstorm, hurricane and hail coverage for property located in an area designated as a catastrophe area by the Commissioner may not be provided under the PPP, and requires that an endorsement excluding such coverage be attached to each PPP homeowners policy issued; and (iii) states that PPP homeowners coverage may only be provided by Homeowners Policy Form HO-A. 3. Rule VII-C--Optional Endorsements. This rule lists the endorsements that may be attached to a PPP homeowners policy (Form HO-A): (i) seven new PPP endorsements adopted by Commissioner's Order No. 95-1285 (December 8, 1995) pursuant to Article 5.35-3 and (ii) thirty endorsements adopted by Commissioner's Order No. 95-1285 that had previously been adopted pursuant to Article 5.35 for attachment to Texas Homeowners Policy Form HO-A. The rule includes a general description of each of the seven new endorsements adopted pursuant to Article 5.35-3. This description specifies whether the attachment of the endorsement requires a reduction in premium, an additional premium, or no additional premium. The rule provides that the rates and rating rules, as set forth in the Homeowners Section of the Manual for the attachment of the thirty endorsements which previously have been adopted pursuant to Article 5.35 for attachment to Texas Homeowners Policy Form HO-A, also shall apply to the attachment of these endorsements to a PPP homeowners policy. 4. Rule VII-D--Rating Rules. This rule requires that the basic premium for the PPP homeowners policy (Form HO-A) is to be determined in the same manner and using the same premium charts as for a Texas Homeowners Policy Form HO-A. The rule specifies the rates and rating methods for those PPP endorsements requiring a reduction in or addition to premium when attached to a PPP homeowners policy (Form HO-A) and specifies the following reductions or additions for these endorsements: (a) Exclusion of Coverage, Endorsement No. (PPP) HO-700 (reduction in premium for exclusion of coverage for the perils of (i) vandalism and malicious mischief and/or (ii) theft): [graphic 1] [graphic 2] (b) Accidental Discharge, Leakage, or Overflow of Water or Steam and Freezing, Endorsement No. (PPP) HO-702 (additional premium): (Calculation of the additional premium to be charged for this endorsement requires input from insurers. This rate will be determined under a separate rulemaking procedure). (c) Collapse of Building, Breakage of Glass, and Falling Objects, Endorsement No. (PPP) HO-703 (additional premium): An additional premium of $1.00, regardless of the limit of liability, is charged for the addition of these perils. B. Dwelling Section. Rule VII, Property Protection Program. 1. Rule VII-A--General. This rule provides general instructions for the writing of the PPP dwelling policy, which insurers must offer through Texas Dwelling Policy Form TDP-1, and for endorsement forms adopted solely for use under the PPP. This rule also requires that all other rules contained in the Dwelling Section of the Manual which govern the writing of Form TDP-1, as well as optional additional coverages and endorsements to Form TDP-1 that have been adopted for use under the PPP and which are not in conflict with the rules in subsection VII, shall apply to the writing of PPP dwelling policy and endorsement forms. The rule further provides that the flexibility percentages filed by individual companies which are applicable to the Texas Dwelling Policy Form TDP-1 will apply to the PPP dwelling policy and endorsement forms. 2. Rule VII-B--Eligibility. This rule: (i) provides that a PPP dwelling policy (Form TDP-1) may only be issued for property located in a Class 1 underserved area, (as initially designated by Commissioner's Order No. 96-1118 (September 24, 1996) pursuant to Article 5.35-3, sec.1) and includes a chart listing the Class 1 areas by ZIP Code, city and county; (ii) states that windstorm, hurricane and hail coverage for property located in an area designated as a catastrophe area by the Commissioner may not be provided under the PPP, and requires that an endorsement excluding such coverage be attached to each dwelling policy issued; and (iii) states that PPP dwelling coverage may only be provided by Dwelling Policy Form TDP-1. 3. Rule VII-C--Optional Endorsements. This rule lists the endorsements that may be attached to a PPP dwelling policy (Form TDP-1): (i) eight new PPP endorsements adopted by Commissioner's Order No. 95-1285 (December 8, 1995) pursuant to Article 5.35-3 and (ii) twelve endorsements adopted by Commissioner's Order No. 95-1285 that had previously been adopted pursuant to Article 5.35 for attachment to Texas Dwelling Policy Form TDP-1. The rule includes a general description of each of the eight new endorsements adopted pursuant to Article 5.35-3. This description specifies whether the attachment of the endorsement requires a reduction in premium, an additional premium, or no additional premium. The rule provides that the rates and rating rules, as set forth in the Dwelling Section of the Manual for the attachment of the twelve endorsements which previously have been adopted pursuant to Article 5.35 for attachment to Texas Dwelling Policy Form TDP-1, also shall apply to the attachment of these endorsements to a PPP dwelling policy. 4. Rule VII-D--Rating Rules. This rule requires that the premium for the PPP dwelling policy (Form TDP-1) is to be determined in the same manner and using the same premium charts as for a Texas Dwelling Policy Form TDP-1. The rule specifies the rates and rating methods for those PPP endorsements requiring a reduction in or addition to premium when attached to a PPP dwelling policy (Form TDP-1) and specifies the following reductions or additions for these endorsements: (a) Accidental Discharge, Leakage, or Overflow of Water or Steam and Freezing, Endorsement No. (PPP) TDP-031 (additional premium): (Calculation of the additional premium to be charged for this endorsement requires input from insurers. This rate will be determined under a separate rulemaking procedure). (b) Collapse of Building, Breakage of Glass, and Falling Objects, Endorsement No. (PPP) TDP-032 (additional premium): An additional premium of $1.00, regardless of the limit of liability, is charged for the addition of these coverages. Deductible adjustment percentage and flex percentage apply to this coverage. This additional premium shall not be less than $1.00. (c) Theft, Endorsement No. (PPP) TDP-033 (additional premium). [graphic 3] C. Farm and Ranch Section. Rule VII, Property Protection Program. 1. Rule VII-A--General. This rule provides general instructions for the writing of the PPP farm and ranch policy, which insurers must offer through Texas Farm and Ranch Policy Form TFR-1, and for endorsement forms adopted solely for use under the PPP. The rule also requires that all other rules contained in the Farm and Ranch Section of the Manual which govern the writing of Form TFR-1, as well as optional additional coverages and endorsements to Form TFR-1 that have been adopted for use under the PPP and which are not in conflict with the rules in subsection VII, shall apply to the writing of PPP farm and ranch policy and endorsement forms. The rule further provides that the flexibility percentages filed by individual companies which are applicable to the Texas Farm and Ranch Policy Form TFR-1 will apply to the PPP farm and ranch policy and endorsement forms. 2. Rule VII-B--Eligibility. This rule: (i) provides that a PPP farm and ranch policy (Form TFR-1) may only be issued for property located in a Class 1 underserved area (as initially designated by Commissioner's Order No. 96-1118 (September 24, 1996) pursuant to Article 5.35-3, sec.1) and includes a chart listing the Class 1 areas by ZIP Code, city and county; (ii) states that windstorm, hurricane and hail coverage for property located in an area designated as a catastrophe area by the Commissioner may not be provided under the PPP, and requires that an endorsement excluding such coverage be attached to each PPP farm and ranch policy issued; and (iii) states that PPP farm and ranch coverage may only be provided by Farm and Ranch Policy Form TFR-1. 3. Rule VII-C--Optional Endorsements. This rule lists the endorsements that may be attached to a PPP farm and ranch policy (Form TFR-1): (i) ten new PPP endorsements adopted by Commissioner's Order No. 95-1285 (December 8, 1995) pursuant to Article 5.35-3 and (ii) fourteen endorsements adopted by Commissioner's Order No. 95-1285 that had previously been adopted pursuant to Article 5.35 for attachment to Texas Farm and Ranch Policy Form TFR-1. The rule includes a general description of each of the ten new endorsements adopted pursuant to Article 5.35-3. This description specifies whether the attachment of the endorsement requires a reduction in premium, an additional premium, or no additional premium. The rule provides that the rates and rating rules, as set forth in the Farm and Ranch Section of the Manual for the attachment of the fourteen endorsements which previously have been adopted pursuant to Article 5.35 for attachment to Texas Farm and Ranch Policy Form TFR-1, also shall apply to the attachment of these endorsements to a PPP farm and ranch policy. 4. Rule VII-D--Rating Rules. This rule requires that the premium for the PPP farm and ranch policy (Form TFR-1) is to be determined in the same manner and using the same premium charts as for a Texas Farm and Ranch Policy Form TFR-1. The rule specifies the rates and rating methods for those PPP endorsements requiring a reduction in or addition to premium when attached to a PPP farm and ranch policy (Form TFR-1) and specifies the following reductions and additions for these endorsements: (a) Accidental Discharge, Leakage, or Overflow of Water or Steam and Freezing, Endorsement No. (PPP) TFR-081 (additional premium): (Calculation of the additional premium to be charged for this endorsement requires input from insurers. This rate will be determined under a separate rulemaking procedure). (b) Collapse of Building, Breakage of Glass, and Falling Objects, Endorsement No. (PPP) TFR-082 (additional premium): An additional premium of $1.00, regardless of the limit of liability, is charged for the addition of these coverages. Deductible adjustment percentage and flex percentage apply to this coverage. This additional premium shall not be less than $1.00. (c) Theft, Endorsement No. (PPP) TFR-083 (additional premium). INSERT FIGURE NO. 4 [graphic 4] D. Farm and Ranch Owners Section. Rule VII, Property Protection Program. 1. Rule VII-A--General. This rule provides general instructions for the writing of the PPP farm and ranch owners policy, which insurers must offer through Farm and Ranch Owners Policy Form FRO-A, and for endorsement forms adopted solely for use under the PPP. The rule also requires that all other rules contained in the Farm and Ranch Owners Section of the Manual which govern the writing of Form FRO-A, as well as optional additional coverages and endorsements to Form FRO-A that have been adopted for use under the PPP and which are not in conflict with the rules in subsection VII, shall apply to the writing of PPP farm and ranch owners policy and endorsement forms. The rule further provides that the flexibility percentages filed by individual companies for Texas Farm and Ranch Owners Policy Form FRO-A will apply to the PPP homeowners policy and endorsement forms. 2. Rule VII-B--Eligibility. This rule: (i) provides that a PPP farm and ranch owners policy (Form FRO-A) may only be issued for property located in a Class 1 underserved area (as initially designated by Commissioner's Order No. 96-1118 (September 24, 1996) pursuant to Article 5.35-3, sec.1) and includes a chart listing the Class 1 areas by ZIP Code, city and county; (ii) states that windstorm, hurricane and hail coverage for property located in an area designated as a catastrophe area by the Commissioner may not be provided under the PPP, and requires that an endorsement excluding such coverage be attached to each PPP farm and ranch owners policy issued; and (iii) states that PPP farm and ranch owners coverage may only be provided by Farm and Ranch Owners Policy Form FRO-A. 3. Rule VII-C--Optional Endorsements. This rule lists the endorsements that may be attached to a PPP farm and ranch owners policy (Form FRO-A): (i) ten new PPP endorsements adopted by Commissioner's Order No. 95-1285 (December 8, 1995) pursuant to Article 5.35-3 and (ii) twenty three endorsements adopted by Commissioner's Order No. 95-1285 that had previously been adopted pursuant to Article 5.35 for attachment to Texas Farm and Ranch Owners Policy Form FRO-A. The rule includes a general description of each of the ten new endorsements adopted pursuant to Article 5.35-3. This description specifies whether the attachment of the endorsement requires a reduction in premium, an additional premium, or no additional premium. The rule provides that the rates and rating rules, as set forth in the Farm and Ranch Owners Section of the Manual for the attachment of the twenty-three endorsements which previously have been adopted pursuant to Article 5.35 for attachment to Texas Farm and Ranch Owners Policy Form FRO-A, also shall apply to the attachment of these endorsements to a PPP farm and ranch owners policy. (4). Rule VII-D--Rating Rules. This rule requires that the basic premium for the PPP farm and ranch owners policy (Form FRO-A) is to be determined in the same manner and using the same premium charts as for a Texas Farm and Ranch Owners Policy Form FRO-A. The rule specifies the rates and rating methods for those PPP endorsements requiring a reduction in or addition to premium when attached to a PPP farm and ranch owners policy (Form FRO-A) and specifies the following rates for each of these endorsements: (a) Exclusion of Coverage, Endorsement No. (PPP) FRO-800 (reduction in premium for exclusion of coverage for the perils of (i) vandalism and malicious mischief and/or (ii) theft): [graphic 5] [graphic 6] (b) Accidental Discharge, Leakage, or Overflow of Water or Steam and Freezing, Endorsement No. (PPP) FRO-803 (additional premium): (Calculation of the additional premium to be charged for this endorsement requires input from insurers. This rate will be determined under a separate rulemaking procedure). (c) Collapse of Building, Breakage of Glass, and Falling Objects, Endorsement No. (PPP) FRO-804 (additional premium): An additional premium of $1.00, regardless of the limit of liability, is charged for the addition of these perils. The Commissioner has jurisdiction over this matter pursuant to the Insurance Code, Articles 5.35-3, 5.96 and 5.98. This notification is made pursuant to the Insurance Code, Article 5.96, which exempts action taken under Article 5.96 from the requirements of the Administrative Procedure Act (Government Code, Title 10, ch. 2001). Consistent with the Insurance Code, Article 5.96(h), the Texas Department of Insurance will notify all insurers affected by the action prior to the effective date of this action. THEREFORE, THE COMMISSIONER OF INSURANCE ENTERS THIS ORDER: 1. Adopting new Subsections VII in the Homeowners, Dwelling, Farm and Ranch, and Farm and Ranch Owners Sections of the Texas Personal Lines Manual, which subsections consist of policy form writing rules and rating rules to govern the writing of forms and endorsements under the Property Protection Program and are attached to this Order and incorporated herein by reference; and 2. Adopting the premium charges and premium reductions for the new endorsements adopted solely for use under the Property Protection Program, which are included within each of the attached Subsections VII and are incorporated herein by reference. This Order is to be effective on and after the 15th day after notice of this action has been published in the Texas Register This agency hereby certifies that the adopted rules and rates have been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on December 11, 1996. TRD-9617968 Caroline Scott General Counsel Texas Department of Insurance Filed: December 11, 1996