The Office of General Counsel issued the following opinion on July 19, 2005, representing the position of the New York State Insurance Department.
Re: Cancellation of Commercial Liability Insurance Policy N.Y. Ins. Law § 3426 (McKinney Supp. 2005).
May an insurer cancel a commercial liability insurance policy for nonpayment of premium when the nonpayment relates to an audit premium on the prior year's policy?
No. Failure to pay an additional premium amount due as the result of an audit on a prior policy period is not nonpayment of premium under N.Y. Ins. Law § 3426 (McKinney Supp. 2005), which prohibits insurers from canceling commercial lines policies mid-term except for specified reasons indicated therein, and may not result in cancellation of the policy.
The initial general liability insurance policy on a commercial risk was in effect January 1, 2004 to January 1, 2005, when it was renewed to expire January 1, 2006. An audit on the first policy resulted in an additional premium which was billed but not paid during the time the succeeding policy has been in effect. The inquirer would like to know if the current policy may be canceled based on nonpayment of additional premium due on the expired policy.
Most commercial liability insurance policies issued by authorized insurers are subject to the cancellation and non-renewal provisions of N.Y. Ins. Law § 3426 (McKinney Supp. 2005). This statute limits the grounds for cancellation to certain specified events, including nonpayment of premium.
N. Y. Ins. Law § 3426(a)(3) (McKinney Supp. 2005) defines nonpayment of premium as follows:
'Nonpayment of premium' means the failure of the named insured to discharge any obligation in connection with the payment of premiums on a policy of insurance or any installment of such premium, whether the premium is payable directly to the insurer or its agent, or indirectly under
any premium finance plan or extension of credit. Payment to the insurer, or to an agent or broker authorized to receive such payment, shall be timely for the purpose of this section if made within fifteen days after the mailing to the insured of a notice of cancellation for nonpayment of premium.
A covered policy, defined under N.Y. Ins. Law § 3426(a)(1) (McKinney Supp. 2005), may not be cancelled under N.Y. Ins. Law § 3426(c) (McKinney Supp. 2005) for nonpayment of a prior years audit premium since nonpayment of premium relates only to the current policy period. The prior policy is not the current covered policy and does not affect the insureds rights under the current covered policy. N.Y. Ins. Law § 3426(c)(1)(A) (McKinney Supp. 2005) permits the cancellation of the covered policy for not paying a premium only in the current policy period.
The insured is entitled to have insurance coverage when the premium bill is paid. The insurer has every right, however, to pursue its legal remedies in court, if necessary, to obtain payment of the increased premium based on audit for the prior coverage.
However, under N. Y. Ins. Law § 3426 (McKinney Supp. 2005), an insurer may nonrenew a policy upon issuance of timely notice and may use the nonpayment of premium from a prior policy period as the basis for that nonrenewal.
For further information you may contact Associate Attorney Jeffrey A. Stonehill at the New York City Office.