New York State Insurance Department Office of General Counsel Opinions -- May to August 2010

I don't know why, but it seems that the number of NYS Insurance Department Office of General Counsel opinion letters being posted to the the Department's website has decreased this year.  From the 2010 Selected Opinions of the Office of General Counsel come these two opinion letters, the first from May and the second from June, relevant to property and casualty insurers doing business in New York, both involving auto physical damage coverage.    

Appearance Allowances Prohibited
OGC Op. No. 10-05-01 (May 10, 2010)

Question Presented:

May an automobile insurer offer to a claimant an “appearance allowance” in lieu of repairing or replacing a damaged part on the claimant’s automobile?

Conclusion:

No.  To the extent that an automobile insurer offers to a claimant less than the fair and reasonable amount sufficient to return the vehicle to its condition immediately prior to the loss, the insurer stands in violation of N.Y. Ins. Law § 3411(i) (McKinney 2007) and New York Comp. Codes R. & Reg. (“NYCRR”) tit. 11, Part 216 (Regulation 64).

Facts:

The inquirer represents ABC Insurance Company (“ABC”).  He reports that ABC offers “appearance allowances” to claimants. An “appearance allowance” is a monetary amount paid by an insurer to a claimant in lieu of restoring the claimant’s automobile to its condition immediately prior to the loss. In a July 1, 2009 memorandum from ABC to the Department, in which ABC explains its use of “appearance allowances,” ABC states that its current business plan includes offering an “appearance allowance” to a claimant in instances where the claimant seeks repair or reimbursement for minor cosmetic damage to a part of the automobile. The memorandum states that ABC’s trained insurance adjusters offer claimants: 1) an “appearance allowance,” 2) repair, or 3) replacement of the damaged automobile part. Furthermore, in the memorandum, ABC claims that the offer of an “appearance allowance” is merely one option addressed with the claimant, and that ABC does not require the claimant to choose the appearance allowance as a condition of payment.

Additionally, ABC has provided the Department with a section of its handbook, which describes ABC’s policies regarding “appearance allowances.” The handbook expressly states that there is “no set amount for an appearance allowance.” Furthermore, ABC’s Handbook sets forth an example of an instance where an adjuster may offer an “appearance allowance” to a claimant:

An example of this would be a front bumper with a small dent or scrapes. In this example, the value of the bumper is $600.00. We might offer the owner an appearance allowance of $100.00 in lieu of repairing or replacing the bumper. The company may still pay to align the bumper if necessary.

Moreover, ABC’s handbook states that “[t]he appearance allowance should not exceed what [ABC] would have to pay to repair or replace the part.”

The inquirer asks whether the “appearance allowance” comports with the Insurance Law and the regulations promulgated thereunder.

Analysis:

Insurance Law § 3411(i) is relevant to the inquiry. That statute governs automobile physical damage insurance covering private passenger automobiles, and states:

Payment of a physical damage claim shall not be conditioned upon the repair of the automobile, provided, however, the insured shall replace any inflatable restraint system (airbag), as defined in subparagraph (b) of S 4.1.5.1 of standard 208 of part 571 of title 49 of the code of federal regulations, that inflated and deployed, or that was stolen, which is included in a physical damage or theft claim. The insurer may request that the automobile be made available for inspection whether or not the automobile is repaired. The results of such inspection may form a basis for determining the value of the automobile in the event of a subsequent loss. If the automobile is repaired the insurer shall request the repair invoice and shall require the insured and the automobile repairer to certify, under penalties of perjury, whether the applicable deductible has been paid to the automobile repairer, whether any repairs have been made and whether the repairs did not include all items allowed by the insurer.

Thus, an insurer may not condition its payment of a claim to a claimant upon repair of the automobile, provided that an insured must replace an airbag that was inflated and deployed, or stolen.  In other words, an insurer is obligated to repair the vehicle or pay the cost of the repair. In fact, the Memorandum in Support of Chapter 161 of the Laws of 1996, which was enacted as Insurance Law § 3411(i), states that even though the legislature mandated an insured to replace an airbag, the legislature intended to maintain “[a] consumers’ right not to have a vehicle repaired and to collect on a claim.”

In addition, 11 NYCRR § 216.6(a), which governs standards for prompt, fair, and equitable settlement, states that:

In any case where there is no dispute as to coverage, it shall be the duty of every insurer to offer claimants, or their authorized representatives, amounts which are fair and reasonable as shown by its investigation of the claim, providing the amounts so offered are within policy limits and in accordance with the policy provisions.

Furthermore, 11 NYCRR § 216.7(b) governs automobile partial loss adjustments.  11 NYCRR § 216.7(b)(13) requires an automobile insurer to detail each item of damage as to the paint, parts, and labor hours it will require to repair that particular item.  Additionally, 11 NYCRR § 216.7(b)(1) requires an insurer to commence negotiations and offer a good faith settlement, sufficient to repair the vehicle to its condition immediately prior to the loss.

Therefore, an automobile insurer is required to detail each item of damage to a claimant’s automobile, commence negotiations with the claimant, and offer a good faith settlement to the claimant that is sufficient to repair the vehicle to its condition immediately prior to the loss.  If there is no dispute as to coverage, the insurer must offer to the claimant a fair and reasonable amount as shown by its investigation, provided the amount offered is with policy limits and in accordance with the policy provisions.

By paying an “appearance allowance” in lieu of the full claim, ABC is not complying with Insurance Law § 3411(i) and Regulation 64. Instead, ABC is paying an arbitrary amount based upon the adjuster’s negotiations with the claimant.  If ABC is offering an “appearance allowance” in lieu of an amount sufficient to repair the claimant’s automobile or part, ABC is conditioning the payment of a claim upon repair, which may constitute undue economic coercion by ABC towards the claimant, inasmuch as ABC is not offering the claimant the full claim amount.  It should also be noted that 11 NYCRR § 216.7(b)(11) and (12) allows ABC to deduct from the claim amounts for betterment and/or depreciation, and for previous damage.

In sum, to the extent that an automobile insurer offers to a claimant less than the fair and reasonable amount of the full claim as found by an insurer’s adjuster, the insurer’s actions do not comply with Insurance Law § 3411(i) and Regulation 64.

For further information you may contact Senior Attorney Sapna Maloor at the New York City Office.

Deductibles for Automobile Physical Damage Insurance Policies
OGC Op. No. 10-06-08 (June 3, 2010)

Questions Presented:

1) May an authorized insurer offer a zero deductible for a policy of comprehensive or collision automobile insurance coverage?

2) Is there an exception to the deductible requirements for antique, special, or historical vehicle programs, since these are not standard automobile programs?

Conclusions:

1)  No.  N.Y. Ins. Law § 3411(k) (McKinney 2007) prohibits an authorized insurer from offering a deductible of less than $50 for fire, theft or comprehensive insurance and $100 for collision insurance coverage on private passenger automobiles registered in New York, except that window glass coverage may be sold without a deductible.

2)  No, there is no exception to the deductible requirements for antique, special, or historical vehicle programs.

Facts:

The inquiry is of a general nature, without reference to particular facts.

Analysis:

1)  Deductibles under private passenger motor vehicle insurance policies

The inquirer asks, on behalf of an insurer who is a customer of the inquirer, about whether an insurer may offer automobile physical damage insurance with a zero deductible for automobiles registered in New York.

Insurance Law § 3411 is relevant to this inquiry. It applies to private passenger automobile policies. For purposes of § 3411(k), the Department interprets a private passenger automobile policy to have the same meaning as a covered policy under Ins. Law § 3425(a)(1): “a contract of insurance... issued or issued for delivery in this state, on a risk located or resident in this state, insuring against losses or liabilities arising out of the ownership, operation, or use of a motor vehicle, predominantly used for non-business purposes, when a natural person is the named insured under the policy of automobile insurance.” See OGC Opinion No. 08-04-36 (April 29, 2008).

Section 3411(k) reads, in pertinent part, as follows:

Each insurer which offers physical damage insurance subject to the provisions of this section shall offer such insurance with a standard deductible of two hundred dollars for each occurrence. The insured shall, however, at the inception of the policy or at the annual anniversary date, or at the time of the replacement or addition of an automobile, have the option of purchasing a policy with a lesser deductible, but in no event may the insurer sell a policy with a deductible of less than fifty dollars for fire, theft or comprehensive insurance coverages (one hundred dollars for assigned risk policies. . .) and one hundred dollars for collision insurance coverage except that window glass coverage may be sold without a deductible. . . .

 A zero deductible on either comprehensive or collision insurance coverage is not permissible under automobile physical damage insurance policies covering New York State registered private passenger automobiles under Ins. Law § 3411(k). The minimum deductible for fire, theft or comprehensive insurance coverage is $50 and, if the policy is issued through the New York Automobile Insurance Plan (“NYAIP”) as an assigned risk policy, the minimum deductible for comprehensive coverage is $100. The minimum deductible for collision insurance coverage is $100. Only window glass coverage may be sold without a deductible.

2)  Deductibles under antique, special, or historical private passenger motor vehicle insurance policies

The inquirer also asks whether there is an exception for antique, special, or historical vehicles to the limitations on deductibles set forth in Ins. Law § 3411(k). The statute makes no exception for such vehicles. The same prohibition against deductibles below the statutory limitations apply to antique, special, or historical vehicles that are private passenger automobiles.

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

The Part of No New York No-Fault Insurers Must Understand -- HCRA Surcharges May No Longer Be Offset Against Aggregate No-Fault Limits

Back in December 2009, I posted about the New York State Insurance Department's withdrawal after only 81 days of Circular Letter No. 21 (2009), entitled "The New York State Health Care Reform Act and No-Fault Insurance", which for a time superseded Circular Letter No. 16 (1996) and Supplement No. 1 to Circular Letter No. 16 (1996).  It all had to do with the the Department's position on whether New York no-fault insurers and self-insurers could offset an applicant's aggregate no-fault benefit limit by the amount of any HCRA surcharges paid directly to the New York State Department of Health's (“DOH”) Office of Pool Administration.  The Department's position on that question from November 22, 1996 through September 16, 2009 was YES, such HCRA surcharge payments could be applied as an offset, NO from September 16 through December 6, 2009, and YES again from December 7, 2009 to present, retroactive to its 1996 circular letter.

Once again, the answer is NO, and it's likely to stay that way indefinitely. On August 24, 2010,  the Department released Circular Letter No. 12 (2010).  Alike its withdrawn 2009 predecessor, this circular letter again supersedes and withdraws Circular Letter No. 16 (1996) and Supplement No. 1 to Circular Letter No. 16 (1996) and again advises New York no-fault insurers and self-insurers that the Department has "reconsidered its position on this issue."

Quoting a June 16, 2010 opinion of the Department's Office of General Counsel, the circular letter states:

The Legislature clearly intended payment to health providers to be included as part of basic economic loss when it enacted Article 51 of the Insurance Law. There is no similar evidence, however, that the Legislature intended payment of the surcharge to be included as a reimbursable health expense under the no-fault law. To the contrary, when it enacted the law providing for HCRA surcharge, the Legislature did not amend the no-fault law in any manner. Accordingly, the interpretive guidance set forth in Circular Letter No. 16 no longer should be followed, and insurers may not offset the HCRA surcharge against any no-fault benefits to which an injured person is entitled under Insurance Law § 5102(a).

 In light of OGC Opinion No. 10-06-05, insurers and self-insurers may not offset an applicant's aggregate no-fault benefit limit for the payment of a surcharge when the surcharge is paid directly to the DOH's Office of Pool Administration.

Since there is no effective date to this circular letter, it took effect immediately upon its issuance.  No more offsetting HCRA surcharges against aggregate no-fault limits. 

The Second Coming of No -- Offsetting HCRA Surcharges Against Aggregate No-Fault Limits

Back in December 2009, I posted about the New York State Insurance Department's withdrawal after only 81 days of Circular Letter No. 21 (2009), entitled "The New York State Health Care Reform Act and No-Fault Insurance", which for a time superseded Circular Letter No. 16 (1996) and Supplement No. 1 to Circular Letter No. 16 (1996).  It all had to do with the the Department's position on whether New York no-fault insurers and self-insurers could offset an applicant's aggregate no-fault benefit limit by the amount of any HCRA surcharges paid directly to the New York State Department of Health's (“DOH”) Office of Pool Administration.  The Department's position on that question from November 22, 1996 through September 16, 2009 was YES, such HCRA surcharge payments could be applied as an offset, NO from September 16 through December 6, 2009, and YES again from December 7, 2009 to present, retroactive to its 1996 circular letter.

Soon it'll be NO again.  Yesterday, the Department released a draft of Circular Letter No. XX dated July XX, 2010.  Alike its withdrawn 2009 predecessor, this proposed circular letter again supersedes and withdraws Circular Letter No. 16 (1996) and Supplement No. 1 to Circular Letter No. 16 (1996) and again advises New York no-fault insurers and self-insurers that the Department has "reconsidered its position on this issue."

Quoting a June 16, 2010 opinion of the Department's Office of General Counsel, which is not yet posted to the Department's website, the proposed circular letter states:

The Legislature clearly intended payment to health providers to be included as part of basic economic loss when it enacted Article 51 of the Insurance Law. There is no similar evidence, however, that the Legislature intended payment of the surcharge to be included as a reimbursable health expense under the no-fault law. To the contrary, when it enacted the law providing for HCRA surcharge, the Legislature did not amend the no-fault law in any manner. Accordingly, the interpretive guidance set forth in Circular Letter No. 16 no longer should be followed, and insurers may not offset the HCRA surcharge against any no-fault benefits to which an injured person is entitled under Insurance Law § 5102(a).  In view of OGC Opinion No. 06-16-2010, insurers and self-insurers may not offset an applicant's aggregate no-fault benefit limit for the payment of a surcharge when the surcharge is paid directly to the DOH's Office of Pool Administration.

The last sentence should probably be its own paragraph, rather than within the proposed circular letter's quotation of OGC Opinion No. 06-16-2010 (which are usually numbered YY-MM-DD).  One of my regular Insurance Department readers -- please tell Debra Parris.

According to the Department's website, the proposed circular letter will be available for review for only five (5) business days, or through July 14, 2010.  Comments on the proposed circular letter may be directed here.

New York State Insurance Department Unchanges Its Mind -- Withdraws Circular Letter No. 21 (2009) Regarding New York HCRA & No-Fault Insurance Surcharge

This may be a new record for the shortgevity of a NYSID circular letter.  Circular Letter No. 21 (2009), issued on September 16, 2009, has been withdrawn effective December 7, 2009.  That's a shelf life of only 81 days.

For the 81 days it was in effect, Circular Letter No. 21 (2009), entitled "The New York State Health Care Reform Act and No-Fault Insurance", expressly superseded Circular Letter No. 16 (1996) and Supplement No. 1 to  Circular Letter No. 16 (1996), which the Department withdrew on 9/16/2009.  With today's withdrawal of Circular Letter No. 21 (2009), Circular Letter No. 16 (1996) and its Supplement No. 1 presumably go back into effect.

In Circular Letter No. 16 (1996), issued November 22, 1996, the Department advised all authorized insurers writing motor vehicle insurance and motor vehicle automobile self-insurers that they were obligated, under the Health Care Reform Act (“HCRA”) set forth in New York Public Health Law § 2807-c and related provisions, to pay a surcharge to the Public Goods Pool on payments made for services rendered in general hospitals, diagnostic and treatment centers, and freestanding clinical laboratories. Supplement No. 1 to Circular Letter No. 16 (1996), issued November 21, 2003, updated the information set forth in Circular Letter No. 16 to take account of amendments to HCRA.  Both Circular Letter No. 16 (1996) and Supplement No. 1 advised insurers and self-insurers that they could offset an applicant's aggregate no-fault benefit limit for the payment of a surcharge when the surcharge was paid directly to the New York State Department of Health's (“DOH”) Office of Pool Administration.

Based on a December 30, 2008 OGC opinion (which has also been withdrawn and rescinded), the Department "changed its position" on the surcharge issue and declared in Circular Letter No. 21 (2009) that insurers and self-insurers were not allowed to offset an applicant's aggregate no-fault benefit limit by the amount of any HCRA surcharges paid directly to the DOH's Office of Pool Administration.

With the withdrawal of both the OGC Opinion No. 08-12-07 and Circular Letter No. 21 (2009), New York insurers subject to HCRA (payors pursuant to the New York State workers' compensation law, volunteer firefighters' benefits law, ambulance workers' benefit law, and the comprehensive motor vehicle insurance reparations act [article 51 of the New York Insurance Law]) may continue to reduce or offset an applicant's aggregate no-fault benefit limit by the amount of any HCRA surcharges paid directly to the DOH's Office of Pool Administration.

The Department's withdrawal of Circular Letter No. 21 (2009) should not affect the increases in HCRA surcharges enacted by the New York state legislature in its 2009-2010 State Fiscal Year Budget.  For services rendered in general hospitals, diagnostic and treatment centers, and freestanding clinical laboratories from 1/1/06 through 03/31/09, the HCRA surcharge percentages were 8.95% and 26.26% (both being owed if paid directly to the provider; just the former if paid directly to the DOH's Office of Pool Administration).

For services rendered from 4/1/09 through 12/31/11, the HCRA surcharge percentages were raised to 9.63% and 28.27%.

Insurers that did not offset or reduce an eligible insured's aggregate PIP limit by HCRA surcharge payments made in 2009 in accordance with the Department's now withdrawn OGC opinion and circular letter on the subject may wish to recalculate the available limits on the involved policies.

New York State Insurance Department Office of General Counsel Opinions for November 2009

From the NYS Insurance Department's website come these two Office of General Counsel Opinions from November 2009 relevant to property and casualty insurers doing business in New York, both involving the cancellation of regulated insurance policies.  

Cancellation of Insurance for Non-payment; Insured has Filed for Bankruptcy
OGC Op. No. 09-11-02 (November 6, 2009)

Question Presented:

Is there any provision in the Insurance Law or the regulations promulgated thereunder that prohibits an insurer from cancelling for nonpayment a marine insurance policy where the insured has filed for Chapter 11 bankruptcy protection?

Conclusion:

No.  There is nothing in the Insurance Law or regulations promulgated thereunder that prohibits an insurer from taking such an action.

Facts:

A commercial insured covered by a marine insurance policy filed for bankruptcy protection under Chapter 11 of the federal Bankruptcy Code. Following that filing, the insurer cancelled the policy for non-payment of premium. The insured’s counsel informed the insurer that the cancellation violates the “automatic stay” provided for under the federal Bankruptcy Code. The insurer then reinstated the policy as new business “until cancelled” with annual “renewal endorsements”.

Analysis:

New York Insurance Law § 3426(b) and (c) (McKinney 2006), which governs the cancellation of most commercial lines property/casualty insurance, is relevant to the inquiry. Those statutory provisions read in pertinent part as follows:

(b) During the first sixty days a covered policy is initially in effect, except for the bases for cancellation set forth in paragraph one, two or three of subsection (c) of this section, no cancellation shall become effective until twenty days after written notice is mailed or delivered to the first-named insured at the mailing address shown in the policy and to such insured's authorized agent or broker.

(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(b) and (c) require an insurer to provide timely notice to the insured of cancellation on grounds of nonpayment of premium. Pursuant to that statute, if an insurer wishes to cancel a liability insurance policy, it must provide the requisite written notice to the insured that specifies the reasons for the cancellation. So long as the reason is not otherwise prohibited by law, the Insurance Law does not otherwise limit an insurer’s ability to cancel for nonpayment of premium. Nothing in the Insurance Law or the regulations promulgated thereunder otherwise prohibits an insurer for cancelling a policy for non-payment of premium where the insured has filed for bankruptcy protection.

Notably, Insurance Law § 3426(l)(2) provides that Insurance Law § 3426 does not apply to policies “principally marine insurance.” That Insurance Law § 3426 does not apply to marine insurance, however, is ultimately irrelevant to the inquiry in that there is no provision of the Insurance Law or regulations thereunder that contains any prohibition on cancellations for nonpayment where the insured has filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code. Therefore, insofar as the Insurance Law is concerned, an insurer is free to cancel a policy for nonpayment of premium irrespective of the insured’s bankruptcy status.

For further information you may contact Supervising Attorney Michael Campanelli at the New York City Office.

Cancellation of Workers’ Compensation Insurance Policy
OGC Op. No. 09-11-03 (November 12, 2009)

Question Presented:

May an insurer cancel an insured’s current workers’ compensation insurance policy midterm for non-payment of the expired policy’s audit premium?

Conclusion:

(Yes.)  An insurer may cancel an insured’s current workers’ compensation insurance policy midterm for non-payment of the expired policy’s audit premium, so long as the policy does not contain any limitations to the contrary, and provided that the insurer complies with New York Workers Compensation Law § 54 (McKinney 2006), and any and all other applicable laws and regulations.

Facts:

An insurance producer reported that an insurer canceled an insured’s workers’ compensation insurance policy midterm because the insured did not pay the audit premium on its most recently expired policy. The producer also reported that the insurer had provided coverage to the insured for several years, and that none of the previous audits resulted in premium change except for the most recent audit, which resulted in a very large additional premium. The producer stated that the insured disputes the accuracy of the audit results, and for that reason, refused to pay the audit premium. The insurer subsequently canceled the insured’s current policy.

Analysis:

New York Insurance Law § 3426 (McKinney 2007) sets forth, among other things, the minimum cancellation provisions applicable to most property/casualty commercial lines insurance policies. However, Insurance Law § 3426(l)(2) explicitly excludes workers’ compensation and employers’ liability coverage. Instead, the cancellation provisions for workers’ compensation insurance are governed by Workers Compensation Law § 54(5), which reads as follows:

[text omitted]

Workers Compensation Law § 54(5) imposes no limitations on the reasons that an insurer may cancel a workers’ compensation insurance policy. Thus, unlike a policy subject to Insurance Law § 3426, a workers’ compensation insurance policy may be canceled by an insurer midterm for non-payment of the expired policy’s audit premium, so long as the policy does not contain any limitations to the contrary, and provided that the insurer complies with Workers Compensation Law § 54, and any and all other applicable laws and regulations. See Insurance Department’s Office of General Counsel Opinion dated May 3, 2005.

However, an insured may invoke the right of review of rating classifications afforded by Insurance Law § 2319. That statute permits an aggrieved insured to request, in writing, a review of the rating classification(s) applied to its policy. An insured that does not receive a timely response to its request for review, or receives an adverse determination, may appeal to the Superintendent for a hearing and new decision. Insurance Law § 2319 reads as follows:

[text omitted]

Thus, the right of review provided by Insurance Law § 2319 may assist the insured here in resolving its dispute over the expired policy’s premium audit.

For further information you may contact Associate Attorney Sally Geisel at the New York City Office.

New York State Insurance Department Office of General Counsel Opinions for September 2009

From the NYS Insurance Department's website come these two Office of General Counsel Opinions from September 2009 relevant to property and casualty insurers doing business in New York. 


Commercial Insurance Policy Cancellation
OGC Op. No. 09-09-02 (September 10, 2009)

Questions Presented:

Is an insured’s failure to comply with an insurer’s recommendations, in of itself, a valid basis for canceling a new or renewed commercial lines insurance policy under N.Y. Ins. Law § 3426(c)(1)(D)?

Conclusion:

No.  An insured’s failure to comply with an insurer’s recommendations, in of itself, is not a valid basis for canceling a new or renewed commercial lines insurance policy under Insurance Law § 3426(c)(1)(D).

Facts:

An inquirer reported that several insurers have canceled their insureds’ commercial lines insurance policies due to non-compliance with recommendations, which they claim is a proper basis for cancellation under Insurance Law § 3426(c)(1)(D). The inquirer disagrees with these assertions, contending that a renewed commercial lines insurance policy may not be canceled on such basis, because “[f]rom a practical standpoint, loss control visit[s] must be secured before [the] renewal date and if recommendations are not properly addressed, appropriate non-renewal notice must be tendered.”  The inquirer also questioned whether a new commercial lines insurance policy may be canceled based on non-compliance with an insurer’s recommendations under Insurance Law § 3426(c)(1)(D).

Analysis:

Insurance Law § 3426, which applies to most property/casualty commercial lines insurance, is relevant to the inquiry. That statute sets forth, among other things, the minimum cancellation provisions applicable to such policies.

Pursuant to Insurance Law § 3426(b), an insurer may cancel a new commercial lines insurance policy during the first sixty days the policy is in effect for any reason not prohibited by law.  Insurance Law § 3426(b) reads as follows:

(b) During the first sixty days a covered policy is initially in effect, except for the bases for cancellation set forth in paragraph one, two or three of subsection (c) of this section, no cancellation shall become effective until twenty days after written notice is mailed or delivered to the first-named insured at the mailing address shown in the policy and to such insured’s authorized agent or broker.

Insurance Law § 3426(b) provides a “free look” period of sixty days, during which time an insurer may complete its review of the risk, and determine whether the risk meets its underwriting standards. The Insurance Department explained the rationale behind this “free look” period in its November, 1989 issue of “The Bulletin,” as follows:

Regarding mid-term cancellation, while [Insurance Law] § 3426 clearly gives insurers the authority to cancel policies, the circumstances under which they may do so are limited. And, in order to provide for the legitimate underwriting needs of the insurers, the statute introduced to commercial lines insurance cancellation rules a concept that had been used in personal lines cancellation for many years – the sixty-day “free look.”

Property/casualty insurance is not purchased with the same time and deliberation that might be attendant to the obtaining of, say, a mortgage. Whereas a bank might have weeks or months to thoroughly investigate the mortgage applicant, inspect the property, verify assets, etc., an insurance policy might need to be procured in days or hours. Accordingly, insurers usually have to base their underwriting decisions upon whatever information is available at the time of application, no matter how incomplete or unverified.

The so called sixty-day free look permits an insurer to cancel any newly issued commercial lines policy, upon twenty days written notice, for virtually any reason, during the first days such policy is in effect. This is intended to give the insurer the opportunity to conduct such inspections, verify such information, obtain such experience, etc., as it may deem necessary to properly underwrite the risk. It also gives company officials the opportunity to review the underwriting decisions which may have been made by general agents, lower echelon underwriters, or others who have been given the “power of the pen.” Where deemed appropriate, rating adjustments may be made during the sixty-day period.

The absence of the opportunity to conduct such a review would have serious repercussions regarding the ready availability of commercial property/casualty insurance products. Without the knowledge that they have an appropriate time period to reflect on their underwriting decisions, and correct any major errors which may have been made, insurers would be much less willing to quickly offer coverage unless complete and verified information was in their possession before coverage took effect.

Accordingly, an insurer initially has sixty days in which to review a new risk that it has accepted, and to cancel coverage if the risk is incompatible with its underwriting standards. After the sixty-day “free look” period has expired, however, an insurer may not cancel coverage during the policy term or any renewal thereof unless cancellation is based on one of the criteria specified in Insurance Law § 3426(c). The specific criteria that are relevant to this inquiry are set forth in Insurance Law § 3426(c)(1)(D), which reads 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:

* * *

(D) after issuance of the policy or after the last renewal date, discovery of an act or omission, or a violation of any policy condition, that substantially and materially increases the hazard insured against, and which occurred subsequent to inception of the current policy period[.]

The Department addressed the purpose of Insurance Law § 3426(c)(1)(D) in its Office of General Counsel opinion, dated August 14, 1990. The Department stated therein:

By enacting [Insurance Law] § 3426(c) the Legislature sought to encourage insurers to thoroughly evaluate the risk and underwrite carefully with the understanding that after the first sixty days they would be on the risk for the remainder of the policy period unless one of the statutorily enumerated reasons for cancellation applied. This section is intended to guarantee reasonable protection against unwarranted cancellation while at the same time permitting insurers the flexibility to operate responsibly.

The [Insurance Law] § 3426(c)(1)(D) requirement that the act substantially and materially increase the hazard insured against embodies the legislative purpose that an insurer be permitted to cancel a policy only when there has been a major change in the scale of the risk subsequent to policy issuance. The conjunctive substantially and materially was used to underscore the stringent criteria that must be met before the subparagraph may be invoked.

The inquirer reported that several insurers have canceled their insureds’ commercial lines insurance policies due to non-compliance with recommendations, which the inquirer states they claim is a proper basis for cancellation under Insurance Law § 3426(c)(1)(D).

However, Insurance Law § 3426(c)(1)(D) only applies when there is a substantial and material increase in the risk after the policy has been issued, but that is not the situation when the policy is nonetheless renewed and the insured fails to comply with the insurer’s recommendations.  In the latter instance, the insurer has inspected, and knows the condition of, the risk when it makes its recommendations prior to the renewal date; the risk itself has not been altered after policy issuance. Failure to comply with an insurer’s recommendations thus is not a permissible basis for canceling a policy under Insurance Law § 3426(c)(1)(D). 
 

For further information you may contact Associate Attorney Sally Geisel at the New York City Office.

Loss Transfer Jurisdiction
OGC Op. No. 09-09-03 (September 15, 2009)

Questions Presented:

1. When a person has a large self-insured retention and the amount of damages at issue in a loss transfer inter-company arbitration falls within the retention, is the self-insured the appropriate party to the arbitration (as opposed to the liability insurer that insures the losses above the retention)? 
2.  Is a person’s self-insured status a valid affirmative defense to jurisdiction by a liability insurer?

Answers:

1. Yes. A person who has, pursuant to the New York Vehicle & Traffic Law (“VTL”), registered a motor vehicle with proper proof of financial security, that indicates that the person is self-insured with respect to the vehicle, is the appropriate party to a loss transfer inter-company arbitration if the amount at issue wholly falls within the retention amount.
2. [Yes.] The loss transfer inter-company arbitration panel may evaluate all defenses raised at the arbitration, including jurisdictional affirmative defenses.

Analysis:

N.Y. Ins. Law § 5105 is relevant to the inquiries. That statute reads, in pertinent part, as follows:

(a) Any insurer liable for the payment of first party benefits to or on behalf of a covered person and any compensation provider paying benefits in lieu of first party benefits which another insurer would otherwise be obligated to pay pursuant to subsection (a) of section five thousand one hundred three of this article or section five thousand two hundred twenty-one of this chapter has the right to recover the amount paid from the insurer or any other covered person to the extent that such other covered person would have been liable, but for the provisions of this article, to pay damages in an action at law. In any case, the right to recover exists only if at least one of the motor vehicles involved is a motor vehicle weighing more than six thousand five hundred pounds unloaded or is a motor vehicle used principally for the transportation of persons or property for hire…

(b) The sole remedy of any insurer or compensation provider to recover on a claim arising pursuant to subsection (a) hereof, shall be the submission of the controversy to mandatory arbitration pursuant to procedures promulgated or approved by the superintendent. Such procedures shall also be utilized to resolve all disputes arising between insurers concerning their responsibility for the payment of first party benefits.

Insurance Law § 5102(g) defines “insurer” as “the insurance company or self-insurer, as the case may be, which provides the financial security required by article six or eight of the vehicle and traffic law.”

Under the facts presented here, the vehicles in question are owned by a large trucking company, which is self-insured for purposes of the VTL, and therefore is an “insurer” for purposes of Insurance Law § 5105. Provided that the vehicles in question weigh more than 6,500 pounds unloaded, the mandatory arbitration provisions set forth in Insurance Law § 5105(a) apply, and thus provide the sole remedy for the party seeking arbitration.

A. Proper Parties to Loss Transfer Arbitration

VTL § 312 is relevant to the first question, which asks whether the proper party to a loss transfer arbitration is the excess liability insurer or the trucking company as the self-insurer. That law requires an application for motor vehicle registration to be accompanied by proof of financial security, which shall be evidenced by proof of insurance or evidence of a financial security bond, a financial security deposit or qualification as a self-insurer.

Here, the trucking company has satisfied the VTL requirements necessary to qualify as a self-insurer. Consequently, the trucking company also is a self-insurer for purposes of Article 51 of the Insurance Law. Given that circumstance, the trucking company is the proper party to the arbitration.

B. Jurisdictional Defenses Relating to Self-Insured Status

The second query asks whether a party’s self-insured status is a valid affirmative defense to jurisdiction by a liability insurer. Pursuant to section 65-4.11(a)(4) of Tit. 11, Subpart 65-2 (Reg. 68-B) of the New York Codes, Rules and Regulations (“NYCRR”) “[a]ny determination as to whether an insurer is legally entitled to recovery from another insurer shall be made by an arbitration panel appointed pursuant to this section.” Self-insurers are subject to mandatory inter-company arbitration pursuant to 11 NYCRR § 65-4.11(a), which states that the “term insurer as used in this section shall include both insurers and self-insurers as those terms are defined in this Part and article 51 of the Insurance Law.”  Therefore, it is for the arbitration panel to determine whether a jurisdictional affirmative defense predicated on an insured’s self-insured status is valid.

For further information, you may contact Associate Counsel Alexander Tisch at the New York City Office.

New York State Insurance Department Office of General Counsel Opinions for April 2009

Posted yesterday to the NYS Insurance Department's website are the Office of General Counsel Opinions for April 2009. Two of the 6 posted opinions are relevant to P&C insurers doing business in New York.

Applicability of Workers' Compensation Board Directive to Durable Medical Equipment Fee Schedule in No-Fault Claims (April 6, 2009)

Question Presented:

Is the Workers’ Compensation Board’s (“WCB”) directive of July 18, 2008 concerning the inapplicability of the durable medical equipment (“DME”) fee schedule to medical providers supplying such equipment applicable to no-fault claims?

Conclusion:

Yes, the WCB’s directive of July 18, 2008 concerning the inapplicability of the DME fee schedule to medical providers supplying such equipment is applicable to no-fault claims.

Facts:

The inquiry is of a general nature, without reference to particular facts.

Analysis:

Under New York’s “no-fault” insurance law, see Article 51 of the New York Insurance Law, a provider of health services is limited in what he can charge to an insurer by the amounts specified in the workers’ compensation fee schedules. See N.Y. Ins. Law § 5108 (McKinney 2000). Section 68.1(a) of N.Y. Comp. Codes R. & Regs. tit. 11, pt. 68 (Regulation 83) adopts certain workers’ compensation fee schedules for purposes of the no-fault law. That regulatory provision reads as follows:

The existing fee schedules prepared and established by the chairman of the Workers’ Compensation Board for industrial accidents are hereby adopted by the Superintendent of Insurance with appropriate modification so as to adapt such schedules for use pursuant to the provisions of section 5108 of the Insurance Law.

Furthermore, 11 N.Y.C.R.R. 68.1(b)(1) incorporates the grounds rules of the workers’ compensation fee schedules by providing in relevant part that “[t]he general instructions and ground rules in the workers’ compensation fee schedules apply” for purposes of no-fault billing. Thus, any charges for health services submitted to an insurer for reimbursement under the no-fault law are limited to the fee schedules and ground rules put forth by the WCB. This includes charges for DME, for which the WCB has established a fee schedule. 

Injured persons typically receive DME either directly from a medical provider or from a DME supplier, as when the equipment has been prescribed by a physician. On July 18, 2008, the WCB issued a directive addressing the fee schedule for DME. The directive makes the DME fee schedule inapplicable to medical providers supplying DME, and reads in relevant part as follows:

The Durable Medical Equipment Fee Schedule does not apply to medical providers supplying durable medical equipment to injured workers as part of medical treatment described in the New York Workers’ Compensation Medical Fee Schedule. Billing and reimbursement follows the ground rules as described in the fee schedule.

The directive thus establishes a separate reimbursement system for medical providers supplying DME directly to patients, while leaving in effect the current DME fee schedule for suppliers of DME (who are not licensed medical providers) to patients. 

For those medical providers, the directive states that billing and reimbursement will instead follow “the ground rules” set forth in the fee schedule. With respect to the reimbursement of medical providers, Ground Rule No. 4 of the Medical Fee Schedule reads in pertinent part as follows:

Supplies and materials provided by the physician…over and above those usually included with the office visit or other service rendered may be charged for separately…. Payment shall not exceed the invoice cost of the item.

Ground Rule No. 4 thus requires that the compensation physicians may receive for providing DME directly to patients shall not exceed the invoice cost of the item.

Since 11 N.Y.C.R.R. 68.1(b)(1) (Regulation 83) adopts the WCB’s fee schedules and ground rules for no-fault billing and reimbursement, and because physicians are excluded from the DME fee schedule, the WCB’s directive interpreting the DME fee schedule applies to charges arising from no-fault claims, in accordance with the clear intent of Insurance Law § 5108(a) to ensure that no-fault health services are reimbursed in accordance with the WCB fee schedule. Thus, the DME fee schedule applies only to DME suppliers, and not to medical providers supplying DME directly to patients, for purposes of reimbursing the cost of DME under the no-fault law.

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

Insurer's Obligation to Notify the Insured's Authorized Agent of the Insurer's Nonrenewal of the Policy (April 8, 2009)

Question Presented:

Does an insurer have an obligation to notify an insured's authorized agent if the insurer mails a notice of its intention not to renew a non-commercial automobile insurance policy to the named insured?

Conclusion:

Yes.  Under N.Y. Ins. Law § 3425(h)(3) (McKinney Supp. 2009), if an insurer mails a notice of intention not to renew a non-commercial automobile insurance policy to the named insured, the insurer shall mail, deliver or transmit a copy of the notice to the insured's authorized agent or broker within seven days of the time the notice is mailed to the named insured.

Facts:

The inquiry is of a general nature, without reference to particular facts.

Analysis:

Insurance Law § 3425 is germane to the inquiry. The statute applies to most non-commercial automobile insurance policies other than those issued through the New York Automobile Insurance Plan. Insurance Law § 3425(a)(1) defines a "covered policy" to mean an insurance policy issued or issued for delivery in this State by an authorized insurer, on a risk located or resident in this State, and that insures against losses or liabilities arising out of the ownership, operation or use of a motor vehicle, when a natural person is the named insured.

Insurance Law § 3425(h)(3) is relevant to the inquirer’s inquiry because that provision governs an insurer's obligation to notify the insured's authorized agent or broker if the insurer mails a notice of its intention not to renew a non-commercial automobile insurance policy to the named insured. Insurance Law § 3425(h)(3) reads as follows:

(3) A copy of every notice of cancellation, reduction of limits, substitution of policy form, elimination of coverages, conditioned renewal or of intention not to renew, including the reasons therefor, or a summary of such notice, shall be mailed, delivered or transmitted to the insured's authorized agent or broker within seven days of the time such notice is mailed to the named insured. Electronic transmission or any other means of delivery or transmission of information commonly used by the insurer to communicate with agents or brokers shall be deemed sufficient for compliance with this paragraph. Failure to mail, deliver or transmit a copy of such notice to the insured's authorized agent or broker pursuant to this paragraph shall not render any such notice ineffective, provided that all of the other requirements of this section are met and shall not be considered failure to include a provision required by this section for purposes of paragraph two of this subsection. (Emphasis supplied.)

Insurance Law § 3425(h)(1), too is relevant here, because proof of mailing of a notice of intention not to renew a non-commercial automobile insurance policy constitutes sufficient proof of notice. Insurance Law § 3425(h)(1) reads as follows:

(h) (1) Proof of mailing of a notice of cancellation, reduction of limits, substitution of policy form, elimination of coverages, conditioned renewal or of intention not to renew, or proof of the mailing of the reasons therefor, to the named insured at the address shown in the policy, shall be sufficient proof of the giving of notice and the giving of reasons required by this section.

For further information, you may contact Senior Attorney Robert Freedman at the New York City office.

Circular Letter No. 27 (2008) -- RE: Recognition in New York of Marriages Between Same-Sex Partners Legally Performed in Other Jurisdictions

I've been getting a lot of hits to the blog lately through Google searches for the "November 21, 2008 new york state insurance department opinion letter". Yesterday, that opinion letter was posted to the NYS Insurance Department's website and corresponds to the Department's Circular Letter No. 27 (2008), also dated November 21, 2008. Before you close this page thinking that the letters pertain only to health insurance, read the post to the end. First, the opinion letter:

Health Insurance for Same-Sex Spouses in Legal Out-of-State Marriages (November 21, 2008)

Question Presented:

Does the marriage of a same-sex couple legally performed in a jurisdiction outside New York confer the same rights to spousal health insurance coverage in New York as the marriage of an opposite-sex couple?

Answer:

Yes. Same-sex parties to marriages validly performed outside of New York must be treated as “spouses” for purposes of the New York Insurance Law, including all provisions governing health insurance.

Analysis:

* * * * *

Same sex couples legally marrying outside of New York and residing in the State give rise to the question of whether a same-sex spouse is considered a “spouse” for purposes of group insurance offered in accordance with the Insurance Law. The remainder of this opinion addresses that question.

Nothing in the Insurance Law – and indeed, nothing in any New York statute – either expressly authorizes or expressly prohibits this agency from interpreting the term “spouse” in the Insurance Law to include same-sex parties to marriages legally performed out of state. Moreover, while the Court of Appeals – the State’s highest court – held in Hernandez v. Robles, 7 N.Y.3d 338, 357, 366 (2006), that New York’s statutory law limits marriage to opposite-sex couples, and that this limitation is consistent with the New York Constitution, Hernandez did not address the question of whether New York should, as a matter of comity, recognize marriages of same-sex couples validly solemnized outside the State. Indeed, “the question of whether same-sex marriages valid in the jurisdiction where performed should be recognized in New York is an outgrowth of [Hernandez’s] determination that the law in New York does not compel the State to sanction same-sex marriage.” Godfrey v. Hevesi, 2007 N.Y. Misc. LEXIS 6589, at *5 (Sup. Ct. Albany Cty. Sept. 5, 2007).

While the Court of Appeals has yet to consider how marriages of same-sex couples performed outside this State should be treated in New York, see Beth R. v. Donna M., 19 Misc.3d 724, 853 N.Y.S.2d 501, 504 (Sup. Ct. N.Y. Cty. Feb. 25, 2008) (holding that “Hernandez did not address what effect New York should give to a validly entered out-of-state same-sex marriage”) (emphasis added), the Appellate Division, Fourth Department recently addressed the issue in Martinez v. Monroe Community College, 50 A.D.3d 189, 850 N.Y.S.2d 740 (4th Dep’t), lv. to appeal denied, 10 N.Y.3d 856 (2008).

* * * * *

Having found no “natural law” or “positive law” prohibition against the recognition by New York courts of a marriage between same-sex partners validly performed outside the State, the Fourth Department concluded that “[t]he Legislature may decide to prohibit the recognition of same-sex marriages solemnized abroad. Until it does so, however, such marriages are entitled to recognition in New York.” Id.; see also 2004 N.Y. Op. Atty. Gen. No. 1, 2004 WL 551537, at *12 (observing that “New York law presumptively requires that parties to [same-sex unions from other jurisdictions] must be treated as spouses for purposes of New York law.”); Legal Opinion of Office of the New York State Comptroller, dated October 8, 2004 (concluding that the New York Retirement System will recognize a Canadian marriage between same-sex partners in the same manner as a New York marriage between opposite-sex partners under the principle of comity).

* * * * *

To date, Martinez is the only Appellate Division decision to address the question of whether New York should recognize valid marriages of same-sex couples performed in jurisdictions outside of New York. The only other Appellate Division decision to consider recognition of out-of-state marriages between same-sex partners defers to Martinez. See Funderburke v. New York State Dep’t of Civil Servs., 49 A.D.3d 809 (2d Dep’t 2008) (vacating Supreme Court decision declining to order recognition of a marriage entered into in Canada between same-sex partners, citing Martinez, and dismissing appeal as moot).

In the absence of guidance from the Court of Appeals or the other Departments of the Appellate Division, Martinez is controlling precedent for all trial courts in the State. See, e.g., Mountain View Coach Lines, Inc. v. Storms, 102 A.D.2d 663, 664 (2d Dep’t 1984) (holding that “[t]he Appellate Division is a single statewide court divided into departments for administrative convenience . . . and, therefore, the doctrine of stare decisis requires trial courts in this department to follow precedents set by the Appellate Division of another department until the Court of Appeals or this court pronounces a contrary rule.”) (citations omitted); see also People v. Turner, 5 N.Y.3d 476, 482 (2005) (following Mountain View); Tzolis v. Wolff, 39 A.D.3d 138, 142 (1st Dep’t 2007) (holding that, “[a]bsent any authority from this Court, the motion court was bound to follow the applicable ruling of another department”) (citation omitted).

* * * * *

In light of the controlling authority of Martinez and the several opinions from lower New York courts consistent with that holding, the Insurance Department is of the view that marriages between same-sex partners legally entered outside of New York must be recognized in the State for purposes of interpreting the Insurance Law. Indeed, the Insurance Department would consider an insurer’s refusal to extend health insurance coverage to same-sex and opposite-sex spouses on an equal basis to be an unfair practice under Insurance Law §§ 2402 and 2403, and to be unfair discrimination under Insurance Law § 4224. Insurance Law § 2403 prohibits any person from engaging in this State in any unfair or deceptive act or practice constituting a “determined violation,” and Insurance Law § 2402(c) defines a determined violation as:

any unfair method of competition or any unfair or deceptive act or practice, which is not a defined violation but is determined by the superintendent pursuant to section two thousand four hundred five of this article to be such method, act or practice.

Insurance Law § 4224(b)(1), in turn, provides:

(b) No insurer doing in this state the business of accident and health insurance … shall:

(1) make or permit any unfair discrimination between individuals of the same class in the amount of premiums, policy fees, or rates charged for any policy of accident and health insurance, or in the benefits payable thereon, or in any of the terms or conditions of such policies, or in any manner whatsoever.

In the Insurance Department’s view, same-sex and opposite-sex legal spouses are similarly situated for purposes of construing the Insurance Law, a principal aim of which is to ensure that all consumers have a fair opportunity to purchase appropriate protection against risk. Although the Court of Appeals concluded in Hernandez that the Legislature could rationally distinguish between same-sex and opposite-sex couples for purposes of determining which couples may marry pursuant to the Domestic Relations Law, see 7 N.Y.3d at 358-60, the bases for the distinction deemed rational in Hernandez – that it could be considered more important to promote stability for children in opposite-sex than in same-sex relationships, and that it could be considered better for children to grow up with both a mother and a father than with two same-sex parents, see id. – are not probative to the construction of the Insurance Law.

In sum, where an employer offers group health insurance to employees and their spouses, the same-sex spouse of a New York employee who legally married his or her spouse out-of-state is entitled to health insurance coverage to the same extent as any opposite-sex spouse.

Moreover, please be advised that, while the query that gives rise to this opinion and the analysis set forth herein addresses accident and health insurance, the Department’s analyses and conclusions are applicable to all other kinds of insurance as well.

-+-+-+-+-+-+-+-+-+-+-+-+-+-+-+-+-+-+-+-+-+--+-+-+-+-+-+-+--+-+-+-+-+-+-+-+-+-+-+-+-

Circular Letter No. 27 (2008), entitled "Recognition in New York of Marriages Between Same-Sex Partners Legally Performed in Other Jurisdictions", underscores that "the Opinion['s] . . . analyses and conclusions are applicable to all other kinds of insurance, too" and lists various Department contacts, including someone in the Property Bureau, for "specific questions about policy forms[.]" Thus, it would be shortsighted for anyone or any insurer to think that this pair of circular and opinion letters applies only to health insurance in New York.

The term "spouse" appears multiple times in the New York State Insurance Law. With respect to property and casualty insurance in particular, "spouse" appears in sections 3420, 5102, and 5202. The term is also used to define "you" or "your" in many auto and homeowners policies expansively to include the named insured and a spouse if a resident of the named insured's household.

The laws of foreign national and state jurisdictions is in flux regarding same-sex marriages. Locally to New York State, same-sex marriages are legally performed in Canada, Connecticut and Massachusetts. Although legally recognized in other states, same-sex civil unions are generally not regarded as the same as same-sex marriages and likely won't be treated as the same by the Insurance Department under Circular Letter No. 27 (2008) and its corresponding OGC opinion letter.

Unless and until the New York State Legislature addresses this question, or a New York court invalidates Circular Letter No. 27 (2008), New York property and casualty insurers should treat the non-named insured spouse of a legally valid same-sex marriage to be an insured under auto and homeowners policies. Question undoubtedly will arise regarding the scope and applicability of certain protections and exclusions as they relate to both affording coverage in the first place, and loss settlement procedures and amounts in the event of a covered loss. In addressing and evaluating such issues, insurers should first verify the validity of the same-sex marriage under the laws of the foreign jurisdiction in which that marriage was performed.

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.

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

Just posted to the NYS Insurance Department's website are the Office of General Counsel Opinions from the first half of October. Only 1 of the 5 opinions posted merits mention this time as being relevant to P&C insurers.

Down Payment for Personal Automobile Insurance (October 10, 2008)

Questions presented:

1. May an insurer require an applicant for personal automobile insurance, who has been uninsured in the thirty days immediately preceding the making of the insurance application, to pay a portion of the premium as a down payment to bind the insurance?
2. If permitted, what requirements must an insurer fulfill or what restrictions must it put in place to require these applicants to pay a portion of the premium as a down payment?
3. If permitted, how does requiring these applicants to pay a portion of the premium as a down payment affect guidelines, billing plans, and agency contracts?

Answers:

1. Yes. New York Vehicle and Traffic Law § 311(5)(c) requires an insurer to collect at least ten percent of the annual premium due for all new policies.
2. An insurer must apply Vehicle and Traffic Law § 311(5)(c) in a fair and non-discriminatory manner to all new automobile insurance applicants. Specifically, an insurer may not require applicants to pay different down payments unless the underwriting criteria used to determine the down payments relate to the risks being insured. If use of the underwriting criteria results in discrimination in benefits under Article 23 of the Insurance Law or is otherwise expressly prohibited by law, then the insurer may not use the criteria to determine the down payments.
3. The question the inquirer presents is too broad and general in nature. Without more specific facts, the New York State Insurance Department is unable to answer it at this time.
   

New York State Insurance Department Office of General Counsel Opinions for September 2008

Just posted to the NYS Insurance Department's website are the Office of General Counsel Opinions from September. Of the 15 opinions posted, only two are directly relevant to P&C insurers for that month.

Cancellation of Homeowner's Insurance Policy Based Upon Pending Foreclosure Action (September 10, 2008)

Question presented:

May an insurer cancel a homeowner’s insurance policy based solely on notification by the bank of an impending or commenced foreclosure action?

Conclusion:

No. An insurer may not cancel a homeowner’s insurance policy based solely on notification by the bank of an impending or commenced foreclosure action, because a foreclosure filing is not one of the permissible grounds for cancellation set forth in N.Y. Ins. Law § 3425(c)(2).

Insurance Law § 3425(c) prevents an insurer from cancelling a personal lines insurance policy that has been in effect for more than 60 days, unless the cancellation is based on one of the permissible grounds set forth in the statute itself:

(c) After a covered policy has been in effect for sixty days, or upon the effective date if the policy is a renewal, no notice of cancellation shall be issued to become effective unless required pursuant to a program approved by the superintendent as necessary because a continuation of the present premium volume would be hazardous to the interests of policyholders of the insurer, its creditors or the public, or unless it is based on one or more of the following:

* * *

(2) With respect to personal lines insurance policies:

(A) nonpayment of premium, provided, however, that a notice of cancellation on this ground shall inform the insured of the amount due;

(B) conviction of a crime arising out of acts increasing the hazard insured against;

(C) discovery of fraud or material misrepresentation in obtaining the policy or in the presentation of a claim thereunder;

(D) discovery of willful or reckless acts or omissions increasing the hazard insured against;

(E) physical changes in the property insured occurring after issuance or last annual anniversary date of the policy which result in the property becoming uninsurable in accordance with the insurer's objective, uniformly applied underwriting standards in effect at the time the policy was issued or last voluntarily renewed[.]

In the OGC's opinion, the filing of a foreclosure action does not constitute any of these grounds. It is not, in and of itself, an increase of the hazard insured against or a physical change in the property.

Public Adjuster Ownership of Construction Company (September 10, 2008)

Question presented:

May an individual licensed as a public adjuster and owner of a public adjusting company act as an owner and principal of a construction/renovation company at the same time?

Conclusion:

Yes, an individual licensed as a public adjuster and owner of a public adjusting company may act as an owner and principal of a construction/renovation company at the same time. However, the public adjuster must take care to comply with the New York Insurance Law in the conduct of his or her business as both a public adjuster and owner of a construction/renovation company.

The OGC reminds public adjusters that they may not charge more than 12.5% of the insured's insurance recovery in compensation for their services as public adjusters, and that when the public adjuster also performs contracting or other work for the insured, there must be full disclosure of the relationship to prevent a potential conflict of interest and to make certain that the insured is properly informed. See OGC Opinion 07-06-25 (June 26, 2007):

At all times, the public adjuster/construction company owner must take care to record transactions conducted in both capacities with the utmost transparency and specificity, so as to dispel any inference of impropriety. The public adjuster’s agreement therefore should be in writing, and separate and distinct from the construction/renovation agreements. The public adjuster/construction company owner also would be well-advised to thoroughly itemize fees for the construction company’s services in writing, so as to avoid the appearance of any overlap with adjuster’s fees and to ensure that the transaction is conducted at arm’s length.

The Department may subject the adjuster to disciplinary action under Insurance Law § 2110 for violating the law or engaging in conduct found to be fraudulent, dishonest or otherwise untrustworthy. And in bringing such a proceeding, the Department would not be limited to services that the public adjuster performed that were within the scope of his or her license.