OGC Opinion No. 11-05-02

The Office of General Counsel issued the following opinion on May 3, 2011, representing the position of the New York State Insurance Department.

Re: Dishonored Check

Questions Presented:

The questions below are based on the following facts: An insurer cancels its insured’s personal lines automobile insurance policy due to non-payment of premium. After the policy is canceled, the insurer agrees to “reinstate” the policy and to accept a debit card payment from the insured for the payment of premium. The insured pays the premium by debit card at the office of the insurance agent, and the agent provides a payment confirmation number to the insured. However, the funds are never debited from the insured’s account. Four days later, the agent contacts the insurer, which states that the policy “remained canceled because the debit card was declined.”

1) If the insured’s bank declined the insured’s debit card payment because of insufficient funds, was the insurer required to inform the insured that the payment was not processed and that the policy was not in effect?

2) Assuming that there were sufficient funds in the insured’s account and the insurer declined the debit card payment for some other reason, was the insurer required to inform the insured that the payment was not processed and that the policy was not in effect?

3) Regardless of the reason the debit card payment was declined, was the insurer required to inform the insurance agent that the insured’s payment of premium was declined?

Conclusions:

1) Yes. The insurer must send to the insured a notice of cancellation that specifies that the policy was canceled due to nonpayment of premium, pursuant to N.Y. Insurance Law § 3425(b). The notice of cancellation must provide a minimum of fifteen days’ notice pursuant to N.Y. Vehicle and Traffic Law
§ 313(1)(a).

2) Yes. The insurer must send to the insured a notice of cancellation that specifies the reason the policy was canceled, pursuant to Insurance Law § 3425(b). The notice of cancellation must provide a minimum of twenty days’ notice pursuant to Vehicle and Traffic Law § 313(1)(a).

3) Yes. Because the facts here result in the insurer having to send notice of cancellation to the insured, the insurer must also provide notice of cancellation, or a summary of such notice, to the insurance agent pursuant to Insurance Law § 3425(h)(3).

Facts:

An insured attempted to pay premium to “reinstate” an automobile insurance policy, which already had been canceled for nonpayment of premium. More than fifteen days after the notice of cancellation was sent to the insured, the insurer agreed to “reinstate” the canceled policy upon the insured’s payment of premium by debit card. The insured thus paid the premium by debit card at the insurance agent’s office, and received a payment confirmation number for the transaction. Funds were never debited from the insured’s account. Four days later, the insurance agent contacted the insurer, which advised the insurance agent that the automobile insurance policy was not in effect because the debit card had been declined. The insurance agent is unclear as to whether the debit card payment was declined because of insufficient funds, or because the insurer decided not to process the payment for some other reason.

Analysis:

Although the inquiry refers to the “reinstatement” of an automobile insurance policy, neither the Insurance Law nor the Vehicle and Traffic Law defines or applies such term. However, the Insurance Department accepts the Barron’s Dictionary of Insurance Terms (4th ed., 2000) definition of “reinstatement” to mean the “restoration of a policy that has lapsed because of nonpayment of premiums after the grace period had expired.”

An insured’s payment of overdue premium is timely if it is made within fifteen days from the date that the insurer mailed to the insured a proper notice of cancellation for nonpayment of premium (“grace period”), pursuant to Insurance Law § 3425(a)(10). In this instance, however, the insured attempted to pay his overdue premium after the fifteen day “grace period” provided in Insurance Law

§ 3425(a)(10) had expired. When the insurer accepted the insured’s payment by debit card, and issued the insured a confirmation number, the insurer had effectively issued a new policy of automobile insurance to the insured, absent a clear indication from the insurer that the policy would be reinstated without a lapse in coverage. Therefore, the insurer was bound by the cancellation requirements set forth in Insurance Law §3425 ¹ and Vehicle and Traffic Law §313.

Insurance Law § 3425(b) sets forth the procedure for canceling a new automobile insurance policy that covers a motor vehicle that is predominantly used for non-business purposes, and names a natural person as the named insured. That statute reads as follows:

During the first sixty days a covered policy is in effect, no notice of cancellation shall be issued or be effective unless it states or is accompanied by a statement of the specific reason or reasons for such cancellation.

Vehicle and Traffic Law § 313(a) also sets forth certain procedures with regard to canceling an automobile insurance policy, whether for nonpayment or otherwise. That statute reads as follows:

No contract of insurance for which a certificate of insurance has been filed with the commissioner shall be terminated by cancellation by the insurer until at least twenty days after mailing to the named insured at the address shown on the policy’s notice of termination by regular mail . . . except where the cancellation is for nonpayment of premium in which case fifteen days notice of cancellation by the insurer shall be sufficient . . . .

Whatever grounds the insurer had for canceling the automobile insurance policy in the instant situation, the insurer was required to notify the insured of the cancellation by mail. The number of days’ notice the insurer was required to provide the insured depended upon the reason for cancellation.

Insufficient Funds

In the first scenario described, the insurer accepted the insured’s debit card payment of premium for an automobile insurance policy, but the insured’s account had insufficient funds. In an Office of General Counsel (“OGC”) Opinion dated April 25, 1996, the Department determined that a check that is remitted for payment of premium and is dishonored constitutes nonpayment of premium. A debit account with insufficient funds is functionally the same as a dishonored check; thus a debit card that is used to pay a policy premium but is backed by insufficient funds amounts to nonpayment of premium.

Insurance Law § 3425(a)(10) states the amount of time in which an insured may pay a premium after the insurer has mailed the insured a notice of cancellation for nonpayment:

Payment to the insurer, or to an agent or broker authorized to receive such payment, shall be timely, if made within fifteen days after the mailing to the insured of a notice of cancellation for nonpayment of premium.

In the instant matter, because the insurer accepted premium payment after the insured’s policy had been effectively canceled, and issued a confirmation number to the insured indicating that a new policy had been issued, the insurer did in fact effectuate a new policy of automobile insurance.

Thus, because the insurer issued a new policy of insurance (after the previous policy had been effectively canceled), the insurer is required under Insurance Law § 3425(b) to notify the insured in writing that the new policy is being canceled, stating the specific reason for the cancellation (i.e., nonpayment of premium). Insurance Law § 3425(a)(10) gives the insured 15 days to pay the premium after the mailing of a notice of cancellation (“15-day grace period”). In addition, such cancellation notice must provide 15 days’ notice pursuant to Vehicle and Traffic Law § 313.

The circumstances here are distinguishable from OGC opinions in which the Department concluded that an insured that had paid its premium by a check that was later dishonored had not made payment. The issue addressed by those opinions was whether a notice of cancellation for non-payment of premium remained in effect when an insured had remitted a check before the 15-day grace period had expired, and the check was thereafter dishonored. The issue addressed here, however, is whether a policy that is in effect may be considered rescinded from inception, because the insured remitted a check that was later dishonored and thus did not pay the premium. Insurance Law § 3425 does not permit such automatic rescission of a policy. An insurer must comply with the applicable cancellation provisions in Insurance Law § 3425 to terminate a policy.

Cancellation for a Reason Other than Non-payment

In the second scenario presented in the inquiry, the policy is canceled for some reason other than nonpayment of premium. As stated above, the policy the insured paid for by debit card is a new automobile insurance policy. Hence, Insurance Law § 3425(b), which applies to a policy that has been in effect for 60 or fewer days, is the applicable cancellation provision. Thus, the insurer is required to notify the insured in writing that the new policy is being canceled, stating the specific reason for the cancellation. Because the policy is canceled for some reason other than nonpayment, the cancellation notice in this instance must provide twenty days’ notice pursuant to Vehicle and Traffic Law § 313(a)(1).

Informing the Insurance Agent

Because the facts here result in the insurer having to send a notice of cancellation to the insured, the insurer must also provide notice of cancellation, or a summary of such notice, to the insurance agent pursuant Insurance Law § 3425(h)(3). That statute reads in relevant part as follows:

A copy of every notice of cancellation . . . including the reasons therefore, or a summary of such notice, shall be mailed, delivered or transmitted to the insured’s authorized agent or broker within seven days of the time such notice is mailed to the named insured. Electronic transmission or any other means of delivery or transmission of information commonly used by the insurer to communicate with agents or brokers shall be deemed sufficient for compliance with this paragraph.

Thus, an insurer is required to inform an insurance agent when the insurer issues the insured a notice of cancellation, whether coverage is canceled for non-payment of premium or some other reason, pursuant to Insurance Law § 3425(h)(3).

For further information you may contact Associate Attorney Sally Geisel at the New York City Office.

¹ If the insurer had clearly indicated that the policy would be reinstated without a lapse in coverage, the insurer would be bound by the cancellation provisions in Insurance Law § 3425(b) if the policy had been in effect for 60 or fewer days, or Insurance Law § 3425(c)(1) if the policy had been in effect more than 60 days, in which case the insurer would have few grounds for cancelling the policy.