The Office of General Counsel issued the following opinion on April 8, 2002, representing the position of the New York State Insurance Department.
RE: Conditional Renewal Notices.
Question:
Is a conditional renewal notice required when a change of limit is the result of the application of an inflation guard to the building limit?
Conclusion:
No, a conditional renewal would not be required in this instance because the increase in coverage is required by the terms of the policy. In addition, the premium increase is tied to an increase in the coverage amount.
Facts:
The inquiry concerns the application of the conditional renewal notice requirement to a situation where the increase in premium is due to the application of an inflation guard mechanism. Specifically, the inquirer noted the ISO Businessowners Special Coverage Form (BP 00 02), which has a built-in automatic increase in the building limit. That policy provision reads as follows:
4. Building Limit - Automatic Increase
a. The Limit of Insurance for Buildings will automatically increase by the annual percentage shown in the Declarations.
b. The amount of increase will be:
(1) The Building limit that applied on the most recent of the policy inception date, the policy anniversary date, or any other policy change amending the Building limit, times
(2) The percentage of annual increase shown in the Declarations, expressed as a decimal (example: 8% is .08), times
(3) The number of days since the beginning of the current policy year of the effective date of the most recent policy change amending the Building limit, divided by 365.
Example:
If: The applicable Building limit is $100,000. The annual percentage increase is 8%. The number of days since the beginning of the policy year (or last policy change) is 146. The amount of increase is ($100,000 x .08 x 146) / 365 = $3,200.
The inquirer noted that in the example provided by ISO, at the end of a one year policy, the building limit would be $108,000 [ ($100,000 x .08 x 365) / 365 + $8,000].
Analysis:
In the context of commercial lines policies, N.Y. Ins. Law § 3426(e)(1) (McKinney 2000) specifically sets forth the circumstances in which a conditional renewal notice must be provided to an insured. That section provides as follows:
(e) (1) A covered policy shall remain in full force and effect pursuant to the same terms, conditions and rates unless written notice is mailed or delivered by the insurer to the first-named insured, at the address shown on the policy, and to such insureds authorized agent or broker, indicating the insurers intention:
(A) not to renew such policy; or
(B) to condition its renewal upon change of limits, change in type of coverage, reduction of coverage, increased deductible or addition of exclusion, or upon increased premiums in excess of ten percent (exclusive of any premium increase generated as a result of increased exposure units, pursuant to subsection (d) of this section, or as a result of experience rating, loss rating, retrospective rating or audit), except that with respect to an excess liability policy, the insurer may also, consistent with regulations promulgated by the superintendent, condition its renewal upon requirements relating to the underlying coverage, in which event the conditional renewal notice shall be treated as an effective notice of nonrenewal if such requirements are not satisfied as of the later of the expiration date of the policy or sixty days after mailing or delivery of such notice; or
(C) that the policy will not be renewed or will not be renewed upon the same terms, conditions or rates; such alternative renewal notice must be mailed or delivered on a timely basis and advise the insured that a second notice shall be mailed or delivered at a later date indicating the insurers intention as specified in subparagraph (A) or (B) of this paragraph and that coverage shall continue on the same terms, conditions and rates as the expiring policy, until the later of the expiration date or sixty days after the second notice is mailed or delivered; such alternative renewal notice also shall advise the insured of the availability of loss information pursuant to subsection (g) of this section and, upon written request, the insurer shall furnish such loss information within twenty days consistent with the provisions of such subsection.
N. Y. Ins. Law § 3426(d) (McKinney 2000), cited in the above-quoted section, provides, in pertinent part, as follows:
(d) (1) After a covered policy has been in effect for sixty days, or on and after the effective date if such policy is a renewal, no premium increase for the term of the policy shall be made to become effective unless due to and commensurate with insured value added, subsequent to issuance or the last renewal date, pursuant to the policy or at the insureds request or, in lieu of cancellation, where such increase is based upon one or more of the grounds for cancellation set forth in subparagraph (D) or (E) of paragraph one of subsection (c) of this section.
In the example presented, the increase in premium is attributable solely to the operation of the inflation guard, which serves to increase the amount of coverage provided in order to protect against the impact of inflation. This mechanism is required by and set forth in the policy itself. Such being the case, no conditional renewal notice need be sent. Had the increase in coverage/premium not been solely attributable to a policy provision or a request by the insured, a conditional renewal notice would be required under the statute, except for a premium increase of ten percent or less.
The situation that the inquirer presented is somewhat analogous to increases that occur under policies requiring that coverage equal to the appraised value of the insured property be maintained. In such cases, the increases in coverage/premium also do not require the issuance of a conditional renewal notice. See Office of General Counsel Opinion (September 9, 1996).
For further information, you may contact Supervising Attorney Michael Campanelli at the New York City office.