NYS Insurance Department Office of General Counsel May 2008 Opinions

Just posted to the NYS Insurance Department's website are the Office of General Counsel opinions from the second half of May. The first half's collection included nothing of particular interest or relevance to P&C insurers.

Insurer Designating a Contractor to Repair, Rebuild or Replace (May 16, 2008)

Property coverage work is so cool because sometimes, like in this OGC opinion, you get to dust off and drag out case law more than a century old.

Question Presented: May a property/casualty insurer designate any contractor to rebuild an insured property that has been partially destroyed by fire, if, pursuant to the policy, the insurer has an option to repair, rebuild or replace the property with other property of like kind and quality?

Conclusion: Nothing in the New York Insurance Law prohibits a property/casualty insurer from designating the contractor of its choosing to repair or rebuild an insured property that has been partially destroyed by fire, pursuant to an insurance policy vesting the insurer with an option to repair, rebuild or replace the property with other property of like kind and quality.

Analysis: An insurer that pays a claim under a fire insurance policy may not require the insured to select a particular contractor. See Opinion of General Counsel No. 06-07-04 (July 10, 2006). However, as an alternative to paying a claim under the standard fire insurance policy, the insurer may, pursuant to the policy, elect to “repair, rebuild or replace the property destroyed or damaged with other of like kind and quality within a reasonable time” by giving proper notice of its intention to do so. See Insurance Law § 3404(e) (policy lines 144-7). Nothing in the Insurance Law prohibits an insurer having made such an election from employing the contractor of its choosing to undertake the repair, rebuilding, or replacement.

Nevertheless, the insurer must use due care in selecting an appropriate, qualified contractor, and should guarantee the contractor’s work. An insurer that deviates from these expectations, as a general business practice, could be found by the Superintendent to have engaged in unfair claims practices within the meaning of Insurance Law § 2601.

Moreover, by electing to repair, rebuild or replace the property rather than paying the claim, a court could determine that an insurer has entered into a building contract with the insured, separate and in place of the insurance policy. See, e.g., Morell v. The Irving Fire Ins. Co., 33 N.Y. 429, 437 (1865); Eisenberg v. Motors Ins. Corp., 62 Misc. 2d 1 (Sup. Ct. N.Y. Co. 1970) (insurer that elected to repair an automobile created a new contract that could not be discharged until the insurer had fully performed the repair and returned the vehicle). In that circumstance, an insurer that fails to deliver property of like kind and quality may be liable for damages for breach of contract, irrespective of the limits of the policy. See Morell, 33 N.Y. at 437. And, the insurer could be liable for negligence of the contractor employed by the insurer. See, e.g., Kleeman v. Rheingold, 81 N.Y.2d 270, 274 (1993) (noting that party may be found negligent in selecting, instructing or supervising the contractor).

Finally, the insurer’s contractor may not act as an independent adjuster without a license. See Insurance Law § 2102.

Wow, is this like a "Yes, but do you really want to do that?" answer? Do you get the sense the OGC Senior Attorney Brenda Gibbs is trying to discourage property insurers from exercising this right? Nonetheless, I have personally been involved in several matters in which even the insurer's mere invocation of this right has facilitated an immediate reasonable compromise and settlement.

Mortgage Note Language (May 23, 2008)

An inquirer asked whether the following language in an insured's mortgage note/agreement violated New York Insurance Law:

Each insurance company concerned is hereby authorized and directed to make payment for such loss directly to Lender, instead of to Borrower and to Lender jointly.

OGC said no, but added that the Insurance Law does not govern the content or form of mortgage notes; the legal requirements for such instruments are set forth in the New York Real Property Law.

Real Property Law § 254(4) recognizes that a mortgagee will seek to protect its interest in the insured property, and allows mortgage notes to contain provisions that require a mortgagor to maintain insurance on the mortgaged property for the benefit of the mortgagee. Section 254(4) also contains safeguards to prevent the mortgagee’s unjust enrichment at the expense of the mortgagor with respect to the application of any insurance proceeds payable. But the statute neither expressly allows nor disallows language of the nature to which the inquirer refers. More importantly, as noted above, the parties to a mortgage note are the lender and the borrower only. Any purported “direction” to an insurer contained in the note cannot, as a general matter, bind the insurer.

I have been involved in claim scenarios in which the mortgagee demands payment of policy proceeds prior to the completion of the insurer's investigation of a suspected arson. In such instances, provisions in certified or attested mortgage agreements such as the one above may permit the insurer to make payment exclusively to the mortgagee in advance of its coverage decision vis-à-vis the insured. As an alternative, a signed Advance Payment Conditioned Upon Reservation of Rights may accomplish the same thing. The risk, of course, in paying the mortgagee directly and exclusively in advance of a reaching a coverage decision on the insured's claim is in having the insured then argue that such payment should not and did not reduce the building's policy limits for purposes of the insured's right of recovery. When in doubt, it's always best to get the insured's acknowledgement and permission prior to making any such direct and exclusive payment to the mortgagee.

Certificates of Insurance (May 30, 2008)

This is an easy one.

Question Presented: May a certificate of insurance provide obligations, conditions, or coverages not set forth within the underlying insurance policy?

Conclusion: No. A certificate of insurance may not confer new or additional rights beyond those specified in the insurance policy.

Analysis: * * * A certificate of insurance is often used as proof that a policy of insurance is in effect. It is a document used in business to summarize the essential terms, conditions, and duration of the contract of insurance that is in effect between the insured and the insurer. The certificate of insurance is not, however, the insurance contract itself, and there is no requirement in statute or regulation that it be filed with the Insurance Department. Nevertheless, the certificate of insurance must contain information consistent with the terms of the insurance policy in question; it cannot confer on a certificate holder new or additional rights beyond that which the insurance policy provides. Thus, if any provision in the certificate of insurance imposes an obligation or liability upon an insurer not required by the policy, such difference would alter, expand, or modify the rights between an insured and the insurer, and would constitute a policy form that must be filed with the Superintendent pursuant to Insurance Law § 2307(b). See, e.g., Office of General Counsel Opinion No. 06-05-02 (May 9, 2006); Opinion No. 06-11-16 (Nov. 17, 2006); Opinion No. 07-05-09 (May 17, 2007).

Thus, to the extent that the certificate of insurance here appears to obligate the insurer to provide additional days of notice not required by the policy, the certificate is inconsistent with the filed policy.

Finally, I note in closing that a producer violates the Insurance Law if the producer amends, expands, or alters the terms of a policy without authorization from the insurer and, where required, approval from this Department. As stated in the Department's Circular Letter No. 15 (1997), the Department may pursue disciplinary measures against any producer who acts in this manner. Consequently, it is prudent to review the entire policy to ensure that the certificate of insurance prepared by the producer actually reflects the terms of the policy.

No-Fault Insurance Policy Additional Personal Injury Protection (May 15, 2008)

This one's not so easy.

Question Presented: Does Article 51 of the New York Insurance Law (commonly known as the “No-fault” law) and the regulations promulgated thereunder require that additional personal injury protection (“APIP”) coverage issued pursuant to N.Y. Comp. Codes R. and Regs. tit. 11, Pt. 65 (Regulation 68) alter personal injury protection (“PIP”) loss of earnings from work limits set forth in N.Y. Ins Law § 5102(a)(2) (McKinney Supp. 2008)?

Conclusion: No. While Regulation 68 requires that APIP coverage alter the time or dollar limits of PIP basic economic loss, the regulation does not specify which PIP basic economic loss limits must be altered. Basic economic loss, as defined in Insurance Law § 5102(a), has multiple time and dollar limits, including the loss of earnings from work limits set forth in Insurance Law § 5102(a)(2). Regulation 68 requires that APIP coverage supplement basic economic loss available in the no-fault scheme by altering at least one basic economic loss time or coverage limit available under PIP. While APIP may alter all of the PIP basic economic limits, including the time and financial loss of earnings from work limits, it is not legally obligated to do so.

File this one in the "I did not know that" category. I always thought that each increment of $50,000 in APIP increased the monthly LOE limit by $1,000 or $2,000 to a maximum (I think) of $4,000 per month. Guess not. Check your policy.

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