CAR’s Commercial Residual Market Standards Subcommittee met on January 23, 2018, and again on February 6, 2018, to discuss and review changes to the CAR Rules and Commercial Automobile Manual. A major issue of this Subcommittee was the amendment of the CAR Rule defining “Principal Place of Business” for commercial automobile risks.
Misrepresentation of commercial auto risks’ principal places of business
A continuing issue in the Massachusetts commercial automobile residual market has been out-of-state risks fraudulently suppressing their insurance rates by claiming a mail-drop Massachusetts location as their principal place of business.
The Residual Market Standards Subcommittee at their December 11, 2017, meeting, focused on using the U.S. Supreme Court’s “nerve center” test that had been effective in confirming eligibility for both multi-state trucking and bus operations.
At its subsequent meeting of January 23, 2018, the Subcommittee recognized that verifying the correct principal place of business is key to determining eligibility for commercial risk in the Massachusetts residual market. Accordingly, the Subcommittee unanimously voted at this meeting to recommend the amendment of CAR Rule 2 to add the “nerve center test.”
At the Subcommittee’s February 6 meeting and amended CAR Rule 2, Principal Place of Business, was presented with additional language relating to the “nerve center test.” The underlined words mark the amended language of the rule:
PRINCIPAL PLACE OF BUSINESS, as it applies to the definition of an Eligible Risk, is defined as the chief or usual place of business. It is the head office; corporation’s nerve center, its center of direction, control, and coordination, the place where the principal officers generally transact business, and the place to which reports are made and from which orders emanate. It is also the place where the majority of executive and administrative corporate functions are performed. It is where executive offices are located and corporate decisions are made.
The Subcommittee agreed to present the amended rule to the Commercial Automobile Committee with a recommendation for adoption with the amended rule referencing the corporation’s center of direction, control, and coordination, in the determination of its principal place of business.
On February 8, 2018, CAR’s Commercial Automobile Committee unanimously voted to accept the recommendation of the Subcommittee to approve the proposed modifications to the Principal Place of Business definition in Rule 2 and to recommend the amended rule’s adoption by CAR’s Governing Committee.
At their February 14, 2018, meeting, the CAR Governing Committee voted to accept the Rule 2 amendment and to submit the proposed rule change to the Division of Insurance for approval.
Non-fleet Private Passenger commercial risks
Also, at their February 6 meeting, this Subcommittee began discussion of alternatives to enhance consistency among Servicing Carriers in confirming eligibility of risks classified as non-fleet private passenger types. This type of risks has led to several proceedings at CAR involving fraudulent policies issued to commercial entities, existing in name only, formed to allow ineligible applicants to obtain insurance. For example, Agency Checklists’ article of December 5, 2017, “Point Insurance Loses Appeal Of Arbella’s Contract Cancellation At Market Review Committee.”
The Subcommittee’s members explored options for a better decision procedure for determining risks eligible for coverage in the private passenger market under the business use classification as opposed to those risks eligible for coverage in the commercial automobile residual market.
The Subcommittee discussed, but did not decide on, possible methods to verify if an alleged commercial entity is a legitimate business. The discussion involved verifying the use of the vehicle, the existence of business cards, websites, and the existence of general liability and workers compensation policies for a risk’s non-auto exposures.
The Subcommittee directed CAR Staff to solicit further input from the Servicing Carriers in order to compile a list of considerations to allow the Subcommittee to develop underwriting standards Servicing Carriers could enforce in dealing with this problematical class of business. The Subcommittee also directed Staff to research the issue of whether it was feasible to implement a method for excluding operators on a ceded policy.
Commercial Automobile Manual review
For the February 6 meeting CAR Staff presented the Subcommittee with five rules in CAR’s Commercial Automobile Insurance Manual identify areas where discretion is afforded to Servicing Carriers in underwriting residual market risks and where the discretionary language should be strengthened or clarified for the purpose of encouraging consistency of Servicing Carrier underwriting policies and procedures.
These rules and the action taken by the Subcommittee were:
Rule 4. A. 1. And 2–Standard Procedures [Supplemental Application]
Rule 4 states that the “Servicing Carrier may elect to include a renewal application or questionnaire with the renewal policy.” In this rule, CAR Staff suggested the Subcommittee consider appropriate to require a supplemental application to collect owner/operator names and license numbers in order to gather data that may aid carriers in assessing risk eligibility.
The Subcommittee decided the implementation of a standard form would be costly to implement and decided it would be more cost-effective to identify elements that should be included in each Servicing Carrier’s application or renewal forms.
Rule 25–Combination of Interest
Rule 25 allows that “more than one interest may be named on a policy and rated as a single risk if one interest owns more than 50% of another.” Staff questioned, “whether this language requires clarification in order to ensure consistent procedures in the residual market.”
The Subcommittee noted that validation of percent of ownership presented an area of concern and suggested some language could be incorporated in the rule to note that a request of an insured for a combination of interests needed the providing of acceptable documentation.
Rule 55–Premium Development Options for Truckers [Gross Receipts Basis]
Rule 55 allows Servicing Carriers to develop premium for trucking risks on a specified car basis or on a gross receipts basis. CAR Staff reported that for policy years 2016 and 2017, no data has been statistically reported for ceded policies written on a gross receipts basis and questioned whether an amendment to this rule would benefit the residual market.
Rule 75–Gross Receipts or Mileage Basis
Rule 75 allows Servicing Carriers to develop premium for public transportation risks on a gross receipts or mileage basis. As for Rule 55, For policy years 2016 and 2017, no data has been statistically reported for ceded policies written on a gross receipts or mileage basis. Also, Staff questioned whether an amendment to this rule would benefit the residual market.
The Subcommittee decided since little residual market business is written on this basis, no change was required to this rule.
Rule 126–Composite Rating
Rule 126 allows Servicing Carries to employ a composite rating procedure to develop premium for special types and operations classifications under certain minimum premium conditions.
Staff reported that for policy year 2016, seven ceded policies were statistically reported as composite rated basis and for policy year 2017, two ceded policies were statistical reported as composite rated basis. Staff also questioned for this rule whether an amendment to the rule would benefit the residual market.
Likewise, the Subcommittee decided on this rule since little residual market business is written on this basis, no change was required to this rule.
The Commercial Residual Market Standards Subcommittee.
This Subcommittee’s charge is to discuss opportunities to improve commercial automobile residual market results by evaluating various topics such as the establishment of various underwriting standards and other Servicing Carrier procedures, enhancement of ERP requirements, development of an information sharing forum relative to risk management, and development of an oversight program including CAR compliance audits.
