The Office of General Counsel issued the following opinion on August 9, 2005, representing the position of the New York State Insurance Department.
Re: Commercial Property Insurance/Affect of Binder
Where a binder has been issued, is it permissible for an insurer to modify the value assigned to the property insured (change the limits of coverage and premium due) under a policy of commercial property insurance?
Insurance binders are the equivalent of temporary insurance until a formal policy is issued. Once a formal policy is issued, the binder is no longer in effect. Accordingly, the insurer may modify the terms and limits of coverage and premium due after the binder is issued as part of the issuance of the insurance policy. However, the cancellation of such a binder shall be governed at the minimum by the provisions of the standard fire insurance policy and the provisions of Insurance Law Chapter 34 applicable thereto.
A binder of coverage was issued on a commercial property. The binder was issued with a building limit of $450,000. After issuance of the binder, the insurer inspected the building and issued a policy with a building limit of $512,000. This resulted in an increase in the premium that was quoted prior to issuance of the binder.
The New York State Court of Appeals, in Springer v. Allstate Life Insurance Co. of N.Y., 94 N.Y.2d 645, 649 (2000), summarized the law regarding insurance binders and coverage in New York, and stated the following:
It has long been settled in this State that an insurance binder is a temporary or interim policy until a formal policy is issued (citations omitted). A binder provides interim insurance, usually effective as of the date of application, which terminates when a policy is either issued or refused (citations omitted). A binder does not constitute part of an insurance policy, nor does it create any rights for the insured other than during its effective period (citation omitted). Thus, a binder is limited in time until an assessment of risk is completed by the carrier.
N.Y. Ins. Law § 3404(h) (McKinney 2000) which governs standard policy provisions for certain property/casualty policies (including commercial property policies) reads, in relevant part as follows:
(h) As used in this section, "binder" means a written document (1) which includes the name and address of the insured and any additional named insureds, mortgagees, or lienholders; a description of the property insured; a description of the nature and amount of coverage which shall be deemed to include the terms of the standard fire insurance policy except as conspicuously noted on the binder; the identity of the insurer and of the authorized representative executing the binder; the effective date of coverage; the binder number or the policy number where applicable to a policy extension, and (2) which temporarily obligates the insurer to provide that insurance coverage pending issuance of the insurance policy. The cancellation of such a binder shall be governed at the minimum by the provisions of the standard fire insurance policy and the provisions of this chapter applicable thereto.... (Emphasis added.)
N.Y. Ins. Law § 3426(b) (McKinney 2000) requires specific procedures for cancellation of commercial line policies. Section 3426(b) states that:
During the first sixty days a covered policy is initially in effect . . . no cancellation shall become effective until twenty days after written notice is mailed or delivered to the first-named insured at the mailing address shown in the policy and to such insureds authorized agent or broker.
According to the New York State Supreme Court in Gatti v. Alliance Group of Western N.Y., et al., 731 N.Y.S.2d 327 (N.Y. Sup. Ct. Nov. 3, 2000), Section 3426(b) "does not differentiate between an interim policy of insurance issued through a binder by an agent, and a formal policy issued by the carrier after assessing the risks involved in the application." If a binder is issued, unless the insurer cancels the coverage in accordance with section 3426, the insured will continue to have coverage and be insured.
In the situation posed, the insurer makes a provisional appraisal of the value of the insured property and issues a binder based upon that valuation. Based upon a subsequent appraisal of the insured property, the insurer determines that an adjustment to the valuation of the property is required. During the first sixty days the binder is in effect, the insurer may "cancel" the binder by giving 20 days written notice to comply with § 3426. It may simultaneously offer to insure the property under a policy modifying the terms and limits of coverage and annual premium due or it may decline to offer coverage beyond the expiration date of the binder provided that the 20 days notice of cancellation requirement is satisfied.
For further information please contact Associate Attorney Sam Wachtel at the New York City Office.