The Office of General Counsel issued the following informal opinion on October 12, 2001, representing the position of the New York State Insurance Department.
Re: Fraud and Misrepresentation Endorsement
Is the Fraud and Misrepresentation endorsement proposed for use in New York with commercial motor vehicle insurance policies permissible under the New York Insurance Law?
No. The language of the proposed endorsement is inconsistent with the cancellation provisions of N.Y. Ins. Law § 3426 (McKinney 2000) and would impermissibly alter the prescribed No-Fault and UM/SUM endorsements established pursuant to N.Y. Ins. Law Article 51 and §§ 3420(f)(1) and (2) (McKinney 2000).
The inquirer filed a Fraud and Misrepresentation Endorsement with the Department of Insurance requesting approval for its use with the inquirers Business Auto liability policies issued in New York (See attached form E959). By letter of May 31, 2001, the Department's Property Bureau advised that the proposed endorsement was disapproved as inconsistent with Articles 34 and 51 of the Insurance Law, and more specifically, as conflicting with the cancellation provisions of Section 3426.
The purpose of the proposed endorsement is to inform insureds that the company may withhold benefits to first party insureds covered under Uninsured Motorist insurance (hereinafter "UM"), Supplementary Uninsured/Underinsured Motorist insurance (hereinafter "SUM") and No-Fault insurance if they commit fraud and/or material misrepresentation.
N.Y. Ins. Law § 3426(c)(1) (McKinney 2000) governs the specific circumstances under which an insurer may cancel a commercial lines insurance policy after such coverage has been in effect for more than sixty days. One of the specified grounds pursuant to Section 3426(c)(1)(C) is the "discovery of fraud or material misrepresentation in the obtaining of the policy or in the presentation of a claim thereunder;. . . " N.Y. Ins. Law § 3105(a) & (b), which is applicable to all types of policies, defines what constitutes material misrepresentation in obtaining a policy as follows:
"§ 3105. Representation by the insured
A representation is a statement as to past or present fact, made to the insurer by, or by the authority of, the applicant for insurance or the prospective insured, at or before the making of the insurance contract as an inducement to the making thereof. A misrepresentation is a false representation, and the facts misrepresented are those facts which make the representation false (emphasis added).
No misrepresentation shall avoid any contract of insurance or defeat recovery thereunder unless such misrepresentation was material. No misrepresentation shall be deemed material unless knowledge by the insurer of the facts misrepresented would have led to a refusal by the insurer to make such contract".
It is the inquirers contention that the proposed endorsement would support the withholding of first party benefits to insureds who commit misrepresentation or fraud. As indicated above, Section 3105 addresses statements made at or before the making of an insurance contract and defines "material misrepresentation". The endorsement, as discussed below, is problematic because it seeks to define "material misrepresentation" both in obtaining a policy and in the presentation of a claim.
First, the first section of the endorsement, in defining which type of representations are covered under the endorsement, includes those representations made in obtaining the policy, representations made in connection with claims for loss under the policy, and representations made "in any notification of change". The language does not specify what the term "change" is referring to.
Second, the second section of the endorsement states that if such a representation is "false, misleading, or materially affects the acceptance or rating of the risk by us, we may cancel this policy." This section than states that false representations may be by direct misrepresentation, omission, concealment of facts or incorrect statements. The endorsement may not define the methods by which a false representation can be made. Further, under the terms of the endorsement any false representations made, whether material or not, may be used as the basis for cancellation of the policy. This result is contrary to the provisions of Sections 3426(c)(1)(C)(2) and 3105(b) which require that such misrepresentation be material.
Finally, pursuant to Sections 3420(f)(1) (UM coverage), 3420(f)(2) (SUM coverage) and Article 51 (No-Fault coverage), these coverages must be provided under prescribed endorsements which may not be altered. The addition of the companys proposed fraud endorsement to a policy containing these prescribed endorsements would contractually affect and alter these prescribed provisions and would, therefore, be in violation of the Insurance Law.
The inquirers letter cites the decision in Insurance Company of North America v. Kaplun, 274 A.D.2d 293, 713 N.Y.S.2d 214 (2nd Dept., 2000) in support of the proposition that where an insured makes a fraudulent claim, the insurance carrier may assert as an affirmative defense that the material misrepresentations and/or fraud in obtaining the policy precludes any recovery by the insured. However, the courts holding did not rely on a written endorsement and therefore, does not support the argument that such an endorsement is necessary for an insurer to assert such affirmative defenses.
Therefore, for the above-stated reasons, the Property Bureau's disapproval of the proposed fraud endorsement was correct.
For further information you may contact Supervising Attorney Lawrence M. Fuchsberg at the New York City Office.