OGC Opinion No. 04-10-21: New York Automobile Insurance Plan Coverage

OGC Op. No. 04-10-21

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: New York Automobile Insurance Plan Coverage

Questions Presented:

1) May an insurer, with respect to a New York Automobile Insurance Plan policy, collect additional premium from the insured if an investigation by the insurer revealed that it miscalculated the policy premium?

2) May an insurer, with respect to a New York Automobile Insurance Plan policy, that issued the insured a $5,000,000 policy and sent a renewal notice with the same terms, then subsequently send the insured an endorsement that lowers coverage to $500,000?

Conclusions:

1) Yes. An insurer that has legitimately miscalculated a policy premium must correct its error by collecting an additional premium from the insured after the policy is bound and in effect, unless the insurer is prohibited from doing so pursuant to N.Y. Ins. Law § 3426(d)(1) (McKinney Supp. 2004). However, a policy issued through the New York Automobile Insurance Plan is not subject to N.Y. Ins. Law § 3426 and is not prohibited from collecting additional premium from the insured.

2) New York Automobile Insurance Plan rules state that the highest optional limit that can be purchased by any applicant is a $500,000 combined single limit. However, if an applicant is required to have higher limits by law, then the New York Automobile Insurance Plan must make such policy limits available when presented with proof that law requires such higher limits.

Facts:

A broker advises that its client applied for insurance coverage for the clients charter bus in 2001, through the New York Automobile Insurance Plan. The insurer conducted inspections in 2001 through 2003 and issued policies for those years. In 2004, the insurer conducted another inspection and issued a renewal notice for the same policy terms as years 2001 through 2003. However, the insurer increased the rating of the vehicle, which resulted in a substantial premium increase. In addition, the insurers calculations resulted in a retroactive policy endorsement and premium increase for 2003.

The same broker advises that another client was issued a policy through the New York Automobile Insurance Plan with a policy limit of $5,000,000 in September 2003. In March 2004, the insurer issued a renewal notice with the same policy limit. In May 2004, the insurer sent the insured an endorsement that the insured was not eligible for the $5,000,000 policy limit, reducing the insureds coverage to $500,000.

Analysis:

N.Y. Ins. Law § 2314 (McKinney 2000) states:

No authorized insurer shall, and no licensed insurance agent, no employee or other representative of an authorized insurer, and no licensed insurance broker shall knowingly, charge or demand a rate or receive a premium which departs from the rates, rating plans, classifications, schedules, rules and standards in effect on behalf of the insurer, or shall issue or make any policy or contract involving a violation thereof.

Thus, unless the insurer is prohibited from collecting additional premium by N.Y. Ins. Law § 3426 (McKinney Supp. 2004), once an insurer determines that it has collected an incorrect amount of premium it must rectify the situation by either returning the over-paid amount of premium to the insured or collecting the additional premium, in an under-payment situation, from the insured. See American Motorists Ins. Co. v. New York Seven-Up Bottling Co., 18 A.D.2d 36, 238 N.Y.S.2d 80 (1^st Dept 1963), affd, 13 N.Y.2d 1157, 247 N.Y.S.2d 386 (1964). The obligation to repay or collect the differing premium amount extends for six years from the policy expiration date (or cancellation date if policy is cancelled) pursuant to N.Y. C.P.L.R. 213 (6) (West, WESTLAW through L. 2004 Ch. 403 legislation), which is the statute of limitations period applied to contracts, unless the policy provides otherwise.

N.Y. Ins. Law § 3426(d)(1) (West, WESTLAW through L.2003, c. 675 legislation) states:

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 insured's 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.

N.Y. Ins. Law § 3426(a)(1) (West, WESTLAW through L.2003, c. 675 legislation) defines a "covered policy" as, "a policy of commercial risk insurance, professional liability insurance or public entity insurance, and shall include any contract, certificate or other evidence of such insurance."

The cancellation provisions set forth in N.Y. Ins. Law § 3426(c)(1)(D) and (E) (West, WESTLAW through L.2003, c. 675 legislation) as referred to N.Y. Ins. Law § 3426(d)(1) state:

(D) after issuance of the policy or after the last renewal date, discovery of an act or omission, or a violation of any policy condition, that substantially and materially increases the hazard insured against, and which occurred subsequent to inception of the current policy period;

(E) material physical change in the property insured, occurring after issuance or last annual renewal anniversary date of the policy, which results in the property becoming uninsurable in accordance with the insurer's objective, uniformly applied underwriting standards in effect at the time the policy was issued or last renewed; or material change in the nature or extent of the risk, occurring after issuance or last annual renewal anniversary date of the policy, which causes the risk of loss to be substantially and materially increased beyond that contemplated at the time the policy was issued or last renewed;

Therefore, unless there is a situation where N.Y. Ins. Law § 3426(c)(1)(D) or (E) would apply, an insurer may not increase the premium on a policy covered by N.Y. Ins. Law § 3426 after 60 days from the effective date of the insurance policy.

However, it is important to note that a policy issued through the New York Automobile Insurance Plan is not subject to N.Y. Ins. Law § 3426(d)(1) and the insurer issuing the policy must make reasonable attempts to collect the additional premium from the insured.

With regard to the lowering of the policy limit from $5,000,000 to $500,000 on an endorsement, the New York Automobile Insurance Plan rules state that the highest optional limit that can be purchased by any applicant is a $500,000 combined single limit. However, if an applicant is required to have higher limits by law, then the New York Automobile Insurance Plan must make such policy limits available when presented with proof that the law requires such higher limits.

Therefore, if an application contains documentation from the appropriate federal authority, state authority, municipal authority, school district or other political subdivision stating that such higher policy limits are required by law, then an insurer with respect to a New York Automobile Insurance Plan policy must make such policy limits available.