OGC Opinion No. 04-10-23: Prior Year Audit Premiums & Cancellation of Renewal Policies

OGC Op. No. 04-10-23

The Office of General Counsel issued the following informal opinion on October 22, 2004, representing the position of the New York State Insurance Department.

Re: Prior Year Audit Premiums & Cancellation of Renewal Policies

Issues Presented:

1. The Department was asked to reverse its opinion, as stated in the Office of General Counsel Opinion No. 04-04-12 (April 19, 2004), and allow an insurer to: (1) cancel an insurance policy under § 3426 of the New York Insurance Law for nonpayment of premium when the nonpayment relates to an audit premium on a prior policy period, and (2) apply an installment premium for a current policy period to an outstanding audit premium owed on a prior policy period.

2. An Office of General Counsel Opinion dated February 21, 1992 (Re: Cancellation for nonpayment of prior year audit premium) concluded that:

(1) if a covered policy of commercial lines insurance under § 3426 specifically states that it may be cancelled for nonpayment of a prior years premium, then an insurer may cancel such policy for such nonpayment; and

(2) if a covered policy of commercial lines insurance specifically provides that the audit premium deposit for a current year may be increased, then the nonpayment of the additional deposit as a result of an audit of the prior policy period may likewise constitute grounds for cancellation based upon nonpayment.

Are these conclusions consistent with the Departments current position on such matters?

3. Under § 3426, may an insurer nonrenew a covered policy of commercial lines insurance at the end of its required policy period upon the issuance of a timely notice of nonrenewal if the insured fails to pay additional premiums (or additional deposits), which were based on the audit of a prior policy period?

Conclusions:

1. No. The Insurance Departments position remains unchanged. Please see the analysis below.

2. No. The 1992 opinion that formed the basis of the two conclusions above was overruled by Office of General Counsel Opinion No. 02-03-15 (March 15, 2002) (see attached). Please see the analysis below.

3. Yes. Under § 3426, an insurer may nonrenew a policy upon issuance of timely notice and may use the nonpayment of premium from a prior policy period as the basis for that nonrenewal.

Facts:

No facts are provided.

Analysis:

The Department was asked to reconsider its current position regarding the cancellation of renewal policies based on the nonpayment of a prior years audit premium. The Departments most current opinion, which was articulated in the Office of General Counsel Opinion No. 04-04-12 (April 19, 2004), concluded that an insurer may not: (1) cancel a commercial lines insurance policy for nonpayment of premium under Section 3426 of the New York Insurance Law when the nonpayment relates to an audit premium on a prior policy period; and (2) apply an installment premium for the current policy period to an outstanding audit premium owed on the prior policy period.

The Department has carefully considered the arguments presented within in support of reversing the Departments current position regarding the cancellation of renewal policies based on the nonpayment of a prior years audit premium. But after due deliberation, the Departments opinion remains unchanged.

§ 3426(a) of the New York Insurance law provides the following definition of "renewal" or to "renew":

"Renewal" or to "renew" means the issuance or offer to issue by an insurer of a policy superseding a policy previously issued and delivered by the same insurer, or another insurer under common control, or the issuance or delivery of a certificate or notice extending the term of a policy beyond its policy period or term; provided, however, that any policy with a policy period or term of less than one year shall, for the purpose of this section, be considered as if written for a policy period or term of one year, and any policy with no fixed expiration date shall, for the purpose of this section, be considered as if written for successive policy periods or terms of one year.¹

It has been contended that the underlined clause (i.e., "the issuance or delivery of a certificate or notice extending the term of a policy beyond its policy period or term") provides support for the argument that "the renewal of a policy results in the extension of the initial term of the policy, not in the issuance of a new policy which supersedes the policy previously issued and delivered." However, the delivery of the certificate or notice has the same effect as the issuance of a new superseding insurance policy. An insurer, in lieu of issuing or delivering a new insurance contract to effectuate a new insurance policy, may simply issue or deliver a certificate or notice to the same effect. While it is true that a renewal policy may share nearly identical policy terms with an expired policy that has been renewed, the renewal policy is not the same policy as the expired policy because, at the very least, the coverage periods have changed, which in and of itself creates a new insurance policy under § 3426. Thus, for the purposes of § 3426, a renewal policy is not the same policy as the prior policy that has been renewed regardless of whether the mere issuance or delivery of a certificate or notice extending the term of a policy beyond its policy period or term is sufficient to effectuate a renewal policy, and regardless of whether the renewal policy shares the pre-existing policy number of the prior policy. Consequently, a policyholders nonpayment of a prior years audit premium can not constitute sufficient grounds for the cancellation of such policyholders current renewal policy because the policies are not the same.

With regard to the Departments position that an insurer applying an installment premium for the current policy period to an outstanding audit premium owed on the prior policy period, the Department will not permit an insurer to perform such activity because: (1) the renewal policy and the expired policy are completely different policies, and (2) a policyholders contractual obligations under a prior policy have no connection with the policyholders obligations under a renewal policy, which, as stated previously, is a new policy.

This analysis of § 3426 is consistent with the legislative intent behind the statute, which was added to the New York Insurance Law by 1986 N.Y. Laws c. 220, § 31, to: "[a]lleviate for the New York State insurance consumer the problem of the unaffordability and unavailability of insurance by . . . preventing unwarranted mid-term cancellations and affording policyholders minimum notice of nonrenewal of policies, reductions in coverage and premium increases." 1986 N.Y. Laws 2856 Memorandum of State Executive Department.

With the second request, it was asked if certain conclusions, which were articulated in an Office of General Counsel Opinion dated February 21, 1992 (Re: Cancellation for nonpayment of prior year audit premium) (see attached), remained consistent with the Departments current position on such matters. The following two conclusions were presented for analysis:

(1) if a covered policy of commercial lines insurance under Section 3426 specifically states that it may be cancelled for nonpayment of a prior years premium, then an insurer may in fact cancel such policy for such nonpayment; and

The 1992 opinion that formed the basis of the two conclusions above was overruled by Office of General Counsel Opinion No. 02-03-15 (March 15, 2002) (see attached), which provided in relevant part:

A covered policy, defined under N.Y. Ins. Law § 3426(a)(1) (McKinney 2000), may not be cancelled under N.Y. Ins. Law § 3426(c) (McKinney 2000) for nonpayment of a prior years audit premium since nonpayment of premium relates only to the current policy period. The prior policy is not the current covered policy and does not affect the insureds rights under the current covered policy. N.Y. Ins. Law § 3426(c)(1)(A) (McKinney 2000) permits the cancellation of the covered policy for not paying a premium only in the current policy period.

Accordingly, regardless of whether a covered policy states that the insurer may cancel such policy for nonpayment of a prior years premium, the insurer may not cancel the policy for such nonpayment; and regardless of whether a covered policy of commercial lines insurance specifically provides that the audit premium deposit for a current year may be increased, the nonpayment of the additional deposit (an amount, which was revealed by an account audit, equal to the unpaid premium of the prior years policy) may not constitute grounds for nonpayment cancellation.

Lastly, confirmation was sought that "an insurer may nonrenew a covered policy of commercial lines insurance at the end of its required policy period upon issuance of a timely notice of nonrenewal in the event that the insured fails to pay additional premiums (or additional deposits) based upon the audit of a prior policy period." This final conclusion is consistent with the Departments position regarding an insurers right to nonrenew a policy under such circumstances. The Department articulated its position in Office of General Counsel Opinion No. 02-03-15 (March 15, 2002) (see enclosed), which stated in relevant part that: "[u]nder N.Y. Ins. Law § 3426 (McKinney 2000), an insurer may nonrenew a policy upon issuance of timely notice and may use the nonpayment of premium from a prior policy period as the basis for that nonrenewal."

For further information you may contact Senior Attorney Kristian Earl Lynch at the New York City Office.