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 ADOPTED The Commissioner of Insurance has adopted (i) amendments to the rating rules in the Homeowners Section and Dwelling Section of the Texas Personal Lines Manual (Manual) to provide for 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 TDP-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 rating rules in the Homeowners and Dwelling Sections of the Manual to specify the requirements for the attachment of Endorsement No. HO-145 and Endorsement TDP-022 for the exclusion of cosmetic damage to roof coverings caused by hail. The amendments to the Manual rules and the new endorsements were proposed by Department Staff in a petition filed on February 18, 1998. Notice of the proposal (Reference No. P-0298-08-I) was published in the February 27, 1998 issue of the Texas Register (23 TexReg 1991). The Manual rules and endorsements were considered at a public hearing on April 1, 1998, at 9:00 a.m., under docket No. 2342 in Room 100 of the Texas Department of Insurance Building, 333 Guadalupe Street in Austin, Texas. The Commissioner has adopted, without changes to the proposal as published in the Texas Register, amendments to the rating rules in the Homeowners and Dwelling Sections of the Texas Personal Manual that delete the restrictions on the application of mandatory premium credits to metal roof coverings so that the mandatory credits can be applied to residential property insurance policies for the installation of metal roof coverings that meet U.L. Standard 2218. The Commissioner has adopted, with changes to the proposal as published in the Texas Register, new Endorsements HO-145 and TDP-022 for the exclusion of cosmetic damage to roof coverings caused by hail. The Commissioner has adopted with changes to the proposal as published in the Texas Register, the amendments to the Manual rules in the Homeowners and Dwelling Sections of the Manual to specify the requirements governing the attachment of Endorsements HO-145 and TDP-022. The adopted amendments to sections of the Manual that remove the restrictions on the application of the mandatory premium credits to metal roof coverings are: (1) in the Homeowners Section, Rule VI.N. entitled "Mandatory Roof Covering Credits" the language contained in subparagraphs 1. and 2. prohibiting the application of the mandatory roof covering credits to metal roof coverings is deleted and (2) in the Dwelling Section, Rule VI.K. entitled "Mandatory Roof Covering Credits" the language contained in subparagraphs 1. and 2. prohibiting the application of the mandatory roof covering credits to metal roof coverings is deleted. The removal of such restrictions allows insurers to apply the mandatory roof covering 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 adopted endorsements are: (1) Endorsement No. HO-145 entitled "Exclusion of Cosmetic Damage to Roof Coverings Caused by Hail" which may be attached to Texas Homeowners Forms (HO-A, HO-B, and HO-C) and (2) Endorsement No. TDP-022, entitled "Exclusion of Cosmetic Damage to Roof Coverings Caused by Hail" which may be attached to Texas Dwelling Forms (TPD-1, TPD-2, and TPD-3). The adopted 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. If the endorsements are attached to a homeowners or dwelling policy, the insured must sign the endorsement to ensure that the insured understands that cosmetic damage has been excluded from coverage under the homeowners or dwelling policy. The adopted amendments to the rating rules in the Homeowners and Dwelling Sections of the Manual that specify the requirements for the attachment of the new endorsements to a residential property policy are: (1) in the Homeowners Section of the Manual, Rule VI.N. entitled "Mandatory Roof Covering Credits", is amended to add new subparagraph 7. which specifies the requirements governing the attachment of Endorsement HO-145, Exclusion of Cosmetic Damage to Roof Coverings Caused by the Peril of Hail and (2) in the Dwelling Section of the Manual, Rule VI.K., entitled "Mandatory Roof Covering Credits" is amended to add new subparagraph 7. which specifies the requirements governing the writing and attachment of Endorsement No. TDP-022, Exclusion of Cosmetic Damage to Roof Coverings Caused by the Peril of Hail. These 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 and failure to do so will void the endorsement, however, a signed endorsement is not required to be attached to the policy provided the insurer maintains on file either the original or a copy of the executed endorsement; (iv) 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; and (v) an insurer must inform a consumer that cosmetic damage may be excluded from the policy if a loss to a roof occurs and the damaged roof is replaced with a hail resistant roof covering. As a result of comments on the proposal, the Commissioner has adopted the two endorsements with the following changes to the endorsements as proposed: 1. In the section of HO-145 and TDP-022 that defines cosmetic damage, the additional language "to keep out the elements over an extended period of time" was added after the phrase "to perform its intended function" because the Commissioner has determined that this change was necessary to clarify the meaning of the phrase "to perform its intended function." 2. The second change made to HO-145 and TDP- 022 was the addition of a date on the signature line of these endorsements. This change was necessary to require the insured to place the date of execution on the signature line when executing the endorsement. Based on comments on the proposal, Rule VI.N. in the Homeowners Section and Rule VI.K. in the Dwelling Section were adopted with the following changes to the rules as proposed: 1. As originally proposed subparagraph 7.b. had a requirement that the endorsement must contain the original signature of the insured before attachment to a policy. In response to comments which pointed out that most residential policy issuance is mechanized and the requirement of a signed original endorsement would disrupt the policy issuance process this requirement has been modified. The amendment allows insurers to attach a photocopy, facsimile copy, or electronic record copy in lieu of an original and it further allows an unsigned copy of the endorsement to be attached to the policy provided the insurer maintains on file the original or a copy of the original endorsement executed by the insured. 2. Subparagraph 7.c. is being deleted because as proposed it required renewal policies to have an endorsement with an original signature attached in order to receive the credits. In light of the amendment to subparagraph 7.b., allowing an unsigned copy of the endorsement to be attached provided the insurer maintains on file an original or copy of the executed endorsement, there is no longer any need for the "original signature requirement" in subparagraph 7.c. 3. Subparagraph 7.d. has been renumbered as 7.c. and new 7.d. has been added. New subparagraph 7.d. requires an insurer to inform a consumer that cosmetic damage may be excluded from the policy if a loss to a roof occurs and the damaged roof is replaced with a hail resistant roof covering. This amendment is necessary to ensure that consumers are aware, at the time the consumer is making the decision of whether to replace his damaged roof with a hail resistant roof, that a coverage exclusion for cosmetic hail damage may be required in order to receive the premium 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. Staff addressed 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 adoption of exclusion endorsements for cosmetic damage to roof coverings caused by hail eliminates 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 amendments apply the mandatory roof covering 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 roof covering 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 existed that these roof coverings, which may not rupture in the event of a hail storm, would 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 by Staff 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 rules for the attachment of Endorsement No. 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 the 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. The endorsements and Manual rules as adopted by the Commissioner of Insurance are on file in the Chief Clerk's Office of the Texas Department of Insurance under Reference No. P-0298-08-I and are incorporated by reference in the Manual by Commissioner's Order No. 98-0390 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), prior to the effective date of this action, the Texas Department of Insurance will notify all insurers affected by this action. This agency hereby certifies that the adopted endorsements and Manual rules have been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. IT IS THEREFORE THE ORDER of the Commissioner of Insurance that the amendments to the Texas Personal Lines Manual, Rule VI.N. in the Homeowners Section and Rule VI.K. in the Dwelling Section, that remove the restrictions on the application of mandatory premium credits to metal roof covering so that such roofing credits shall be applied to metal roof coverings, as specified herein and which are attached to this Order and incorporated into this Order by reference, are adopted to be effective May 2, 1998. IT IS FURTHER ORDERED that endorsement form HO-145, Exclusion of Cosmetic Damage to Roof Coverings Caused by Hail and endorsement form TDP-022, Exclusion of Cosmetic Damage to Roof Coverings Caused by Hail to be attached to a Texas Homeowners Forms (HO-A, HO-B, and HO-C) and Texas Dwelling Forms (TDP-1, TDP-2, and TDP-3) respectively, as specified herein which are attached to this Order and incorporated by reference, are adopted to be effective May 2, 1998. IT IS FURTHER ORDERED that amendments to the Texas Personal Lines Manual, Rule VI.N. in the Homeowners Section and Rule VI.K. in the Dwelling Section that specify the requirements for the attachment of Endorsement No. HO-145 and Endorsement TDP-022 for the exclusion of cosmetic damage to roof coverings caused by hail, as specified herein which are attached to this Order and incorporated by reference, are adopted to be effective May 2, 1998. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Filed with the Office of the Secretary of State on April 8, 1998. TRD-9804918 Caroline Scott General Counsel and Chief Clerk Texas Department of Insurance Effective date: May 2, 1998 Proposal publication date: February 27, 1998 For further information, please call: (512) 463-6327