The Office of General Counsel issued the following informal opinion on August 22, 2000 , representing the position of the New York State Insurance Department.
RE: Insurers Collection of Additional Premium After Policy Issuance
May an insurer that has miscalculated a policy premium correct its error by collecting the additional premium from the insured after the policy is bound and in effect?
An insurer that has miscalculated a policy premium may correct its error by collecting an additional premium from the insured after the policy is bound and in effect unless the insurer is prohibited by N.Y. Ins. Law § 3426 (d) (1) (McKinney Supp. 2000).
N.Y. Ins. Law § 2314 (McKinney 1985) states:
No authorized insurer shall, and no licensed insurance agent, no employee or other representative of an authorized insurer, and no licensed insurance broker shall knowingly, charge or demand a rate or receive a premium which departs from the rates, rating plans, classifications, schedules, rules and standards in effect on behalf of the insurer, or shall issue or make any policy or contract involving a violation thereof.
Thus, unless the insurer is prohibited from collecting additional premium by N.Y. Ins. Law § 3426 (McKinney Supp. 2000), to be discussed infra, once an insurer determines that it has collected an incorrect amount of premium it must rectify the situation by either returning the over-paid amount of premium to the insured or collecting the additional premium, in an under-payment situation, from the insured. See American Motorists Ins. Co. v. New York Seven-Up Bottling Co., 18 A.D.2d 36, 238 N.Y.S.2d 80 (1st Dept 1963), affd, 13 N.Y.2d 1157, 247 N.Y.S.2d 386 (1964). The obligation to repay or collect the differing premium amount extends for six years from the policy expiration date (or cancellation date if policy is cancelled) pursuant to N.Y. C.P.L.R. 213 (6) (McKinney 1990 & Supp. 2000), which is the statute of limitations period applied to contracts.
N.Y. Ins. Law § 3426 (d) (1) (McKinney Supp. 2000) states:
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 subsection (c) of this section.
N.Y. Ins. Law § 3426 (a) (1) (McKinney Supp. 2000 ) defines a covered policy as "a policy of commercial risk insurance, professional liability insurance or public entity insurance, and shall include any contract, certificate or other evidence of such insurance."
The § 3426 (c) (1) (D) and (E) cancellation provisions referred to in § 3426 (d) (1) state:
(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.
Thus, unless there is a § 3426 (c) (1) (D) or (E) situation, or there is a value-added basis for doing so, an insurer may not increase the premium on a § 3426 covered policy after 60 days from the policy effective date if the policy in question is a new "covered policy", or from the effective date if the policy is a renewal § 3426 covered policy. See Investors Ins. Co. of America v. Nicks Grove, Inc., 198 A.D.2d 69, 603 N.Y.S.2d 444 (1st Dept 1993).
Note, however, that medical malpractice liability insurance policies are not subject to N.Y. Ins. Law § 3426 (d) (1) (McKinney Supp. 2000) because insurers of such policies are required to adhere to the strict rating requirements established by the Superintendent pursuant to N.Y. Comp. Codes R. Regs. tit. 11 A-1, §§ 70.4 70.21 (1995 1998). Thus, an insurer of medical malpractice liability insurance would be required to collect from its insured the deficient amount of premium it erroneously quoted.
For further information you may contact Attorney Sally A. Geisel at the New York City Office.