Legal Storm Brews Over Insurers’ ‘Binding Restrictions’

Should you be able to buy homeowners insurance during a blizzard? Can you purchase flood insurance when you’re ankle deep in water? Can you extend your auto policy’s damage coverage when hail is forecast for your area?

Insurance companies say “no” to all those questions. They call their right to deny coverage under those circumstances and others “binding restrictions.”

Binding restrictions occur when an insurance company temporarily stops issuing new policies in a specific area due to the immediate threat of hurricanes, floods, wildfires, snowstorms, or other potential weather catastrophes. For example, one insurer’s website states, “No new homeowners or auto policies may be bound in Florida counties under a hurricane warning.”

Insurers protecting themselves

“If [insurers] let that happen unchecked, then they get flooded with immediate claims from the highest-risk folks,” Adam Dayan, attorney and founder of Consumer Law Group LLC, told Insurify. “And if people only buy insurance when a wildfire is at their doorstep, the insurer only collects a few months of premium but might have to pay out a huge claim right away.”

Insurers argue that binding restrictions are necessary. But legal challenges allege binding restrictions violate consumer rights. Pending litigation could lead to significant changes in insurance practices, affecting how insurers apply restrictions.

One lawsuit seeking class action status is playing out in Massachusetts. The suit claims an insurer unfairly and illegally denied a policyholder’s claim under her collision coverage. The insurer invoked its binding restriction due to a National Weather Service flood warning in effect for the area when the woman bought her policy.

The complaint alleges the insurer’s decision clashes with the state’s consumer protection laws. State regulations list only six situations in which insurers may refuse collision coverage. None of the acceptable situations relates to weather.

The woman’s complaint said her insurer “never articulated the lawful basis for this ‘binding restriction’ and how it could, as a matter of law, supersede statutory authority to the contrary and deprive a Massachusetts consumer of the statutory protections mandated by the legislature.”

The average cost of car insurance in Massachusetts is well below the national average, Insurify data shows — $1,751 per year for full coverage vs. $2,402.

The first lawsuit of its kind

The Massachusetts case is the first major lawsuit directly challenging the legality of auto insurance binding restrictions. Most previous cases centered on matters of property insurance. Litigation charged that insurers invoked restrictions indiscriminately or prohibited coverage in entire areas based on ZIP codes, even when some homeowners had taken mitigation measures.

“Expanding the binding restriction boundaries in a particular area to include many different ZIP codes creates an issue for the people who are not exposed to any real risk but who are seeking the same access to coverage as everyone else,” said Steve Case, a financial and insurance consultant whom Insurify contacted. “In addition, using an excessive number of binding restrictions is usually an indication of the lack of a well-defined price and plan.”

Climate-driven volatility is pushing binding restrictions into legal debate. As weather-related losses increase for auto and home insurers, some companies have applied binding freezes to specific ZIP codes, counties, or weather zones. Consumer advocates raise concerns that these practices will lead to redlining, inconsistent application, and access inequities.

Legal challenges could lead to regulatory changes that would better protect consumers during dangerous weather events and improve access to coverage.

What’s next? A future decided in the courts

A judge in the Massachusetts case recently rejected the insurance company’s motion to dismiss the case. If the courts agree with plaintiffs, insurers may no longer be able to shut off certain coverages when weather risk spikes.

Consumer groups say such plaintiff success could lead to similar class action lawsuits in California, New York, and Florida, signaling a shift that insurance professionals would monitor closely.

“As a broker, I see these restrictions as the only way for carriers to remain in high-risk states such as California,” said Michael Benoit, founder of California Contractor Bond & Insurance Services. “If regulations forbid insurers from pausing coverage during a wildfire or hurricane, I am certain they would simply stop writing business in those regions permanently.”

Meanwhile, insurance consultant Case says consumers can actually benefit from binding restrictions by keeping insurance more affordable.