OGC Opinion No. 09-01-10

The Office of General Counsel issued the following opinion on January 16, 2009, representing the position of the New York State Insurance Department.

RE: Flexible Rating for Private Passenger Automobiles Predominantly Used for Business Purposes

Questions Presented:

1. May an insurer utilize flexible rating for private passenger automobiles predominantly used for business purposes under Insurance Law § 2344 instead of Insurance Law § 2350?

2. Is an insurance policy covering a private passenger automobile predominately used for business purposes subject to Insurance Law § 3425 or Insurance Law § 3426?

Conclusions:

1. An insurer may utilize flexible rating under Insurance Law § 2344 for private passenger automobiles predominantly used for business purposes if the automobiles are not used for the transportation of persons for hire.

2. An insurance policy covering a private passenger automobile predominately used for business purposes is subject to Insurance Law § 3426.

Facts:

The inquiry is of a general nature, without reference to particular facts.

Analysis:

The inquirer questions whether an insurer may utilize flexible rating¹ for “private passenger automobiles” predominantly used for business purposes under Insurance Law § 2344 instead of Insurance Law § 2350. Insurance Law § 2344 establishes flexible rating for property/casualty commercial insurance markets not subject to prior approval, and which would otherwise be subject to the “file-and-use” requirements of Insurance Law § 2310.² Insurance Law § 2344(a)(1) defines a “market” as “a line, subline or classification (other than a classification delineated by geographic location) of property/casualty risks whose coverages are not subject to” Insurance Law §§ 2305(b), 2328, 3425 or 3446. Thus, in order to determine whether private passenger automobiles predominantly used for business purposes are subject to Insurance Law §§ 2305(b), 2328, 2344 or 2350, one must analyze the applicability of those provisions, as well as Insurance §§ 3425 and 3426.

With regard to Insurance Law § 2305, subsection (b) requires the Superintendent’s prior approval for rate filings for certain kinds of insurance, such as motor vehicle assigned risk insurance, motor vehicle insurance required by Vehicle and Traffic Law § 370, and private passenger automobile insurance. Vehicle and Traffic Law § 370 applies to automobiles that transport persons for hire.³ Yet, Insurance Law § 2305 does not define “private passenger automobile insurance.” In fact, “private passenger automobile” has different meanings throughout Article 23 of the Insurance Law depending upon the section and the context. But because of the legislative history of Insurance Law § 2305 and earlier provisions dealing with personal lines automobile insurance,⁴ the Department interprets “private passenger automobile insurance,” as used in Insurance Law § 2305(b)(13), to apply to motor vehicles (other than motorcycles, which are subject to file-and-use under Insurance Law § 2310, or motor vehicles in the assigned risk plan, which are subject to prior approval pursuant to Insurance Law § 2305(b)(4)) predominantly used for nonbusiness purposes. Further, although as a general rule Insurance Law § 2305(b) requires the Superintendent’s prior approval of rate filings for policies covering motor vehicles used predominately for nonbusiness purposes, the new Insurance Law § 2350 permits flexible rating for such policies so long as the rate change falls within the 5% band. Any rate change in excess of the 5% band requires the Superintendent’s prior approval.

Furthermore, a policy is subject to Insurance Law § 2328⁵ if it covers losses or liabilities arising out of ownership of an automobile used principally for the transportation of persons for hire, including a bus or school bus, as defined in Vehicle and Traffic Law §§ 104 and 142. Therefore, non-assigned risk insurance covering private passenger automobiles predominantly used for business purposes are not subject to Insurance Law §§ 2305(b) or 2328 so long as the automobiles are not used for the transportation of persons for hire. Instead, they are subject to the flexible rating provisions set forth in Insurance Law § 2344.

Moreover, whether automobile insurance is subject to Insurance Law § 3425 depends upon the predominant use of the motor vehicle.⁶ If the vehicle is predominantly used for business purposes, then the insurance coverage is not subject to Insurance Law § 3425. See Ins. Law § 3425(a)(1). Here, the private passenger automobiles are used predominantly for business purposes. Therefore, they are not subject to Insurance Law § 3425, but instead are subject to Insurance Law § 3426, which applies to commercial lines insurance.

Lastly, an insurance policy is subject to Insurance Law § 3446 if it is a product or system group insurance policy. Pursuant to Insurance Law § 3446(b), a product or system group insurance policy insures persons who purchased or own a product or system where the manufacturer, distributor or installer has represented that the product or system is designed to prevent loss of, or damage to, property from a specific cause (other than loss or damage resulting from a defect in materials or workmanship, or wear and tear). In the situation presented here, however, a product or system group insurance policy does not exist. Thus, Insurance Law § 3446 is inapplicable.

To summarize, coverage insuring against losses or liabilities arising out of the ownership, operation, or use of a private passenger automobile predominantly used for business purposes is not subject to Insurance Law §§ 2305(b), 2328, or 3425 if the automobile is not used for the transportation of persons for hire. Therefore, an insurer may utilize flexible rating for private passenger automobiles predominantly used for business purposes under these conditions pursuant to Insurance Law § 2344 instead of Insurance Law § 2350. Further, a policy covering such an automobile is subject to Insurance Law § 3426 rather than Insurance Law § 3425. Note, however, that rating classifications and territories require the Superintendent’s prior approval pursuant to Insurance Law § 2307(a).

For further information, you may contact Senior Attorney Joana Lucashuk at the New York City office.

¹ Flexible rating permits periodic rate changes within applicable flexibility bands on a file-and-use basis. § 161.0(c) of N.Y. Comp. Codes R. & Regs. tit. 11, Part 161 (1989) (Regulation 129). Unless the Superintendent specifically exempts markets from flexible rating, an insurer must obtain the Superintendent’s approval to implement rate changes beyond the bands. Id.

² 11 NYCRR 161 (Regulation 129) sets forth accompanying exemptions, standards and procedures.

³ However, as discussed infra, the operative section for vehicles for hire is Insurance Law § 2328.

⁴ Prior to 1984, Insurance Law § 677(3), which pertained to prior approval of rates in the context of no-fault insurance, applied to policies covering losses or liabilities arising out of the ownership, operation, or use of a motor vehicle predominately used for nonbusiness purposes. The term did not include motorcycles because “motor vehicle,” as used in the now Article 51 of the Insurance Law pertaining to no-fault insurance, excludes motorcycles. During the 1984 recodification of the Insurance Law, which was intended to make only non-substantive changes, the Legislature renumbered Insurance Law § 677(3) as Insurance Law § 2328. Although Insurance Law § 2328 was no longer part of what is now Article 51, the language set forth in Insurance Law § 2328 essentially remained the same, and the statute continued to use the phrase “motor vehicle predominately used for nonbusiness purposes.” Chapter 113 of the Laws of 1995 thereafter created a flexible rating system for policies covering automobiles predominately used for nonbusiness purposes. In doing so, Chapter 113 amended Insurance Law § 2328 by removing the reference to a motor vehicle “predominately used for nonbusiness purposes,” and established Insurance Law § 2350, which references motor vehicles predominately used for nonbusiness purposes. Insurance Law § 2350 sunset in 2001. As a result, in 2003, the Legislature added private passenger automobile insurance to Insurance Law § 2305(b). In 2008, Chapter 136 added a new Insurance Law § 2350 to permit flexible rating for nonbusiness automobile insurance policies, and amended Insurance Law § 2305(b)(13) to require prior approval for private passenger automobile insurance rates, except as provided in new Insurance Law § 2350. Although Insurance Law §§ 2305(b)(13) and 2350 use different terms, it is clear from the legislative history that they have the same meaning.

⁵ Insurance Law § 2328 modifies the prior approval requirements for vehicles for hire by subjecting to file-and-use rate filings that are no higher than the rates last approved by the Superintendent.

⁶ For the purposes of Insurance Law § 3425, “motor vehicle” has a broader meaning than under Insurance Law § 2350, and includes motorcycles.