OGC Op. No. 07-06-07
The Office of General Counsel issued the following opinion on June 7, 2007, representing the position of the New York State Insurance Department.
RE: Section 3426 Non-Renewals and Cancellations
1) May a notice of cancellation for nonpayment of premium terminate an expiring commercial risk insurance policy when a notice of renewal has already been mailed to the insured?
2) Does a valid cancellation notice sent after a renewal notice supersede the policy renewal, even if the cancellation is effective after the renewal policy would have gone into force?
3) Once it issues a renewal notice, may a commercial risk insurer subsequently issue a non-renewal notice after finding out that the insured did not comply with “mandatory recommendations” that the insurer made in a separate letter?
1) Yes. In general, a valid nonpayment cancellation terminates an expiring policy and supersedes a notice of renewal, provided that the insurer has complied with the statutory requirements of Insurance Law § 3426 (McKinney 2007).
2) Yes. If a valid cancellation notice has been mailed after a renewal notice, the cancellation notice supersedes the renewal notice, even if the cancellation is effective after the renewal policy period would have gone into force.
3) No. Under the circumstances discussed below, a notice of non-renewal may not supersede an unconditional renewal notice that has been sent to the insured. Where policyholders receive renewals with separate “recommendations,” and a warning from the insurer that the policy will be non-renewed if the insured does not satisfy the “recommendations,” the insurer is improperly circumventing the requirements of Insurance Law § 3426.
The inquirer reports that she represents an insurer that sells commercial risk insurance. She presents the following hypothetical scenarios relating to renewals and cancellations of commercial risk insurance policies and seeks confirmation that they do not implicate any Insurance Law violations.
1) An insured fails timely to remit an installment payment on an expiring policy and the insurer issues a nonpayment notice of cancellation. However, the declaration page of the renewal policy, which serves as a notice of renewal, had been timely mailed 60-120 days prior to the expiration date. The inquirer believes that because it properly terminated the existing policy, its offer of renewal is automatically withdrawn.
2) A policy period runs from July 15, 2005 to July 15, 2006 (“the 2005/2006 policy”). The insurer sends a timely renewal notice to the insured on May 15, 2006, with the policy period running from July 15, 2006 to July 15, 2007 (“the 2006/2007 policy”). On July 2, 2006, the insurer discovers a material change in the nature or extent of the risk, occurring after the last annual renewal anniversary date of the policy. On the same day, it issues a statutory notice of cancellation to be effective on July 19, 2006. The inquirer believes that because the cancellation notice was sent after a renewal notice, but before the renewal policy went into effect, the cancellation notice would supersede the renewal policy, even if the cancellation were effective after the renewal policy would have gone into force.
3) A policy period runs from July 15, 2005 to July 15, 2006 (“the 2005/2006 policy”). The insurer sends a timely notice of renewal on May 1, 2006, with the new policy period running from July 15, 2006 to July 15, 2007 (“the 2006/2007 policy”), and a subsequent letter stating that the insured must implement certain improvements to the property. The letter states that if the insured fails to implement its recommendations, it will withdraw its offer to renew the policy. Upon inspection of the premises, the insurer discovers that the insured has not complied with its recommendations for improvement that it made. Thus, it issue a notice of non-renewal on June 15, 2006 to be effective August 16, 2006, providing minimum notice required by Insurance Law § 3426 for a late nonrenewal notice. The inquirer indicates that since 99% of its policies are renewed, the insurer sends blanket renewal notices to all its insureds in an effort to be timely and efficient, and later conduct its inspections. Furthermore, the inquirer indicates that a conditional renewal notice would cause unwarranted anxiety amongst policyholders, most of whom the insurer would renew.
New York Insurance Law § 3426 governs the cancellation and renewal provisions of most commercial risk insurance policies, and we presume its applicability in this case.
Nonpayment Notice of Cancellation
Insurance Law § 3426(c) governs cancellation of commercial risk insurance policies and provides, in pertinent part, as follows:
(c) After a covered policy has been in effect for sixty days unless cancelled pursuant to subsection (b) of this section, or on or after the effective date if such policy is a renewal, no notice of cancellation shall become effective until fifteen days after written notice is mailed or delivered to the first-named insured and to such insured's authorized agent or broker, and such cancellation is based on one or more of the following:
(1) With respect to covered policies:
(A) nonpayment of premium provided, however, that a notice of cancellation on this ground shall inform the insured of the amount due.
Insurance Law § 3426(c) thus states that a notice of cancellation, if based on non-payment of premium, is not effective until 15 days after a written notice is mailed or delivered to the first-named insured and the insured’s agent or broker. Despite the fact that a notice of renewal had been mailed prior to the notice of cancellation, valid cancellation for these reasons terminates the expiring policy as well as the renewal, provided that the insurer has complied with all the requirements of Insurance Law § 3426. However, if the cancellation notice is invalid pursuant to Insurance Law § 3426(c), the existing policy will continue in full force and effect, and the insurer may not terminate the renewal policy. See New York Insurance Department Circular Letter 1986-14.
Underwriting: Statutory Cancellation
Pursuant to Insurance Law § 3426(c)(1)(E), a material physical change in the property, or a material change in the nature or extent of the risk that occurs after the issuance or last annual renewal anniversary date of the policy, is a valid basis for cancellation. Insurance Law § 3426(c) provides that a valid cancellation is not effective until 15 days after it has been mailed or delivered. If a valid cancellation notice has been mailed after a renewal notice, the cancellation notice supersedes the renewal notice, even if the cancellation is effective after the renewal policy period would have gone into force. In this instance, where the insurer discovers the material change after it issued the renewal notice, but prior to the effective date of renewal, the insurer may properly cancel the policy when it issues a cancellation notice prior to the renewal date.
Notice of Renewal Followed by Subsequent Notice of Non-Renewal Insurance Law § 3426(e)(1) provides:
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 insured's authorized agent or broker, indicating the insurer's 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 insurer's 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 ten days consistent with the provisions of such subsection.
Insurance Law § 3426(e)(1) thus provides an insurer with several options at the end of a policy term: 1) to offer to continue the policy in full force and effect pursuant to the same terms, conditions, and rates; 2) to non-renew the policy; 3) to condition renewal upon certain changes; or 4) to issue an alternative renewal notice followed by a second notice. An insurer should use the alternative renewal notice when it is not yet in a position to determine whether to non-renew or conditionally renew the policy. The language of the statute clearly indicates that when using the alternative renewal notice, an insurer must state in the first notice that the policy will not be renewed, or will not be renewed upon the same terms, conditions, or rates, and that a second letter is forthcoming. As soon as possible after the first notice, however, the insurer should issue a second notice indicating whether it will non-renew or conditionally renew the policy. Insurance Law § 3426(e)(1)(C).1
The legislative history shows that the one of the primary purposes of enacting Insurance Law § 3426 was to protect commercial risk property/casualty insureds from the severe constriction in the availability and affordability of certain types of insurance, and to “guarantee reasonable protection against unwarranted cancellation and failure to give fair notice of the intent not to renew a policy.” 1986 N.Y. Laws 220, pp. 2862-3.
Insurance Law § 3426(e)(1)(b) specifically provides that an insurer may also, consistent with regulations promulgated by the Superintendent, condition its renewal upon requirements relating to the underlying coverage. In this event, a conditional renewal notice is be treated as an effective notice of non-renewal if the requirements that it sets forth are not satisfied as of the later of the expiration date of the policy or 60 days after mailing or delivery of such notice. Where, however, policyholders receive renewals with separate “recommendations,” and a warning from the insurer that the policy will be non-renewed if the insured does not satisfy the “recommendations,” the Department is of the view that the insurer improperly circumvents the requirements of Insurance Law § 3426. The policyholders should receive conditional renewal notices in the first instance or, where circumstances are yet unknown, alternative renewal notices. Here, the insurer has failed to provide the requisite notice in either manner; and because the notice of non-renewal cannot supersede the original unconditional notice of renewal, it is a nullity.
For further information, you may contact Assistant Attorney Sapna S. Maloor at the New York City Office.
1 In Office of General Counsel Opinion 02-02-17, dated February 14, 2002, this Department opined that the second notice is not required to be issued prior to the policy expiration date.