New York State Insurance Department Office of General Counsel Opinions for October 2008 -- Part II

Posted earlier today to the NYS Insurance Department's website are the Office of General Counsel Opinions from the second half of October. A rich 5 of the 8 posted opinions get a look as relevant to P&C insurers.

Duty to Defend -- Directors' and Officers' Policies (October 16, 2008)

Question Presented:

May a directors' and officers' (D&O) liability policy include a provision that places the duty to defend upon the insured rather than the insurer?

Answer:

No, a D&O liability policy may not include a provision that places the duty to defend upon the insured, rather than the insurer.

Analysis:

* * * A policy that places the duty to defend upon an insured would run afoul of Regulation 107 (11 NYCRR Part 71) because it would limit the availability of coverage for legal defense costs. By placing the duty upon the insured, the policy would condition defense cost coverage upon the insured taking charge of the defense. And, even where, as is the case with the proposed ABC policy, the policy provides coverage for attorneys’ fees and other direct costs of litigation, the insurer transfers to the insured the insurer’s duty to absorb the administrative costs of litigation, such as the cost of managing, controlling and otherwise overseeing the litigation. The ABC filing, in particular, excludes any coverage for compensation to directors, officers or employees of the insured, thereby negating any defense cost coverage for representation by the insured’s in-house counsel.

Although the inquiry concerns the duty to defend, the Department notes that the ABC policy also limits the availability of coverage for legal defense costs by providing allocation of defense costs between covered and noncovered matters. As noted above, where the insurer has the duty to defend, in an action in which at least one claim may possibly fall within the coverage, the insurer has the duty to defend all claims in the action. Clearly, the cost allocation provision of the ABC policy affords less defense costs coverage to the insured than a policy under which the insurer bears the duty to defend. Moreover, Regulation 107 does not authorize any allocation of defense costs. Given these circumstances, the Department will not approve such a provision * * *.

No-Fault Lost Earnings Claim (October 27, 2008)

Question Presented:

May an individual who receives a stipend under the federal Foster Grandparent Program, and is subsequently injured in a motor vehicle accident, receive compensation for the stipend through a lost earnings claim under the no-fault coverage of the vehicle in which she was a passenger, or may the claim be denied by the no-fault insurer based upon the Domestic Volunteer Services Act of 1973, 42 U.S.C. § 5058?

Answer:

[Yes], [a]n individual receiving a stipend under the federal Foster Grandparent Program who is injured in a motor vehicle accident may receive compensation for the stipend through a lost earnings claim made under the no-fault coverage of the vehicle in which the inquirer was traveling. The federal statute, 42 U.S.C. § 5058, is not applicable and does not preempt the New York no-fault law with respect to reimbursement of the lost earnings claim.

Analysis:

The New York no-fault law, enacted by the New York Legislature as Article 51 of the Insurance Law, is a mechanism through which individuals who are injured in automobile accidents may receive prompt compensation for substantially all resulting economic losses without regard to fault.

The lost earnings claim for the stipend which the Foster Grandparent Program affords was initially denied based on the Domestic Volunteer Services Act of 1973, 42 U.S.C. § 5058. That statute provides:

Notwithstanding any other provision of law, no payment for supportive services or reimbursement of out-of-pocket expenses made to persons serving pursuant to subchapter II of this chapter shall be subject to any tax or charge or be treated as wages or compensation for the purposes of unemployment, temporary disability, retirement, public assistance, workers’ compensation, or similar benefit payments, or minimum wage laws. This section shall become effective with respect to all payments made after October 1, 1973.

“Subchapter II” in this context refers to the subchapter which enacts the Foster Grandparent Program. Whether the federal statute is applicable to the New York no-fault law, and therefore preempts the New York no-fault law with respect to the availability of lost earnings for stipends under the program, is thus determinative of whether the lost earnings claim for lost stipends may be denied. Since no-fault reparations payments are not referenced directly in the statutory definition, the question therefore turns on whether the New York no-fault law is deemed to be subject to the federal statute with respect to the term “similar benefit payments.”

It is the Department’s view that the federal statute does not preempt coverage for lost stipends in this instance, given the no-fault law’s distinction from the “similar benefit payments” provision enumerated in the federal statute. Insurance Law § 5102(a)(2) (McKinney 2000) specifically enumerates loss of earnings for reimbursement as:

(2) Loss of earnings from work which the person would have performed had he not been injured, and reasonable and necessary expenses incurred by such person in obtaining services in lieu of those that he would have performed for income, up to two thousand dollars per month for not more than three years from the date of the accident causing the injury. An employee who is entitled to receive monetary payments, pursuant to statute or contract with the employer, or who receives voluntary monetary benefits paid for by the employer, by reason of the employee’s inability to work because of personal injury arising out of the use or operation of a motor vehicle, is not entitled to receive first party benefits for “loss of earnings from work” to the extent that such monetary payments or benefits from the employer do not result in the employee suffering a reduction in income or a reduction in the employee’s level of future benefits arising from a subsequent illness or injury. (Emphasis added.)

Pursuant to this provision, no-fault reimbursement for loss of earnings would include stipends for work performed had the person not been injured. The federal statute creating the Foster Grandparent Program exempts stipends earned from specifically enumerated programs providing other types of benefits, such as workers’ compensation payments, and other non-specified programs that would provide “similar benefit payments.” But the New York no-fault law was enacted with a broad mandate to provide reparations for a more comprehensive range of earnings than the programs referenced in the federal statute. The concept of basic economic loss defined in Insurance Law § 5102 addresses a broad spectrum of losses for which the no-fault law provides compensation, and the statute does not limit earnings reparations to employees’ wages alone. The second sentence of Insurance Law § 5102(a)(2) distinguishes certain “monetary payments” to which an “employee” is entitled, indicating that the language of the previous sentence refers to loss of earnings from broader sources than employment alone. The wording of Insurance Law § 5102(a)(2) thus makes clear that loss of earnings is to be compensated without regard to the kinds of limitations and exemptions described in the federal statute at issue.

Therefore, because the term “similar benefit payments” under the federal statute is silent as to whether such payments under the no-fault law would be “similar” so as to exclude reimbursement for lost stipends under the federal program, it is the view of the Department that the no-fault coverage is not a similar benefit to any of the benefits specified in the federal act, and that the no-fault law’s intent to provide reimbursement for a loss of earnings logically and naturally encompasses the loss of stipends under the federal statute. Accordingly, the insurer here should honor the claim.

For further information you may contact Principal Attorney Lawrence M. Fuchsberg at the New York City office.

Privacy of Consumer's Nonpublic Personal Financial Information (October 29, 2008)

Questions Presented:

1. Does the Insurance Law or regulations promulgated thereunder require an insurer or its agent to purge consumer’s personal information from its records after giving the consumer a quote for an automobile insurance policy, when the transaction does not result in the purchase of insurance?
2. Under what circumstances, if any, may an insurer or its agent disclose to third parties personal information that it receives about a consumer for an insurance quote, when the transaction does not result in the purchase of insurance?
   

Answers:

1. No. Neither the Insurance Law nor regulations promulgated thereunder require an insurer or its agent to purge information it receives from persons who request an insurance quote. In fact, the Department’s regulations require the insurer to maintain certain information for minimum specified periods.
2. An insurer and its agent may not disclose a consumer’s personal information to third parties, except in accordance with N.Y. Comp. Codes R. & Regs. Tit. 11, Part 420 (Regulation 169).

Replacement Cost; Payment on an "Estimated Claim" (October 29, 2008)

Questions Presented:

1. Does the Insurance Law or regulations promulgated thereunder define the term “replacement cost”?
2. Does an insured’s acceptance of an insurer’s check for payment based on an “estimated claim” extinguish the insured’s right to seek additional payments from the insurer?
   

Answers:

1. No. The term “replacement cost” is not defined in either the New York Insurance Law or Insurance Department regulations.
2. As general matter, if the payment made on the estimated claim represents payment of only the undisputed elements of the claim, the insured may accept the check, and then seek payment for the disputed amount within the limitations of the insured’s insurance policy. If the payment represents a full settlement of the claim, and the insured accepts the payment, then the insured may not seek additional payment for damages sustained.

Calculation of Total Loss Payments Upon Automobiles' Title Transfer Fees and Sales Tax" (October 30, 2008)

Questions Presented:

1. When a claimant elects to retain title to an automobile that is a total loss - under which the vehicle’s salvage value will be deducted from the settlement payment - is the amount of sales tax added to the value of the vehicle prior to the accident, or added after the deduction for the salvage value has reduced the value of the vehicle?
2. Must an automobile insurance company include title transfer fees as part of a settlement for the actual cash value of a motor vehicle upon its total loss?

Answers:

1. The amount of sales tax is added to the value of the vehicle prior to the accident, in accordance with the definition of actual cash value in § 216.6(b)(2) of 11 NYCRR 216 (Regulation 64), before the deduction for the salvage value is taken.
2. No. An insurance company is not required under the New York Insurance Law or regulations promulgated thereunder to include title transfer costs associated with the purchase of a replacement vehicle in determining the actual cash value of a motor vehicle that has suffered a total loss. However, there is also no prohibition in paying that extra sum as a component of loss, so long as it is done in a uniform and non-discriminatory manner.

Facts:

This is an example of a situation where a first- or third-party claimant retains ownership of an automobile that has been declared a total loss, which had a pre-loss value of $1,000 and a post-loss value of $100. The claimant transfers the automobile to the insurer for disposal. The insurer would pay $1,000 plus sales tax on the pre-loss value of $1,000. However, where the claimant elects to retain the salvage automobile, and the insurer deducts the $100 salvage value from the settlement payment, it is asked whether the insurer should pay sales tax calculated on $1,000, the actual cash value just prior to the loss, or on the $900 paid after deducting the $100 salvage value.

It has been the insurer’s practice to include a $50 title transfer fee as part of its settlement payments to first- and third-party claimants whose automobiles have been declared total losses. The insurer has learned of an opinion of the New York Insurance Department’s Office of General Counsel dated March 12, 2001, which concluded that an automobile insurance company need not include title cost in determining the total loss claim settlement with its insured. It is asked whether that opinion still represents the Department’s position.

Analysis:

Automobile insurance policies generally provide coverage on an “actual cash value” basis. Except where an automobile insurance policy provides otherwise, the definition of “actual cash value” that an insurer must use is set forth in Regulation 64. 11 NYCRR § 216.6(b) defines “actual cash value" as follows:

(b) Actual cash value, unless otherwise specifically defined by law or policy, means the lesser of the amounts for which the claimant can reasonably be expected to:

(1) repair the property to its condition immediately prior to the loss; or

(2) replace it with an item substantially identical to the item damaged. Such amount shall include all monies paid or payable as sales taxes on the item repaired or replaced. . . . [Emphasis added.]

Accordingly, in calculating the actual cash value of a vehicle upon a total loss where the claimant elects to retain the salvage, the definition of actual cash value in § 216.6(b)(2) specifies that the cost of replacement includes sales tax. The salvage value of the insured vehicle upon a total loss is a deduction from its actual cash value and, therefore, it is taken after the sales tax has already been added into the calculation of the vehicle’s replacement cost. Applying this formula to the hypothetical example posed, the insurance company would add the amount of sales tax to the $1,000 pre-loss value of the automobile, and then deduct the salvage value to arrive at the amount of the claim payment.

Concerning the question of title transfer fees, there is no requirement in the New York Insurance Law or Regulation 64 that an insurance company include a title transfer fee in the calculation of an automobile’s actual cash value in New York. But there is also no prohibition in paying such fee as a component of loss, as many insurers do so long as it is done in a uniform and non-discriminatory manner.

As the analysis above indicates, this opinion is consistent with the conclusions of the March 12, 2001 Department opinion that this inquiry references. Consequently, that opinion remains the position of the Department.

For further information you may contact Associate Attorney Jeffrey A. Stonehill at the New York City Office.