The office of General Counsel issued the following informal opinion on June 22, 2000, representing the position of the New York State Insurance Department.
Re: Commercial liability policies, N.Y. Ins. Law § 3426(d)(1) (McKinney Supp. 2000).
In auditing a commercial liability policy at expiration, the insurer determined that the insured engaged in both carpentry and roofing operations although the application indicated that 100% of the business was carpentry. It is not known whether the roofing operations were added before or after the application was submitted. May the insurer charge the insured a premium increase due to the increased risk without violating N.Y. Ins. Law §3426(d)(1) (McKinney Supp. 2000)?
2. In auditing a different insureds commercial liability policy at expiration, the insurer determined that the insured engaged 100% in waterproofing work although the application indicated that 100% of the work would be painting. It is not known whether the insured engaged in waterproofing before or after the application was submitted. May the insurer charge the insured a premium increase due to the change in type of work without violating N.Y. Ins. Law §3426(d)(1)(McKinney Supp. 2000)?
3. When the insurer determined at audit that an insured owed additional premium money and the insured sends premium monies to renew the policy, may the insurer apply these premium monies first against the outstanding audit premium owed and then apply the balance to pay part of the renewal policy premium owed?
1. and 2. Yes, assuming that the insurer did not have reason to know until the audit that the work actually being done was materially different than as indicated in the two applications in question.
3. No. If the insured receives a bill indicating premium due on the renewal policy and the insured makes payment for same, the monies may not be applied elsewhere but must be credited against the renewal policy premium.
There are no facts apart from those contained in the hypothetical questions presented above. The analysis below presumes that the insurer was unaware of the change in risk being insured until the audit, did not previously condone or ignore said work changes, and that the insured did not engage in fraudulent misrepresentation in completing the application. I note that fraudulent misrepresentation could lead to a cancellation of such policy within the meaning of N.Y. Ins. Law § 3426(c)(1)(C).
N.Y. Ins. Law §3426(d)(1) (McKinney Supp. 2000) reads as follows:
(d)(1) After a covered policy has been in effect for sixty days, or on and after the effective date if such policy is a renewal, no premium increase for the term of the policy shall be made to become effective unless due to and commensurate with insured value added, subsequent to issuance or the last renewal date, pursuant to the policy or at the insured's request or, in lieu of cancellation, where such increase is based upon one or more of the grounds for cancellation set forth in subparagraph (D) or (E) of paragraph one of sub-section (c) of this section.
Said statute refers to N.Y. Ins. Law § 3426(c)(1) (D) or (E) (McKinney Supp. 2000) which indicates that for a covered policy, no notice of cancellation shall become effective following proper notification unless the cancellation is based on, among other reasons:
(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;
(E) material physical change in the property insured, occurring after issuance or last annual renewal anniversary date of the policy, which results 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 renewed; or material change in the nature or extent of the risk, occurring after issuance or last annual renewal anniversary date of the policy, which causes the risk of loss to be substantially and materially increased beyond that contemplated at the time the policy was issued or last renewed;
From the questions posed, it would appear that the additional type of work or a total substitution in the type of work being insured was newly discovered and that such change would substantially and materially increase the hazard insured against ("D") and/or constitutes a material change in the nature or extent of the risk, which causes the risk of loss to be substantially and materially increased beyond that contemplated at the time the policy was issued or last renewed ("E"). Accordingly, timely notification to the insured of the increase in premium is permissible and the insurer would be entitled to receive a properly rated adjustment of premium without violating N.Y. Ins. Law §3426(d)(1) (McKinney Supp. 2000).
The insured is entitled to have insurance coverage when the premium bill is paid. Where there is nonpayment of premium, a timely cancellation of a covered policy is permitted under N.Y. Ins. Law Section 3426(c)(1)(A) (McKinney Supp. 2000). If the premium bill is paid before the insured is notified as to the other debt, the insurer may not divert the monies paid with the intent to remain insured for the new policy term. The insurer has every right, however, to pursue its legal remedies in court, if necessary, to obtain payment of the increased premium based on audit for the prior coverage.
For further information you may contact Associate Attorney Jeffrey A. Stonehill at the New York City Office.