The Office of General Counsel issued the following informal opinion on September 17, 2001, representing the position of the New York State Insurance Department.
Re: Interpretation of Circular Letter No. 21 (2001) and § 3425
Questions Presented:
1. Is the obligation of an insurer under § 3425(j) to continue to offer an automobile insurance policy through a terminated insurance agent or broker subject to the insurers right to nonrenew or cancel the policy in accordance with the other provisions of § 3425?
2. May an insurer nonrenew or conditionally renew an automobile insurance policy, initially written on or after August 2, 2001, pursuant to one of the specified reasons contained in § 3425(m)(3) upon the renewal date of the policy, even though the three-year required policy period has not expired?
3. May an insurer nonrenew an automobile insurance policy subject to § 3425 for any reason not otherwise prohibited by law, upon the expiration of the three year required policy period? Specifically, may an insurer specify as a reason that the insureds agent no longer represents the insurer?
4. Has the Superintendent promulgated a regulation pursuant to § 3425(m)(3)(D)?
5. Did the expiration of certain provisions of § 3425 change the cancellation requirements of § 3425, or were the expired sections limited to the nonrenewal provisions of the section?
6. Was the statement in Circular Letter No. 21 (2001) that the provisions of § 3425(j)(1)(A) are still applicable a misstatement?
Conclusions:
1. Yes, the obligation of an insurer to continue to offer an automobile insurance policy through a terminated insurance agent or broker is otherwise subject to the insurers right to nonrenew or cancel the policy in accordance with the provisions of § 3425.
2. Yes, an insurer may nonrenew or conditionally renew an automobile insurance policy, initially written on or after August 2, 2001, pursuant to one of the specified reasons contained in § 3425(m)(3) upon the renewal date of the policy, even though the three-year required policy period has not expired.
3. Yes, an insurer may nonrenew an automobile policy subject to § 3425 for any reason not otherwise prohibited by law, in accordance with the insurers uniformly applied underwriting rules, upon the expiration of the policys three year required policy period. Specifically, an insurer may specify as a reason that the insureds agent no longer represents the insurer.
4. No, the Superintendent has not promulgated a regulation pursuant to § 3425(m)(3)(D).
5. No, the expiration of certain provisions of § 3425 did not change the cancellation requirements of § 3425.
6. The statement in Circular Letter No. 21 (2001) that the provisions of § 3425(j)(1)(A) are still applicable was not meant to imply that such provision previously applied to automobile insurance policies.
Facts:
The inquirer did not provide specific facts, but raised certain questions concerning the application of § 3425 in light of the expiration of certain of its provisions and the Departments discussion thereof in Circular Letter No. 21 (2001).
The provisions of § 3425 that expired relate to covered policies of "automobile insurance," as such term is defined in § 3425(a)(1). A § 3425 covered policy is one that insures a motor vehicle used primarily for non-business purposes, where the insured is a natural person, but does not include a policy issued by the New York Assigned Risk Plan (the Plan) pursuant to N.Y. Ins. Law Article 53 (McKinney 2000). These provisions of § 3425 expired only in connection with new policies issued on and after August 2, 2001. The Department in Circular Letter No. 21 (2001) stated that these expired provisions remain applicable for policies initially issued on or before August 1, 2001. For policies that are initially issued on or after August 2, 2001, the provisions of § 3425(m) apply. One of the principal differences is that pursuant to subsection (m) a three year required policy period applies, with no limit on the number of policies that may be nonrenewed or conditionally renewed at the end of the required policy period. Under the expired provisions, the required policy period was one year, but the insurer was limited in the number of policies that could be annually nonrenewed or conditionally renewed by the so-called "two-percent rule", specified in § 3425(f).
A brief history of § 3425 and its predecessor sections is beneficial in the following discussion. Chapter 1072 of the Laws of 1974 added a new § 167-a of the Insurance Law, and repealed former § 167-a and § 167-b. The new § 167-a combined, and modified, the provisions of the former sections, which had dealt with personal lines automobile and non-automobile insurance separately. Five years later, however, Chapter 690 of the Laws of 1979 added a new § 167-aa, which dealt exclusively with automobile insurance. While many of the provisions in new § 167-aa were the same as in § 167-a, the nonrenewal provisions were substantially different, substituting a one year required policy period for the three year required policy period that was in § 167-a, but subject to the two-percent rule. The provisions of § 167-a regarding automobile insurance were not repealed and remained part of that section, but were no longer effective. Section 167-aa was subject to a sunset provision that provided that, upon the expiration of § 167-aa, the former provisions of § 167-a would be reinstated. In 1984, when the Insurance Law was recodified, the provisions of § 167-a and § 167-aa were combined into § 3425, eliminating the redundant provisions, reuniting the automobile and non-automobile provisions under one section, but automobile policies continued to remain subject to different nonrenewal rules than non-automobile policies. Since 1979, except between August 1, 1985 and January 1, 1986, the provisions of § 167-aa, as recodified as part of § 3425, have been extended continuously and remained in effect. That is, until now, when they expired again. In essence then, the expiration of the provisions of former § 167-aa have reinstated the automobile insurance provisions of § 167-a.
Analysis:
Terminated agent/broker rights
Subsection (j) of § 3425 provides that when an insurer terminates its contract or account, the policy must continue to be offered through the terminated agent or broker for the specified time. Section 3425(j)(1)(A), which applies to personal lines policies, is derived from old § 167-a, while subparagraph (B), which applied to automobile policies, is derived from old § 167-aa. Section 3425(j)(1)(B) was one of those provisions that expired on August 1, 2001. Pursuant to § 3425(m)(1), subparagraph (A) of subsection (j)(1) now applies to newly issued automobile insurance.
The inquirer observed that under subparagraph (B), and reiterated in subparagraph (E), which also expired, the rights of the agent or broker are specifically subject to the insurers right to otherwise cancel or nonrenew the policy, whereas subparagraph (A) does not contain such language. The inquirer requested confirmation that, notwithstanding the absence of such language, an insurer would nonetheless have the right to nonrenew or cancel the policy in accordance with the provisions of § 3425.
As discussed above, subparagraphs (A) and (B) are derived from two different provisions of the Insurance Law, which were enacted at different times. The later enacted provision contains more explicit language regarding the right of the insurer to cancel or nonrenew the policy, but this Department has always construed both provisions in the same manner in this regard. The rights of a terminated agent or broker were not intended to force the insurer to keep a policy in force even though the insurer had legitimate grounds to cancel or nonrenew. Accordingly, an insurer may nonrenew or cancel a policy under subparagraph (A) even though the terminated agent or broker may have certain rights provided that the policy remains in force.
Meaning of subsection (m)(3)
Subsection (m)(3) provides that " no notice of nonrenewal or conditional renewal of such covered automobile insurance policies referred to in this subsection shall be issued to become effective during the required policy period unless it is based upon a ground for which the policy could have been cancelled [pursuant to subsection (c)(1)] or unless it is based upon one or more of the following grounds .", followed by a number of reasons in subparagraphs (A) through (D) of such subsection.
Automobile policies are often issued on a six-month or annual basis. The inquirer requested confirmation that the circumstances specified in subsection (m)(3)(A) through (D) allow an insurer to nonrenew or conditionally renew a policy upon the policy renewal date even though it is before the end of the three-year required policy period.
While this provision was not originally in § 167-a when it was first enacted in 1974, it was added by Chapter 348 of the Laws of 1976 specifically to allow insurers to nonrenew or conditionally renew (but not cancel) the policy for the listed reasons, even though the three year required policy period had not elapsed. Previously, insurers had limited reasons permitted for cancellation before the end of the three years. As stated at the time in Circular Letter No. 15 (1976), "the expanded list of grounds upon which insurers may base nonrenewal of such policies was derived from the most serious surcharge categories in various merit rating plans currently used by most insurers in this State " Accordingly, with the reinstatement of these provisions, in regard to a policy initially written on or after August 2, 2001, an insurer again has the right to nonrenew or conditionally renew a policy for one of the specified reasons prior to the end of the three year required policy period.
Reasons for nonrenewal
Section 3425(d)(1) states that "the specific reason or reasons for nonrenewal or conditional renewal shall be stated in or accompany the notice [of nonrenewal or conditional renewal]. This is elaborated further in N.Y. Comp. Codes R. & Regs. tit. 11 Part 218 (2000) (Regulation 90). Section 218.3(b)(1) reiterates the requirement of the specific notice and also provides that "a specific reason shall not be an unsupported general statement such as underwriting judgment."
An insurer may nonrenew an automobile policy subject to § 3425 for any reason not otherwise prohibited by law (such as race, religion, etc.), in accordance with the insurers uniformly applied underwriting rules, upon the expiration of the three year required policy period. An insurer may specify as the reason that the insureds agent no longer represents the insurer, so long as that is in fact the reason for the nonrenewal. If the insurer does not nonrenew all of the insureds serviced by the terminated agent, though, than the insurer would have to specify why it opted to nonrenew one insured but not another.
Regulation to permit additional grounds for nonrenewal
Subsection (m)(3)(D) authorizes the Superintendent to promulgate a regulation establishing additional grounds to permit an insurer to nonrenew or conditionally renew a policy. The Superintendent has not proposed nor promulgated a regulation pursuant to § 3425(m)(3)(D).
Effect of sunset on cancellation provisions of § 3425
The inquirers letter referred to Circular Letter No. 21 (2001), stating that new voluntary "personal private passenger automobile [policies] in New York State with an effective date on or after August 2, 2001 are subject to different cancellation and non-renewal (sic) provisions than automobile insurance policies written voluntarily prior to that date." The inquirer requested confirmation that there are no new cancellation standards in effect. The inquirers observation is correct. Only the nonrenewal provisions of § 3425 sunset; those provisions that govern cancellation remain unchanged.
Clarification of Circular Letter No. 21
The inquirers letter noted that Circular Letter No. 21 includes the following statement: "In addition, cancellation of [new automobile policies] remains subject to the provisions of Section 3425(b) and (c)(1); and the rights of an insured to continue coverage through a terminated agent or broker, as set forth in subsection (j)(1)(A) are still applicable." The inquirer noted that subsection (j)(1)(A) was not previously applicable to automobile policies and asked whether the statement that subsection (j)(1)(A) was previously applicable to such policies was an error. Subsection (j)(1)(A) is made applicable to automobile policies issued initially on or after August 2, 2001 through the operation of § 3425(m)(2).
The aforementioned sentence was intended to make it clear that an insured continued to have the right to require the insurer to continue coverage through the insureds agent or broker, even though terminated. The sentence was not intended to imply that such provision applied previously to automobile policies. The inquirer is correct that subsection (j)(1)(A) has not applied to automobile policies since 1979 (except for the period from August 1, 1985 through December 31, 1985).
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.