OGC Opinion No. 07-07-03
The Office of General Counsel issued the following opinion on July 3, 2007, representing the position of the New York State Insurance Department.
RE: Insurance Cancellations and Refunds by a Premium Finance Agency
Questions Presented:
1. What is the maximum length of time that an insurer has to cancel a policy due to nonpayment of premium after notice is provided to the insurer by the PFA?
2. What is the maximum length of time that an authorized insurer has to refund the premium to the finance agency after the cancellation request has been received by the insurer?
Conclusions:
1. The earliest date an insurer may cancel a policy after it receives a cancellation request from a PFA is the day the request is received. Although no statute establishes a precise deadline for the cancellation by the insurer, applicable legal precedent establishes that a policy is cancelled, subject to any pertinent statutory requirements, once the insurer receives notice of the cancellation.
2. In accordance with both the New York Insurance Law and the New York Banking Law, an authorized insurer must return whatever gross unearned premiums are due within a reasonable time not to exceed sixty days after the effective date of the cancellation of the policy.
Facts:
A PFA wants to cancel an insurance policy due to non-payment of the monthly finance payment. The PFA has power of attorney and is authorized to cancel the policy if payment is not made. The PFA has notified the authorized insurer of the cancellation.
Analysis:
New York Banking Law § 576 (McKinney 2005) is relevant to the first query. That statute governs the methods of prospective cancellation applicable to a premium finance agency with the requisite power to act on behalf of the insured. In relevant part, Banking Law § 576 reads as follows:
(1) When a premium finance agreement contains a power of attorney or other authority enabling the premium finance agency to cancel any insurance contract or contracts listed in the agreement, the insurance contract or contracts shall not be cancelled unless such cancellation is effectuated in accordance with the following provisions:
(a) Not less than ten days written notice shall be mailed to the insured at his last known address as shown on the records of the premium finance agency, of the intent of the premium finance agency to cancel the insurance contract unless the default is cured within such ten day period and that at least three days of mailing such notice is added to the ten day notice. A copy of the notice of intent to cancel shall also be mailed to the insurance agent or broker.
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(d) After the notice in paragraph (a) above has expired, the premium finance agency may thereafter, in the name of the insured, cancel such insurance contract by mailing to the insurer a notice of cancellation stating when thereafter the policy be cancelled, and the insurance contract shall be cancelled as if such notice of cancellation had been submitted by the insured himself, but without requiring the return of the insurance contract. A copy of the notice of cancellation shall also be mailed to the insured.
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(f) The insurer or insurers within a reasonable time not to exceed sixty days after the effective date of cancellation, shall return whatever gross unearned premiums are due under the insurance contract or contracts on a pro rata basis to the premium finance agency for the benefit of the insured or insureds. However, upon such cancellation the insurer or insurers shall be entitled to retain a minimum earned premium on the policy of ten percent of the gross premium or sixty dollars, whichever is greater.
By its terms, Banking Law § 576 allows a premium finance agency to prospectively request cancellation of an insurance policy on behalf of the insured. The cancellation of a policy, however, cannot be earlier than the date that the notice of cancellation is received by the insurer. See Insurance Department Office of General Counsel (“O.G.C.”) Opinion No. 06-08-02 (August 2, 2006). In fact, in order to avoid a retroactive cancellation, the Department has held that pursuant to General Construction Law § 19, the cancellation does not actually take effect until the calendar day after the request for cancellation has been received by the insurer. See O.G.C. Opinion No. 06-08-02 (August 2, 2006).1
Neither Banking Law § 576 nor any other New York law specifies the latest date that an insurer may cancel the policy after it receives notice from the PFA. But the Court of Appeals, relying on the common law, has held that the cancellation occurs upon the insurer’s receipt of the cancellation notice from the PFA. See Savino v. Merchants Mutual Ins. Co., 44 N.Y.2d 625, 378 N.E.2d 1038 (1978); Crump v. Unigard Ins. Co., 100 N.Y.2d 12, 790 N.E.2d 244 (2003). Thus, the policy is cancelled upon receipt of the cancellation notice by the insurer.
The second question asks about the insurer’s obligation to refund premium after receiving a notice of cancellation from a PFA. Insurance Law § 3428(d) and (e) (McKinney 2006) and Banking Law § 576(1)(f) govern the cancellation of insurance contracts, and require that an insurer return whatever gross unearned premiums are due within a reasonable time not to exceed sixty days after the effective date of the cancellation. Insurance Law § 3428 reads in relevant part as follows:
(a) Except as provided in subsection (e) of this section, whenever an insurance contract made or issued in this state is cancelled or otherwise terminated by the insured before the expiration thereof in accordance with the terms of such contract, the earned premium to be retained by the insurer shall be determined by the applicable rate filing, if any, otherwise in accordance with the provisions of such contract.
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(d) Whenever an insurance contract, the premiums for which are advanced under a premium finance agreement as defined in section five hundred fifty-four of the banking law, is cancelled, the insurer or insurers within a reasonable time not to exceed sixty days after the effective date of the cancellation shall return whatever gross unearned premiums are due under the insurance contract or contracts to the bank, lending institution, premium finance agency or sales finance company for the benefit of the insured.
(e) Whenever an insurance contract, issued by or on behalf of an authorized insurer or insurers, the premiums for which are advanced under a premium finance agreement as defined in section five hundred fifty-four of the banking law, is cancelled, upon such cancellation the authorized insurer or insurers shall return the gross unearned premiums due under the insurance contract or contracts, on a pro rata basis to the bank, lending institution, premium finance agency of premium finance company, for the benefit of the insured, provided, however, that such authorized insurer or insurers shall be entitled to retain a minimum earned premium on the policy of ten percent of the gross premium or sixty dollars, whichever is greater.
Therefore, when insurance premiums are advanced pursuant to a premium finance agreement as defined in Banking Law § 554 (McKinney 2005)2, and the policy for which such premiums have been financed is cancelled, the insurer must return the unearned premiums no later than sixty days after the cancellation pursuant to provisions in both the Insurance and Banking Laws. See O.G.C. Opinion No. 07-01-09 (January 29, 2007); O.G.C. Opinion No. 06-07-02 (July 5, 2006).3
For further information you may contact Associate Counsel Alexander Tisch at the New York City office.
1 General Construction Law § 19 (McKinney 2006) defines the meaning of a day as follows: “[a] calendar day includes the time from midnight to midnight. Sunday or any other day of the week specifically mentioned means a calendar day.
2 Banking Law § 554 (8) (McKinney 2005) defines a premium finance agreement as follows:
“Premium finance agreement” means a promissory note or other written agreement by which an insured promises or agrees to pay to, or to the order of, either a premium finance agency or an insurance agent or broker the amount advanced or to be advanced under the agreement to an authorized insurer or to an insurance agent or broker in payment of premiums on an insurance contract, together with a service charge as authorized or limited by law. If the premium finance agreement is payable to, or to the order of, an insurance agent or broker not licensed by a premium finance agency, payments under the agreement must be payable at the office of a premium finance agency named in the agreement, to whom the agreement is by its terms to be and is subsequently assigned. The term “premium finance agreement” does not include a retail installment credit agreement which complies with the provisions of paragraph (b) of subdivision eleven of section four hundred thirteen of the personal property law.
3 How to calculate the amount of the premium to be returned depends on whether the insurer is authorized or unauthorized. Insurance Law § 3428(e) governs authorized insurers and provides for a pro-rata refund. However, Banking Law § 576 (1)(f) provides for a pro-rata refund without mention as to whether the statute applies to authorized or unauthorized insurers. See O.G.C. Opinion No. 07-01-09 (January 29, 2007). The Banking Law has not been amended to conform § 576 with the 2004 amendments to Insurance Law § 3428, which resulted in the revision of subdivision (d) of that statute.