The Office of General Counsel issued the following informal opinion on November 5, 2001, representing the position of the New York State Insurance Department.
Re: Insurers Proposal: Tiering by Individual Vehicle
With regard to personal lines motor vehicle insurance, may an insurer tier by individual vehicle/insured under N.Y. Ins. Law § 2349 (McKinney 2000), where each vehicle is assigned to a primary operator and the vehicle and driver characteristics are used to determine the appropriate tier for each vehicle and the driver/vehicles total premium?
Yes, an insurer may tier by individual vehicle/insured.
An insurer has proposed tiering by individual vehicle/insured, as opposed to tiering by policy. It proposes a four-tier program with Tier A being the most preferred and Tier D, the least preferred. Each vehicle would be assigned to a primary operator and the vehicle and driver and driver characteristics would be used to determine the appropriate rating tier for each vehicle, which ultimately determine what tier factor would be applied to the driver/vehicles total premium. Tier A would receive a factor of X and Tier D would receive a factor of X+Y. Hence, under one policy, different tiers may apply to different vehicles.
N.Y. Ins. Law § 2349 (McKinney 2000), enacted in 1995, authorizes insurers in the voluntary private passenger motor vehicle voluntary market to establish multi-tier programs, allowing an insurer to have more than one rate level.
N.Y. Ins. Law § 2349 (McKinney 2000) provides:
An insurer may make available a multi-tier program, with more than one rate level in the same company, for private passenger motor vehicle insurance in the voluntary market, provided that:
the program and the insurers business plan encourage depopulation of the assigned risk plan established by article fifty-three of this chapter;
the program is based upon mutually exclusive underwriting rules per tier, to the extent feasible;
credits and surcharges pursuant to an approved rating plan can be applied on a per tier basis; and
the program conforms to regulations promulgated by the superintendent.
For an insurer with an approved multi-tiering program, the provisions of subsection (f) of section three thousand four hundred twenty-five of this chapter shall apply in all respects, except that the two percent limitation set forth therein shall:
not apply to any risk moved from a tier to a lower-rated tier; and
be deemed to be three percent for risks moved from a tier to a higher-rated tier. (emphasis added).
There is nothing in the plain language of N.Y. Ins. Law § 2349 (McKinney 2000) specifying that tiering must be done by policy only. N.Y. Ins. Law § 2349 (McKinney 2000) refers only to the movement of "risks", not policies, from one tier to another. The Dictionary of Insurance Terms defines the word "risk" as "[a] term used to designate an insured or a peril insured against". (emphasis added). See, Dictionary of Insurance Terms 441 (4th ed. 2000).
The legislative history surrounding N.Y. Ins. Law § 2349 provides little guidance as to whether the intent of the drafters was that tiering be done by policy only. However, in a letter dated February 22, 1995 and addressed to the Honorable Michael C. Finnegan (Counsel to the Governor) supporting the enactment of N.Y. Ins. Law § 2349, then Superintendent of Insurance Edward J. Muhl stated, "[t]his legislation provides an insurer with the needed flexibility to write a risk at the proper rate while still retaining the ability to non-renew truly bad risks." (emphasis added). Superintendent Muhls use of the word risk in his supporting letter is consistent with the language in the statute.
The Superintendent promulgated N. Y. Comp. Codes R. & Regs. tit. 11, § 154 (1995) (Regulation 150), which contains the rules that insurers must comply with in enacting multi-tiering programs. Part 154.2(c), as well as other subparagraphs of that section, uses the terms "insured" and "policy" interchangeably, which implies that tiering by individual vehicle/insured was not precluded. Specifically, that section provides in pertinent part:
The underwriting rules governing potential tier movement shall permit an insured to be moved to a higher rated tier only upon the end of the required policy period notwithstanding changes in underlying exposure during the required policy period. Changes in underlying exposure during the required policy period may be reflected in the premium in accordance with the rating rules of the specific tier. Should a policy become eligible for midterm cancellation in lieu of cancellation an insurer may uptier that policy midterm. (emphasis added).
Based upon the language of N.Y. Ins. Law § 2349 (McKinney 2000), its legislative history and Regulation 150, there is no statutory bar against tiering by vehicle. In fact, such program may be more beneficial to consumers by virtue of the fact that each individual insured/vehicle would be rated by its individual risk, not by policy.
Please note that in order to comply with N.Y. Ins. Law § 2349(b)(2) (McKinney 2000), any proposal to tier by individual insured/vehicle must comply with the three percent rule laid out in that section. Therefore, in order to be in compliance with the three-percent rule, uptiering of one or more persons who are covered under one policy must be calculated as the uptiering of one policy. Note also, that while the Department has no objection to the concept of tiering by individual vehicle/insured, the Department must review and approve any proposed tiering programs, in order to determine whether such programs are in compliance with the goals and objectives of N.Y. Ins. Law § 2349 (McKinney 2000) and other relevant provisions of the Insurance Law.
For further information you may contact Attorney D. Monica Marsh at the New York City Office.