New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

The Office of General Counsel issued the following informal opinion on September 5, 2001, representing the position of the New York State Insurance Department.

RE: Fully Earned Premium

Question Presented:

May the annual premium of a commercial risk insurance policy covering a risk or operation in this state, be fully earned at policy inception, whether the insurer of such policy is authorized in New York or unauthorized?

Conclusion:

Excepting certain types of policies, such as "seasonal" or "special event" policies, or other similar types of policies that provide coverage on an annual basis when the principal exposure under the policy is concentrated in a much shorter time period, the Department considers a commercial risk insurance policy covering a risk or operation in this state, with a premium that is fully earned at policy inception, to have excessive rates in contravention of Article 23 of the Insurance Law. However, unauthorized insurers are not subject to Article 23 and, thus, are not prohibited from issuing, through a licensed excess line broker pursuant to N.Y. Ins. Law §§ 2105 and 2118 (McKinney 2000), or through a licensed broker pursuant to N.Y. Ins. Law § 2117 (McKinney 2000), a policy stating that premiums are fully earned at policy inception.

Facts:

The Department received an inquiry that was of a general nature and did not provide specific facts, other than a reference made to a "standard commercial policy." By this it is assumed that the inquirer was referring to a property/casualty policy of "commercial risk insurance" as defined by N.Y. Ins. Law § 107(a)(47) (McKinney 2000), which states:

"Commercial risk insurance" means insurance not subject to section three thousand four hundred twenty-five of this chapter issued or issued for delivery in this state, on a risk located in this state, insuring any of the following contingencies:

(A) loss of or damage to real property;

(B) loss of or damage to personal property;

(C) losses or liabilities arising out of the ownership, operation or use of a motor vehicle;

(D) liabilities of persons acting as officers or directors; or

(E) other liabilities, including product liability, for loss of, damage to, or injury to persons or property.

Analysis:

In regard to policies that provide property/casualty insurance, N.Y. Ins. Law § 3428(a) (McKinney 2000) states:

Except as provided in subsection (d) of this section, whenever an insurance contract made or issued in this state is cancelled or otherwise terminated by the insured before the expiration thereof in accordance with the terms of such contract, the earned premium to be retained by the insurer shall be determined by the applicable rate filing, if any, otherwise in accordance with the provisions of such contract.

Thus, where an insured cancels a policy that provides property/casualty insurance in accordance with the cancellation provisions of such contract, the insured is entitled to the return of any unearned premium based on the rates that the insurer filed with the Department, or where no rates have been filed (such as where the insurer is unauthorized), the unearned premium should be calculated based on the policy’s provisions.

Section 3428(a) does not specifically limit its applicability to insurers authorized in New York, unlike subsections (b) and (c) thereof. Thus, § 3428(a) also applies to unauthorized insurers that make or issue insurance policies in New York. Policies may not be issued or delivered in New York by an unauthorized insurer except through a licensed excess line broker pursuant to N.Y. Ins. Law §§ 2105 and 2118 (McKinney 2000), or through a licensed insurance broker pursuant to the exceptions contained in N.Y. Ins. Law § 2117(b) and (c) (McKinney 2000). N.Y. Comp. Codes, R. & Regs. tit. 11, § 27.20 (1999) (Regulation 41) states: "In the event of cancellation of an insurance policy placed by an excess line broker with an unauthorized insurer, the excess line broker shall apply best efforts to collect for the insured all unearned premiums due."

Note, however, that § 3428(a) only requires a return of unearned premium based on the applicable rate filing or in accordance with policy provisions. The Department considers a commercial risk insurance policy with a premium that is fully earned at policy inception to have excessive rates in contravention of Article 23 of the Insurance Law (which applies to any policy issued by an authorized insurer covering a risk or operation in this state), except in certain circumstances, such as "seasonal" or "special event" policies, or other similar types of policies that provide coverage on an annual basis when the principal exposure under the policy is concentrated in a much shorter time period. Hence, an authorized insurer generally would be prohibited from issuing a commercial risk insurance policy with a premium that is fully earned at policy inception pursuant to Article 23 of the Insurance Law. However, unauthorized insurers are not subject to Article 23 and, thus, are not prohibited from issuing, through a licensed excess line broker pursuant to N.Y. Ins. Law §§ 2105 and 2118 (McKinney 2000), or through a licensed broker pursuant to N.Y. Ins. Law § 2117 (McKinney 2000), a policy stating that premiums are fully earned at policy inception.

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