OGC Op. No. 10-09-02
The Office of General Counsel issued the following opinion on September 7, 2010 representing the position of the New York State Insurance Department.
RE: Unlawful Inducements
Under the facts presented, may ABC insurer require an insured to insure her primary home with the insurer as a condition of covering her second home?
No. The ABC insurer’s requirement that an insured insure her primary home with the insurer as a condition of covering her second home runs afoul of N.Y. Ins. Law § 2324 (McKinney 2006), because it is an inducement not specified in the policy for the primary home.
The Insurance Department’s Consumer Services Bureau (“CSB”) received a complaint from a consumer who claims that ABC insurer denied her request for insurance coverage for her second home because her primary home was not insured through ABC insurer. CSB asked ABC insurer to explain why its policy of not writing insurance for a second home unless the prospective insured has a homeowners policy on her primary home with ABC insurer is not an unlawful inducement proscribed by Insurance Law § 2324.
ABC insurer admits that its requirement that the insured purchase a policy on her primary home before the insurer will insure the insured’s second home is an inducement. But ABC insurer asserts that the inducement is specified in the policy, and thus is not unlawful. ABC insurer claims that the inducement is specified in the policy because the insurance on the primary home and the second home are inter-related through language in the policies and the declaration forms. To buttress its claim that the inducement is specified in the policy, the insurer proffers its homeowners policy form (which is the same form it uses for a primary home and a second home) and two declaration forms that the insurer issued to an insured (one for a primary home and one for a second home). ABC insurer argues that policy specifies the inducement based upon its definition of the term “insured location,” which the policy defines in pertinent part, as follows:
“Insured location” means:
a. The “residence premises”;
b. The part of other premises, other structures and grounds used by you as a residence; and
(1) Which is shown in the Declarations; or
(2) Which is acquired by you during the policy period for your use as a residence;
c. Any premises used by you in connection with a premises described in a. or b. above; . . . .
The policy defines “residence premises,” in relevant part as:
a. The one family dwelling where you reside;
b. The two, three or four family dwelling where you reside in at least one of the family units; or
c. That part of any other building where you reside;
and which is shown as the “residence premises” in the Declarations . . . .
The insurer also points to references in the sample declaration forms. One declaration form, which the insurer has hand-marked as “Policy #1” and “Primary HO pol.,” defines the residence premises as “64 Vichy Drive” and lists an “additional insured location (Section II only)” as “Camp 9240.” The other declaration, which the insurer has hand-marked as “Policy #2” and “Second H.O. policy w/ liability from primary H.O.,” identifies the residence premises as “Camp 9240” and does not specify any liability coverage for the property. Rather, the second declaration states, “This policy provides no Section II coverage – see your policy No. 55 RBB868929.” But nowhere does the policy state explicitly that an insured may only purchase a homeowners insurance policy on a second residence if the insured purchases a homeowners insurance policy on her primary residence.
Insurance Law § 2324(a) prohibits the offering of inducements in connection with the purchase of most types of property/casualty insurance, including homeowners insurance. The express language of Insurance Law § 2324 precludes insurers, brokers, agents and their employees and representatives from directly or indirectly offering inducements or valuable consideration (other than an article of merchandise, or “keepsake”, not exceeding $15 in value), in connection with the offer of insurance, unless the inducement or valuable consideration is specified in the insurance policy. See Opinion of the Office of General Counsel (“OGC Opinion”) No. 07-07-10 (July 18, 2007). That statute reads in pertinent part as follows:
(a) No authorized insurer, no licensed insurance agent, no licensed insurance broker, and no employee or other representative of any such insurer, agent or broker shall make, procure or negotiate any contract of insurance other than as plainly expressed in the policy or other written contract issued or to be issued as evidence thereof, or shall directly or indirectly, by giving or sharing a commission or in any manner whatsoever, pay or allow or offer to pay or allow to the insured or any employee of the insured, either as an inducement to the making of insurance or after insurance has been effected, any rebate from the premium which is specified in the policy, or any special favor or advantage in the dividends or other benefit to accrue thereon, or shall give or offer to give any valuable consideration of inducement of any kind directly or indirectly, which is not specified in such policy or contract, other than any article or merchandise not exceeding fifteen dollars in value which shall have conspicuously stamped or printed thereon, the advertisement of the insurer, agent or broker. (Emphasis added.)
Insurance Law § 2324’s proscription against unspecified inducements includes situations where the purchases of two insurance policies are tied together, such that the purchase of one policy is contingent on the purchase of another. See, e.g., OGC Opinion No. 05-09-19 (September 21, 2005); OGC Opinion No. 87-56 (NILS INsource (“NILS”) September 25, 1987). Such "tie-in" sales are permitted only where the valuable inducement is specified in the underlying policy, and the insurer furnishes the policies in a manner consistent with the insurer’s filing and underwriting guidelines.1 OGC Opinion No. 87-2 (NILS February 1, 1987). The underlying policy is the policy that the insured must purchase in order to obtain the other policy, which in this case is the policy on the insured’s primary residence. See OGC Opinion No. 87-56 ( NILS September 25, 1987).
The common meaning of the word “specify” is “to identify clearly and definitely.” See New Oxford American Dictionary: Second Edition (2005) at 1629. Thus, it is not sufficient that the policies are “inter-related,” as ABC insurer asserts. The inducement must be specifically stated in the terms of the policy itself.
ABC insurer’s homeowners policy on a primary home, together with the declaration pages of the insurance policy for a primary home and a second home, does not specify the inducement because the policy does not identify it clearly and definitely. Indeed, there is nothing in the policy form or declarations that clearly and definitely states that the insurer will insure a second home only if the insured purchases a policy on her primary residence from ABC insurer. In fact, without explanation from ABC insurer, it is impossible to discern the insurer’s stance on insuring second homes.
In addition, the definitions of “insured location” and “residence premises” do not specify the inducement. To the contrary, by their plain terms, these definitions demonstrate that ABC insurer conceivably could use the policy form to insure a second residence without insuring the primary residence simply by designating the property as either an insured location or the residence premises in the declarations. In fact, ABC insurer’s second sample declaration form does just that: it identifies a second home as the policy’s “Residence Premises.”
The sample declarations provided by ABC insurer also do nothing to specify clearly and definitely that the insurer will only issue a policy on a second home if the insured purchases a policy on her primary home from ABC insurer. The sample declarations merely show that ABC insurer provides coverage for a second home by providing part of the coverage through the policy of a primary residence, and part through a separate policy for the second home.
In sum, ABC insurer’s requirement that an insured insure her primary home with the insurer as a condition of covering her second home runs afoul of Insurance Law § 2324 because it is an inducement that is not specified in the policy for the primary home.
For further information you may contact Senior Attorney Brenda M. Gibbs at the Albany Office.
1 In the alternative, rather than issue two policies, the insurer may offer the coverage for the second home as an endorsement to the policy on the primary home, provided the coverage on the second home is available only through the endorsement. See OGC Opinion No. 87-2 (NILS February 1, 1987).