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 October 9, 2001, representing the position of the New York State Insurance Department.

Re:  Settlements of Total Loss Motor Vehicle Damage Claims

Questions Presented:

1. Are the provisions set forth in N.Y. Comp. Codes R. & Regs. tit.11, § 216.7(c)(1)(iv) (2000) (Regulation 64) applicable to a total loss that results from a motor vehicle collision?

2. Do the facts that a motor vehicle that has been rendered a total loss in a motor vehicle accident was originally purchased for a price substantially below market value, and can presently be shown to have an actual cash value significantly higher than the original purchase price, constitute "extenuating circumstances" within the meaning of the Department opinion entitled "Settlements of Total Loss Motor Vehicle Damage Claims", issued on April 5, 2001?

3. Would an insurer, in making a cash settlement offer pursuant to the provisions set forth in N.Y. Comp. Codes R. & Regs. tit.11, § 216.7(c)(1)(iv) (2000) (Regulation 64), be violating the standard by which it has an obligation to place its insured’s interests on an equal footing with its own interests, where the motor vehicle in question has been rendered a total loss in a motor vehicle accident, and where the vehicle was originally purchased for a price substantially below market value and can presently be shown to have an actual cash value significantly higher than the original purchase price?

Conclusions:

1. Yes. As long as the cash settlement method used in N.Y. Comp. Codes R. & Regs. tit.11, §§ 216.7(c)(1)(i), (ii) or (iii) (2000) (Regulation 64) would result in a settlement offer greater than the purchase price plus the cost of substantiated improvements paid by the insured for a vehicle purchased within the 180 calendar days prior to date of loss, the insurer’s offer of a motor vehicle physical damage or property damage liability settlement may be limited, under N.Y. Comp. Codes R. & Regs. tit.11, § 216.7(c)(1)(iv) (2000) (Regulation 64), to the purchase price, plus the cost of any substantiated improvements, less the deductible, whether the loss occurs as a result of a motor vehicle accident, a motor vehicle theft, or any other kind of occurrence.

2. Whether or not such facts constitute "extenuating circumstances" within the meaning of the Department opinion issued on April 5, 2001, the insurer would be permitted to limit a cash settlement offer as specified under § 216.7(c)(1)(iv), as long as the cash settlement method used in §§ 216.7(c)(1)(i), (ii) or (iii) would result in a settlement offer greater than the purchase price plus the cost of substantiated improvements paid by the insured for a vehicle purchased within the 180 calendar days prior to date of loss.

3. The standard to which Mr. A has referred, articulated by the Court of Appeals in Pavia v. State Farm Mutual Automobile Insurance Company, 82 N.Y.2d 445, 605 N.Y.S.2d 208 (1993), is applicable to bad faith settlement actions commenced by insureds for money damages based on an insurer’s failure to settle a third-party liability claim against the insured, and is not inconsistent with Regulation 64.

Facts:

Mr. A has presented a situation where a motor vehicle belonging to an insured has been rendered a total loss as a result of an accident. The insured had bought the vehicle in question from a dealer. The insured had gotten an "unusually good deal", buying the vehicle for below market value. The insured is able to clearly substantiate an actual cash value significantly higher than the original purchase price. The Department is assuming that the vehicle was purchased within the 180 calendar days prior to the date of loss.

Mr. A inquires whether N.Y. Comp. Codes R. & Regs. tit.11, § 216.7(c)(1)(iv) (2000) (Regulation 64) was written solely to address problems relating to motor vehicle theft fraud. Mr. A has cited the following portions of the Department opinion issued on April 5, 2001, which addressed the issue of whether an insurer could limit its settlement offer for a particular total loss motor vehicle damage claim pursuant to N.Y. Comp. Codes R. & Regs. tit.11, § 216.7(c)(1)(iv) (2000) (Regulation 64):

This provision [N.Y. Comp. Codes R. & Regs. tit.11, § 216.7(c)(1)(iv) (2000) (Regulation 64)] was adopted to deter fraudulent claims, without sacrificing the insured’s ability to obtain a fair settlement. At the time of this revision, it had been reported to the Insurance Department that insureds were arranging to have their substandard vehicles stolen in order to obtain a settlement based upon the greater dollar amount of the actual cash value of a clean vehicle. See Regulatory Impact Statement, Amendments to Part 216 of Title 11 NYCRR, 33 N.Y. St. Reg. 13 (1981).

In the present case, the insurer’s offer would be justified provided that it conforms to the requirements of Regulation 64 and there are no extenuating circumstances that would yield a different result.

Analysis:

N.Y. Comp. Codes R. & Regs. tit.11, §§ 216.0 through 216.12 (2000) (Regulation 64) contain the provisions relating to unfair claims settlement practices and claim cost control measures. N.Y. Comp. Codes R. & Regs. tit.11, § 216.7 (2000) (Regulation 64) prescribes the standards for prompt, fair and equitable settlement of all first party motor vehicle physical damage claims. N.Y. Comp. Codes R. & Regs. tit.11, § 216.7(c)(1) (2000) (Regulation 64) prescribes the methods by which an insurer may value a vehicle in a total loss situation and provides in relevant part as follows:

(c)(1) If the insurer elects to make a cash settlement, its minimum offer, subject to the applicable deductions, must be one of the following:

(i) The average of the retail values for a substantially similar vehicle as listed in the two valuation manuals current at the date of loss and approved by this department….

(ii) A quotation for a substantially similar vehicle obtained by the insurer from a qualified dealer located reasonably convenient to the insured….

(iii) A quotation obtained from a computerized database, approved by the superintendent, that produces statistically valid fair market values for a substantially similar vehicle, within the local market area….

(iv) If the method used in subparagraph (i), (ii) or (iii) of this paragraph would result in a settlement offer greater than the purchase price plus the cost of substantiated improvements paid by the insured for a vehicle purchased within the 180 calendar days prior to date of loss, the insurer’s offer of settlement may be limited to the purchase price, plus the cost of any substantiated improvements, less the deductible. This method of settlement shall not be applicable to motor vehicles acquired by the insured through a private sale or as a gift. A private sale is one in which the seller does not engage in the sale of motor vehicles as an occupation [emphasis in original].

N.Y. Comp. Codes R. & Regs. tit.11, § 216.10 (2000) (Regulation 64) prescribes the standards for prompt, fair and equitable settlement of third-party property damage claims arising under motor vehicle liability insurance contracts, and states in pertinent part as follows:

This section is applicable to claims arising under motor vehicle liability insurance contracts affording coverage for claims of property damage by third parties caused by the alleged negligence of the insured. The following provisions of this Part shall also be applicable to these claims: sections…216.7…(c)(1)….

With respect to Mr. A’s first question, nowhere in § 216.7(c)(1) is there any exception for losses that result from a motor vehicle accident. Additionally, the language cited in the Department opinion issued on April 5, 2001 from Regulatory Impact Statement, Repeal and Promulgation of New Part 216 of Title 11 NYCRR, 33 N.Y. St. Reg. 13 (1981), relating to the intention behind the adoption of § 216.7(c)(1)(iv), does not limit itself to the determent of motor vehicle theft fraud only. Instead, the language includes the determent of all kinds of motor vehicle insurance fraud as the intention behind the adoption of the section. Accordingly, as long as the cash settlement method used in §§ 216.7(c)(1)(i), (ii) or (iii) would result in a settlement offer greater than the purchase price plus the cost of substantiated improvements paid by the insured for a vehicle purchased within the 180 calendar days prior to date of loss, the insurer’s offer of settlement may be limited under § 216.7(c)(1)(iv) to the purchase price, plus the cost of any substantiated improvements, less the deductible, whether the loss occurs as a result of a motor vehicle accident, a motor vehicle theft, or any other kind of occurrence.

With respect to Mr. A’s second question, the April 5, 2001 letter apparently mistakenly gave the impression that an insured could demonstrate "extenuating circumstances" and, in such a case, the insurer would be obligated to offer more than as provided under § 216.7(c)(1)(iv). The "extenuating circumstances" referred to in the April 5, 2001 letter are those circumstances that would constitute unfair claims settlement practices other than the unfair claims settlement practices that are based upon violations of the provisions set forth in § 216.7(c)(1) of Regulation 64. Notwithstanding the existence of any such extenuating circumstances, an insurer would still be permitted to limit a cash settlement offer as specified under § 216.7(c)(1)(iv), as long as the cash settlement method used in §§ 216.7(c)(1)(i), (ii) or (iii) would result in a settlement offer greater than the purchase price plus the cost of substantiated improvements paid by the insured for a vehicle purchased within the 180 calendar days prior to date of loss.

With respect to Mr. A’s third question, the Court of Appeals, in Pavia v. State Farm Mutual Automobile Insurance Company, 82 N.Y.2d 445, 605 N.Y.S.2d 208 (1993), stated, in pertinent part, as follows, with respect to the standard to be applied in determining whether an insurer has acted in bad faith in actions commenced by an insured for money damages based upon the insurer’s failure to settle a third-party liability claim against the insured:

….in order to establish a prima facie case of bad faith, the plaintiff must establish that the insurer’s conduct constituted a "gross disregard" of the insured’s interests—that is, a deliberate or reckless failure to place on equal footing the interests of its insured with its own interests when considering a settlement offer (citing case).

82 N.Y.2d 445 at 453.

While Regulation 64 does not contain any explicit language regarding the bad faith rule, the regulation is of course subject to court decisions. However, the Department disagrees with the assumption in Mr. A’s inquiry that an insurer would somehow be violating the standard enunciated by the Court of Appeals in Pavia in implementing § 216.7(c)(1)(iv) of Regulation 64, even for the third-party claim that the case dealt with. The standard applies to an insurer acting in an improper manner, not to one that implements a regulatory standard. An insurer would not be violating the court’s standard by complying with the regulation, if it otherwise acts in a fair manner in settling claims.

For further information you may contact Senior Attorney Ethan G. Wolfe at the New York City Office.