OGC Op. No. 07-02-01
The Office of General Counsel issued the following opinion on February 1, 2007, representing the position of the New York State Insurance Department.
Re: Workers Compensation Audit
Must an insured pay the additional premium calculated at audit on its workers compensation policy, although the audit was conducted more than 180 days after the policy's expiration date?
Yes. An insured must pay the additional premium calculated at audit on its workers compensation policy, although the audit was conducted more than 180 days after the policy's expiration date.
An independent insurance agent in upstate New York has a client who recently received a request to pay additional premium of more than $19,000, calculated on the audit of a workers compensation policy that expired on January 1, 2006. The physical audit was completed in October 2006 and the request for additional premium was issued on December 6, 2006. The agent questioned whether the insured must pay the additional premium when the audit was conducted more than 180 days after the policy's expiration.
New York Insurance Law § 2339 (McKinney 2006) is relevant to this inquiry. The provision states in relevant part:
(a) This section shall apply only to kinds of insurance the rates for which are subject to prior approval pursuant to subsection (b) of section two thousand three hundred five of this article.1
(b) No member of or subscriber to a rate service organization, and no insurer which makes and files its own rates, shall charge or receive any rate which deviates from the rates, rating plans, classifications, schedules, rules and standards made and filed by such rate service organization, or by such insurer, as the case may be, which are applicable to any kind or type of business done by such member or subscriber, or by such insurer, except as provided in this article.
This section, formerly New York Insurance Law § 185(1) prior to the 1985 re-codification of the Insurance Law, was interpreted by Public Serv. Mut. Ins. Co. v. Rosebon Realty Corp., 39 Misc.2d 663, 241 N.Y.S.2d 555 (N.Y. Civ. Ct. 1963) as prohibiting the forbearance of additional premium resulting from a workers compensation audit. The court stated: "Under subdivision 1 of section 185, insurers are forbidden to charge or receive rates which deviate from those filed with the Superintendent. The filed rates thus have the force of law and any agreement changing or varying such rates would be invalid. . . . The rates published by law must be paid and no arrangement to the contrary - no matter how arising - is valid. . . . The law favors obedience to its statutes rather than the keeping of contracts in violation of them." 39 Misc. 2d at 664, 241 N.Y.S.2d at 557.
N.Y. Comp. Codes R. & Regs. tit. 11, § 161.10 (Regulation 129) is likewise germane to your inquiry. It states in relevant part:
(a) An audit to determine final premium for policies under which the initial premium is based on an estimate of the insured's exposure base shall be conducted within 180 days after expiration of such policy, and may not be waived except in the following circumstances:
(i) The total annual premium attributable to the auditable exposure base is not reasonably expected to exceed $1,500;
(ii) The policy requires notification to the insurer with the specific identification of any additional exposure units for which coverage is requested (i.e., motor vehicles); or
iii) The policy is a commercial umbrella for which the rate or premium is determined by the application of a factor to the rate or premium of an auditable underlying policy.
(b) The insurer shall, as soon as practicable following such audit, refund or credit the insured's account for any return premium due the insured, or bill and make a good faith effort to collect any additional premium due the company, as a result of the audit.
Thus, this regulation requires an insurer to conduct its audit within 180 days after policy expiration where none of the three exceptions provided in 11 N.Y.C.R.R. § 160.10 (Regulation 129) applies. Absent an exception, an insurer that fails to conduct a timely audit may be subject to the general penalty provision of New York Insurance Law § 109 (McKinney 2000), which imposes monetary fines for violations of the Insurance Law.
The Department promulgated 11 N.Y.C.R.R. § 161.10 (Regulation 129) to ensure audits are conducted promptly. However, given the importance of adhering to the filed rate, an insurer does not forfeit its right to conduct an audit once the 180 day period imposed by 11 N.Y.C.R.R. § 161.10 (Regulation 129) expires. See Office of General Counsel Opinions dated December 7, 2001, April 7, 2003 and February 8, 2005 (authorizing late policy audits so as to preclude insurer from departing from its rate filings).
Moreover, New York Workers Compensation Law § 131(1) (McKinney 2006) states:
Every employer subject to the provisions of this chapter shall keep a true and accurate record of the number of his employees and the wages paid by him for a period of four years after each entry therein, which records shall be open to inspection at any time, and as often as may be necessary to verify the same by investigators of the board, by the authorized auditors, accountants or inspectors of the carrier with whom the employer is insured, or by the authorized auditors, accountants or inspectors of any workers" compensation insurance rating board or bureau operating under the authority of the insurance law and of which board or bureau such carrier is a member. Any and all records required by law to be kept by such employer upon which the employer makes or files a return concerning wages paid to employees shall form part of the records described in this section and shall be open to inspection in the same manner as provided in this section. Any employer who shall fail to keep such records, who shall willfully fail to furnish such record as required in this section or who shall falsify any such records, shall be guilty of a misdemeanor.
In Commissioners of State Ins. Fund v. SM Transp. Ltd., 11 Misc.3d 1083A, 819 N.Y.S.2d 847 (Sup. Ct. Queens Co. 2006), the court held that N.Y. Work. Comp. Law § 131(1) provides a four-year statutory right to conduct an audit after policy expiration.2
This four-year right to audit does not conflict with 11 N.Y.C.R.R. § 160.10 (Regulation 129) since the regulation does not preclude audits from being conducted after 180 days. An insurer that fails to conduct its audit within 180 days may be subject to penalty under New York Insurance Law § 109 (McKinney 2006), but due to countervailing policy considerations concerning the filed rate, the insurer may nevertheless proceed with the audit.
In sum, an insured must pay the additional premium calculated at audit on its workers compensation policy, which was conducted more than 180 days after the policy's expiration date.
For further information you may contact Associate Attorney Sally Geisel at the New York City Office.
1 Workers compensation rates are subject to prior approval under New York Insurance Law § 2305(b) (McKinney Supp. 2007)
2 The court also held that the New York Civil Practice Laws and Rules § 213 (McKinney 2003) six-year statute of limitation applies, which begins to run "at a point after contemplated adjustments to the premium [a]re made pursuant to the audit." The court noted that the statute begins to run when the insured fails to pay premiums demanded after audit.