OGC Op. No. 08-09-13
The Office of General Counsel issued the following opinion on September 29, 2008, representing the position of the New York State Insurance Department.
RE: Minimum Earned Premiums on General Liability Policies
Is an unauthorized insurer that issues a commercial general liability policy through a licensed excess line broker prohibited from imposing a 100% minimum earned premium?
No. An unauthorized insurer that issues a commercial general liability policy through a licensed excess line broker is not prohibited from imposing a 100% minimum earned premium, subject to N.Y. Ins. Law § 3428(a) and (d) (McKinney 2007) concerning cancellation of contracts. Because an unauthorized insurer is not licensed by the Department, and the terms of the governing contract prevail.
The inquirer reports that his company builds four or five custom homes per year, and that the company’s general liability policy was issued by an unauthorized insurer through a licensed excess line broker.
The policy contains a “Minimum and Advance Premium Endorsement” with a minimum premium of 100%. The Endorsement reads in relevant part as follows1:
The advance premium for this Coverage Part is a deposit premium only. The final premium shall be subject to audit. At the close of each audit period we will compute the earned premium for that period….If the sum of the advance and audit premiums paid for the policy term is greater than the earned premium, we will return the excess to the first Named Insured, subject to the minimum premium as defined below.
Thus, the final audited premium may be higher then the initial premium if the payroll or cost of subcontractors is greater than what the premium was based on but not lower then the initial estimate, which is the minimum. The company learned that it would not receive a refund in 2007 that the company had anticipated due to the 100% minimum premium endorsement.
The Department understands an "annual minimum and deposit premium" to be the premium that an insured has to pay as a deposit on the policy, which is also the minimum dollar amount that the insured will be charged as a premium regardless of whether the policy is written on an auditable basis, or is canceled prior to the expiration date of the policy. See Office of General Counsel (“OGC”) Opinion 02-03-26 (March 27, 2002). Here, the Endorsement uses the term “advance premium” in place of the term “deposit premium.”
For authorized property/casualty insurers licensed by the Department and thus subject to Article 23 of the New York Insurance Law, the Department has approved minimum earned premium endorsement filings (which may include an annual minimum and deposit premium endorsement) where the insurer has provided supportable evidence that the minimum earned premium equals the cost associated with issuing the policy. The purpose of allowing a minimum earned premium is to permit the insurer to recover the expenses of writing the business should the policy be canceled prior to expiration, or, in the case of an auditable policy, where the audit results in a premium lower than the amount needed to cover the cost of writing the policy. See OGC Opinion 02-03-26.
In the scenario presented by the inquiry, the general liability policy was issued by an unauthorized insurer through a licensed excess line broker. Unauthorized insurers are not subject to Article 23 of the Insurance Law. No provision of the Insurance Law prohibits an unauthorized insurer from imposing a 100% minimum earned premium.
To be sure, Insurance Law § 3428(a) and (d) apply to unauthorized insurers, and concern cancellation of insurance contracts and returning premium. However, under these provisions, the minimum earned premium that an unauthorized insurer may retain upon policy cancellation is the amount provided for in the policy, whether shown in a flat dollar, percentage or other amount.
Here, the insurance contract was not cancelled. Furthermore, the contract clearly states in the Endorsement that the minimum earned premium is 100%. Thus, since the insurer is not licensed by the Department, the terms of the governing contract prevail. Accordingly, as provided by the Endorsement, the audited premium may be higher then the initial premium, but never lower then the initial estimate, which is the minimum.
For further information, you may contact Elizabeth Barrett Special Counsel at the New York City office.
1 An endorsement is a form that amends a policy and always should be examined before signing the contract. The Endorsement, in this inquiry, defines:
• advance premium as “the premium …payable…at the inception of the policy”;
• earned premium as “[t]he premium that is developed by applying the rate(s) scheduled in the policy to the actual premium basis for the audit period”; and
• minimum premium as “[t]he lowest premium for which this insurance will be written…equal to 100% (unless a different percentage (%) is shown in the schedule above) of the advance premium including any premium adjustments made by endorsement to this policy during the policy period. Premium adjustments do not include the audit premium…”