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.

Update: NY PIP Intercompany Arbitration Rule Revisions -- Effective February 1, 2009

On January 25th, I posted about Arbitration Forums' revised rules for no-fault intercompany loss transfer arbitrations pursuant to New York Insurance Law § 5105(b), effective February 1, 2009.

In that post, I asked whether anyone could explain to me the "CPLR 325A-1" reference on page 2 of the revised rules.  There is no such section of the CPLR.  Attorney Tom Etzel commented that perhaps the citation was meant to refer to what was formerly 11 NYCRR 65.10(d)(5)(i). 

I emailed Arbitration Forums' Tim McKernan, Manager of Member Training and Forum Rules, for clarification and heard back from him this morning, advising that the revised rules have been corrected and are again posted here.

As you can see, the CPLR reference has been changed to "[t]he appropriate arbitration filing must be made within 60 days of the date of final determination of the issue of coverage by the Court."

NY PIP Intercompany Arbitration Rule Revisions -- Effective February 1, 2009

Arbitration Forums has announced and posted revised rules for no-fault intercompany loss transfer arbitrations pursuant to New York Insurance Law § 5105(b).  Read them here.  Insurers, self-insurers and compensation providers subject to § 5105 take note. 

Can someone explain the "CPLR 325A-1" reference on page 2 of the revised rules to me?  There is no such section of the CPLR. 

Loss Transfer Arbitration Award Vacated -- No Proof that Offending Vehicle was "Used Principally" as Livery

NO-FAULT – LOSS TRANSFER – INSURANCE LAW § 5105(A) – LIVERY VEHICLE – "USED PRINCIPALLY"
Matter of Progressive Northeastern Ins. Co. v. New York State Ins. Fund
(3rd Dept., decided 11/26/2008)

Sometimes called the "loss transfer" statute, New York Insurance Law § 5105(a) allows an auto insurer that has paid first-party no-fault benefits (or, as in this case, a workers' compensation insurer that has paid compensation benefits in lieu of first-party no-fault benefits for injuries to an insured sustained in a motor vehicle accident while working) to recover the amount paid from the insurer of the at-fault party "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." This case addresses the question of which insurer must prove that the at-fault vehicle was "used principally" for the transportation of persons for hire, i.e., as a livery vehicle.

Cheseboro was injured when his vehicle was struck in the rear by a 1999 Dodge minivan being driven by Redden, owned by her employer and Progressive's insured, Taddeo, and bearing livery plates registered to a 1998 Dodge minivan also owned by Taddeo. It is uncontested that on this day Redden was using the 1999 minivan bearing the livery plates to transport passengers for Taddeo's Affordable Wheelchair Transportation business.

New York State Insurance Fund (NYSIF) paid workers' compensation benefits to Cheseboro in lieu of first-party no-fault benefits and then filed for intercompany PIP loss transfer arbitration against Progressive, seeking to recover $50,000 in paid benefits. Progressive countered by arguing that Taddeo's 1999 minivan was her personal vehicle and not used primarily for the transportation of persons or property, as required by Insurance Law § 5105(a). After limited documentary evidence was submitted, the arbitrator determined that NYSIF was entitled to reimbursement from Progressive. Progressive then commenced this special proceeding to vacate the arbitration award, which Albany Supreme denied, and Progressive appealed.

In REVERSING Supreme Court's order and granting Progressive's petition, vacating the arbitration award, the Third Department held that NYSIF had but did not carry its burden of proving the "principal use" of the 1999 minivan involved in the accident -- not just on the accident date in question, but in general:

As relevant here, Insurance Law § 5105 (a) provides that an insurer liable for first party benefits or a workers' compensation carrier that pays benefits in lieu of first party benefits, which another insurer would otherwise be obligated to pay but for the No-Fault Law, has a right to recover "only if at least one of the motor vehicles involved [weighs] more than [6,500 pounds] unloaded or is . . . used principally for the transportation of persons or property for hire" (emphases added). The latter alternate requirements have been recognized to be "condition[s] precedent to ultimate recovery" (Matter of Progressive Cas. Ins. Co. v New York State Ins. Fund, 47 AD3d 633, 634 [2008]), and were added by amendment in 1977 "to limit the right of insurance carriers to recover first-party payments" (Matter of State Farm Mut. Auto. Ins. Co. v Aetna Cas. & Sur. Co., 132 AD2d 930, 931 [1987], affd 71 NY2d 1013 [1988]). Respondent, as the applicant seeking reimbursement, bore the burden of proof to show entitlement to recover benefits paid ^[FN3] (see e.g. Matter of Hanover Ins. Co. v State Farm Mut. Auto. Ins. Co., 226 AD2d 533, 534 [1996]; Matter of Eveready Ins. Co. v Lumberman's Mut. Cas. Co., 201 AD2d 649, 649 [1994]; Republic Claims Serv. Co. v Allstate Ins. Co., 160 AD2d 925, 926 [1990]). Insurance Law § 5105 (b) "provides that mandatory arbitration is the sole remedy regarding disputes between insurers over responsibility for payment of first-party benefits" (State Farm Mut. Auto. Ins. Co. v Nationwide Mutual Ins. Co., 150 AD2d 976, 977 [1989]).

Here, the record is devoid of evidence establishing the "principal use" of the passenger vehicle insured by petitioner. No proof established when the livery plates were put on the passenger vehicle, or if this plate-switching or use of the passenger vehicle to transport persons or property for hire occurred on any occasions other than the date of the accident, i.e., if it was Taddeo's or Redden's practice to use this passenger vehicle "for hire." Petitioner did not submit an affidavit from its insured and none of the documentary evidence established that the "principal use" of the vehicle it insured was other than its registered status as a passenger vehicle (compare Victoria Ins. Co. v Utica Mutual Ins. Co., 8 AD3d 87, 87 [2004]), i.e., the only evidence is that on the day of this accident, the passenger vehicle was being used "for hire," bearing livery plates from another vehicle.

Where, as here, the parties are obligated by statutory mandate to submit their dispute to arbitration (see Insurance Law § 5105 [b]), the arbitrator's determination is subject to "closer judicial scrutiny" than with voluntary arbitration (Matter of Motor Veh. Acc. Indem. Corp. v Aetna Cas. & Sur. Co., 89 NY2d 214, 223 [1996]). "To be upheld, an award in a compulsory arbitration proceeding must have evidentiary support and cannot be arbitrary and capricious" (id. [citations omitted]; see Matter of Utica Mut. Ins. Co. Selective Ins. Co. of Am., 27 AD3d 990, 992 [2006]). On this record, there is no evidentiary support or rational basis for the arbitrator's determination that petitioner's insured passenger vehicle was used "principally . . . for hire" as required for respondent to obtain reimbursement under Insurance Law § 5105 (a) (see Matter of Progressive Casualty Ins. Co. v New York State Ins. Fund, 47 AD3d at 634; Matter of Allstate v American Arb. Assn., 26 AD3d 374, 374 [2006]; Matter of Kemper Ins. Co. v Westport Ins. Co., 9 AD3d 431, 432 [2004]). To the extent that the arbitrator granted respondent's application based upon its finding that petitioner's insured passenger vehicle was "at the time" being used as a vehicle for hire, such a conclusion is inadequate to support the award and is "in disregard of the standard prescribed by the legislature" (Mount St. Mary's Hosp. Niagara Falls v Catherwood, 26 NY2d 493, 506 [1970]), i.e., that one of the vehicles be used "principally . . . for hire" (Insurance Law § 5105[a][emphasis added]). The arbitration award should, therefore, be vacated.

Footnote 3 is worth a look. The Third Department stated: "We do not agree with the arbitrator's conclusion that petitioner's position, that its insured vehicle was not used 'principally...for hire,' is an affirmative defense. Rather, the principal use of the vehicle is a threshold part of respondent's required showing, as the applicant seeking reimbursement under Insurance Law § 5105[.]" Same rule would seem to apply for which party must prove that the offending vehicle weighed more than 6,500 pounds.

NYSIF argued that since Progressive presumably had evidence of the 1999 minivan's principal use within its possession and reach, its failure to present such evidence justified the denial of its petition to vacate the arbitration award. The Third Department found that argument to be unconvincing, noting:

Further, respondent relies heavily on petitioner's failure to produce evidence presumably within its possession or reach regarding the principal use of its insured's vehicle. However, the record does not reflect that respondent availed itself of any of the avenues for discovery, such as requesting a hearing at which witnesses could be called (see CPLR 7506 [c]), asking the arbitrator to issue subpoenas to procure documentary evidence (see CPLR 7505; see also Alexander, Practice Commentaries, McKinney's Cons Laws of NY, Book 7B, CPLR 7505, at 682-683 [1998]) or, as a last resort, applying to the court for an order directing disclosure in aid of arbitration upon a showing of extraordinary circumstances (see CPLR 3102 [c]; see also Siegel, NY Prac § 597, at 1052-1054 [4th ed]; Matter of Goldsborough v New York State Dept. of Correctional Servs., 217 AD2d 546, 547 [1995], appeal dismissed 86 NY2d 834 [1995]). While "[u]nder the CPLR, arbiters do not have the power to direct the parties to engage in disclosure proceedings" (DeSapio v Kohlmeyer, 35 NY2d 402, 406 [1974]; see Matter of Goldsborough v New York State Dept. of Correctional Servs., 217 AD2d at 547), avenues of disclosure were clearly available (see Siegel, NY Prac § 597, at 1052-1054 [4th ed]).

No Do-Overs in Intercompany Arbitration

NO-FAULT – LOSS TRANSFER – INTERCOMPANY ARBITRATION – INSURANCE LAW § 5105 – RES JUDICATA
Matter of Progressive N. Ins. Co. v. Sentry Ins. A Mut. Co.
(2nd Dept., decided 5/13/2008)

Progressive paid no-fault benefits to its insured for injuries she sustained in a motor vehicle accident with Sentry's insured, and then commenced an intercompany arbitration proceeding against Sentry, seeking reimbursement under the priority-of-payment section of Regulation 68 (11 NYCRR § 65-3.12[b]; 65-4.11). In that first arbitration proceeding, the arbitrator ruled against Progressive and denied reimbursement.

Progressive commenced a second intercompany arbitration proceeding against Sentry, this time asserting a loss-transfer claim under Insurance Law § 5105. Sentry argued that Progressive was barred by res judicata from re-arbitrating its reimbursement claim, and the arbitrator agreed, denying Progressive's loss-transfer claim on that basis.

Progressive then commenced this CPLR article 75 special proceeding to vacate the second arbitration decision. In AFFIRMING the lower court's denial of Progressive's petition, the Second Department held that the arbitrator did not exceed its authority by rendering an award in favor of Sentry:

[I]t is clear that the instant claim made by Progressive arose out of the same transaction as the prior claim that was denied in the prior arbitration (citations omitted). While Progressive now alleges different facts regarding how the accident occurred, and a different theory upon which reimbursement is sought, the instant arbitration and the instant claim involve the same accident and the same parties, while Progressive seeks reimbursement of the same payments, albeit on a different legal theory (citations omitted).

Based on res judicata, the denial of Progressive's petition to vacate the second arbitration decision was upheld.