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. Texas Department of Insurance PROPOSED ACTION The Commissioner of Insurance will hold a public hearing under Docket Number 2342 on April 1, 1998 at 9:00 a.m. in Room 100 of the Texas Department of Insurance Building, 333 Guadalupe Street in Austin, Texas, to consider a petition by the staff of the Texas Department of Insurance proposing the adoption of (i) amendments to the rating rules in the Homeowners Section and Dwelling Section of the Texas Personal Lines Manual (Manual) to provide mandatory credits under a homeowners policy and dwelling policy for metal roof coverings on residential risks which meet the Underwriters Laboratories (U.L.) test criteria under U.L. Standard 2218 that establishes a classification system for measuring the impact resistance of roof coverings; (ii) Endorsement HO-145, Exclusion of Cosmetic Damage to Roof Coverings Caused by Hail, for attachment to Texas Homeowners Forms (HO-A, HO-B, and HO-C) and Endorsement NumberTDP-022, Exclusion of Cosmetic Damage to Roof Coverings Caused by Hail, for attachment to Texas Dwelling Forms (TDP-1, TDP-2, and TDP-3), each of which provides for the exclusion of coverage for cosmetic damage caused by hail to roof coverings installed on risks that are eligible for and are receiving premium credits for the installation of a roof covering meeting U.L. Standard 2218 or such other standard as may be approved by the commissioner; and (iii) amendments to the policy writing and rating rules in the Homeowners and Dwelling Sections of the Manual to specify the requirements for the attachment of Endorsement Number HO- 145 and Endorsement TDP-022 for the exclusion of cosmetic damage to roof coverings caused by hail. The petition requests consideration of the adoption of amendments to two rating rules in the Texas Personal Lines Manual. (1) In the Homeowners Section, staff proposes amendments to Rule VI.N. entitled "Mandatory Roofing Credits" that delete the language contained in subparagraphs 1. and 2. prohibiting the application of the mandatory roofing credits to metal roof coverings. (2) In the Dwelling Section, staff proposes amendments to Rule VI.K. entitled "Mandatory Roofing Credits" that delete the language contained in subparagraphs 1. and 2. prohibiting the application of the mandatory roofing credits to metal roof coverings. These amendments propose the deletion of language in the Manual rules contained in the Homeowners Section and Dwelling Section of the Manual that restricts metal roof coverings from eligibility to receive the mandatory premium credits for the installation of impact resistant roof coverings that meet U.L. Standard 2218. The removal of such restrictions allows insurers to apply the mandatory roof credits to homeowners policies and dwelling policies for residential risks which have installed metal roof coverings that meet the impact resistance classifications of U.L. Standard 2218. The petition also requests the consideration and adoption of two new endorsements that are to be promulgated by the commissioner. (1) Endorsement Number HO-145 entitled "Exclusion of Cosmetic Damage to Roof Coverings Caused by Hail" is for attachment to Texas Homeowners Forms (HO-A, HO- B, and HO-C). (2) Endorsement Number TDP-022, entitled "Exclusion of Cosmetic Damage to Roof Coverings Caused by Hail" is for attachment to Texas Dwelling Forms (TPD-1, TPD- 2, and TPD-3). The endorsements amend the homeowners policy and the dwelling policy by adding a new exclusion to the policies that excludes coverage for cosmetic loss or damage to roof coverings caused by the peril of hail. Cosmetic loss or damage is defined in the endorsements to mean only that damage that alters the physical appearance of the roof covering but does not result in damage that allows penetration of water through the roof covering or does not result in the failure of the roof covering to perform its intended function. In addition, the endorsements define roof covering to mean the roofing material exposed to the weather, the underlayments applied for moisture protection, and all flashings required in the replacement of a roof covering. The endorsements clearly state coverage is afforded for hail damage to roof coverings that results in damage that allows the penetration of water through the roof covering or that results in the failure of the roof covering to perform its intended function. The endorsements may only be attached to homeowners or dwelling policies insuring risks eligible for and receiving credits for the installation of impact resistant roof coverings. The endorsements are optional and insurers may or may not choose to attach such endorsements to a homeowners or dwelling policy. Homeowners may or may not choose to accept the endorsement if the insured declines to sign the endorsement, the insurer may offer to issue the policy without the application of a mandatory or optional roofing credit. If the endorsements are attached to a homeowners or dwelling policy, the insured must sign the endorsement with an original signature to ensure that the insured understands that cosmetic damage has been excluded from coverage under the homeowners or dwelling policy. The petition also proposes the consideration and adoption of amendments to two rating rules in the Texas Personal Lines Manual by adding new subparagraphs to address the writing of the Endorsement Nos. HO-145 and TDP-022 which exclude coverage under a homeowners and dwelling policy for cosmetic damage to roof coverings caused by the peril of hail. (1) In the Homeowners Section of the Manual, staff proposes an amendment to Rule VI.N. entitled "Mandatory Roofing Credits" by adding a new subparagraph 7 which specifies the requirements governing the writing of Endorsement HO-145, Exclusion of Cosmetic Damage to Roof Coverings Caused by the Peril of Hail. (2) In the Dwelling Section of the Manual, staff proposes an amendment to Rule VI.K., entitled "Mandatory Roofing Credits" by adding a new subparagraph 7 which specifies the requirements governing the writing of Endorsement Number TDP-022, Exclusion of Cosmetic Damage to Roof Coverings Caused by the Peril of Hail. The proposed amendments provide that (i) the endorsements are optional and may be attached only to a policy insuring a risk eligible for and receiving a premium credit for the installation of an impact resistant roof covering; (ii) the endorsements may be attached at the inception date of a new policy or renewal policy or during the term of a policy on the date the roof covering premium credit is applied to the policy; (iii) the endorsements must be signed by the insured with an original signature and failure to do so will void the endorsement; (iv) the signed endorsement does not have to be provided on a renewal policy if the renewal policy is accomplished by renewal certificate; and (v) if the insured declines to sign the endorsement, the insurer may offer to issue the policy without the application of a mandatory or optional roofing credit. The proposed endorsements and Manual rules are necessary to provide mandatory roof covering credits for residential risks which have metal roof coverings that meet the impact resistance classifications of U.L. Standard 2218. The application of mandatory roofing credits to metal roof coverings was originally prohibited in the Manual rules because of a concern that although many types of metal roof coverings might meet U.L. Standard 2218 for impact resistance, nevertheless, they would suffer cosmetic damage in hail storms requiring replacement of the metal roof covering. It would have been inappropriate to apply premium credits to risks with metal roof coverings meeting U.L. Standard 2218 without assurances of a corresponding reduction in losses. In general, metal roof coverings are very durable and have excellent impact resistance capabilities, however, metal roofing is also susceptible to cosmetic damage which constitutes a covered loss under an insurance policy. Part of the proposal in the petition, addresses the issue of cosmetic damage to roof coverings caused by hail through the use of exclusion endorsements for such cosmetic damage. The availability of the exclusion endorsements for cosmetic damage to roof coverings caused by hail provides the necessary assurances to the insurers that the exposure of loss to roof coverings from cosmetic hail damage is sufficiently reduced to offset the reduction in premium. The proposed adoption of exclusion endorsements for cosmetic damage to roof coverings caused by hail will eliminate the concern of providing a premium credit for a metal roof covering without a corresponding reduction in exposure to loss from cosmetic damage to metal roof coverings. The proposed amendments apply the mandatory roofing credits to metal roof coverings in the same manner and to the same extent as the credits currently apply to other types of roof coverings. Additionally, the proposed adoption of the exclusion endorsements for the homeowners and dwelling policies is necessary to provide a means of addressing the general concern of cosmetic loss or damage to all types of roof coverings which are receiving a premium credit for meeting U.L. Standard 2218. The availability of mandatory roofing credits for the installation of impact resistant roof coverings meeting U.L. Standard 2218 contemplates that the installation of impact resistant roof coverings will afford some assurance to insurers that losses from hail will be reduced to offset the loss in premium from the application of the mandatory credits. It is anticipated that many different types of roof coverings will be developed with the capacity to meet the requirements of U.L. Standard 2218. However, a concern still exist that these roof coverings, which may not rupture in the event of a hail storm, will sustain cosmetic damage caused by hail which is a covered loss under an insurance policy requiring replacement of the roof. It would be inappropriate to mandate that insurers provide premium credits for impact resistant roof coverings when an exposure to cosmetic damage exists that subjects the insurer to claims for the repair or replacement of roof coverings sustaining only cosmetic damage. If the insurer has provided a mandatory credit for the installation of an impact resistant roof covering, it is fair and reasonable to allow insurers the option of excluding cosmetic damage to all roof coverings caused by hail through the attachment of an endorsement. At the public hearing held on December 3, 1997, many commenters expressed concerns with the exposure of cosmetic damage caused by hail to roof coverings. Although the majority of the comments focused on cosmetic damage to metal roofing, the exposure of cosmetic damage to roof coverings caused by hail is present for many different types of roof coverings. The endorsements proposed in staff's petition will apply to any type of roof covering installed on a risk that is eligible for and is receiving a credit for the installation of a roof covering meeting U.L. Standard 2218. The proposed rules for the attachment of Endorsement Number HO-145 and TDP-022 to a homeowners or dwelling policy are necessary to specify the appropriate manner in which these endorsements are attached to a homeowners or dwelling policy. To ensure that policyholders are aware of the exclusion of cosmetic loss or damage under a homeowners or dwelling policy, the endorsements will require an original signature of the insured indicating the insured has been provided a copy of the endorsement and has been provided with information as to the coverage being excluded. In those instances where an insured chooses not to sign the endorsement, the insurer may then offer to write the policy without the endorsement attached and without applying a mandatory or optional roofing credit. The commissioner has jurisdiction of this matter pursuant to the Insurance Code, Articles 5.35, 5.101, 5.96, and 5.98. Copies of the full text of the staff petition, the proposed amendments to the Manual rules, and the proposed endorsements are available for review in the Office of the Chief Clerk of the Texas Department of Insurance, 333 Guadalupe Street, Austin, Texas, 78714-9104. For further information or to request copies of the petition and proposed amendments, please contact Sylvia Gutierrez at (512) 463-6326, (refer the reference Number P-0298-08-I) Comments on the proposed changes must be submitted in writing within 30 days after publication of the proposal in the Texas Register to the Office of the Chief Clerk, P. O. Box 149104, MC 113-2A, Austin, Texas 78714-9104. An additional copy of the comment should be submitted to Lyndon Anderson, Associate Commissioner for the Property and Casualty Division, P. O. Box 149104, MC 103- 1A, Austin, Texas 78714-9104. This notification is made pursuant to the Insurance Code, Article 5.96, which exempts action taken under this article from the requirements of the Administrative Procedure Act (Government Code, Title 10, ch. 2001). This agency hereby certifies that the proposed rules have been reviewed by legal counsel and found to be within the agency's authority to adopt. TRD-9802410 Caroline Scott General Counsel and Chief Clerk Texas Department of Insurance Filed: February 18, 1998