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

Re: Late conditional renewal under N.Y. Ins. Law § 3426

Question Presented:

Does the issuance by an insurer of a late conditional renewal notice on a commercial lines insurance policy before the expiration date entitle the insured, who thereafter cancels the policy within 60 days from the giving of notice by the insurer (whether the cancellation occurs before or after the expiration date), to a return of any unearned premium on a pro rata basis, regardless of how far in advance of the expiration date the late conditional renewal notice is mailed or delivered by the insurer?

Conclusion:

Yes. Should the insured elect to cancel the policy within the 60 day period from the giving of late conditional renewal notice specified under § 3426(e)(5)(B) of the N.Y. Ins. Law (McKinney 2000), such a cancellation is on a pro rata premium basis, regardless of how far in advance of the expiration date the late conditional renewal notice was mailed or delivered by the insurer.

Facts:

The inquirer has asked for a clarification of the timeframes afforded policyholders by N.Y. Ins. Law § 3426 (McKinney 2000) upon the issuance of a late conditional renewal for a covered policy.

The inquirer states that when an insurer issues a notice of conditional renewal the insurance agent and the insured normally will shop the market for an alternative policy at lower cost. The inquirer further asserts that the 60-120 day advance notice requirement is designed to allow sufficient time to shop around. However, if the insurer provides less than 60 days notice of conditional renewal there may not be adequate time to shop for alternatives before the policy renewal occurs. Also, if the insured does not find an alternative prior to the expiration but the late conditional renewal notice has been given by the insurer at least 30 days prior to the expiration date, the policy renews upon the terms of the conditional renewal offer. Since the insured may not have completed its shopping by the expiration date but later does find an alternative policy it may then wish to cancel coverage.

The following example was provided to illustrate the inquirer’s concerns:

A company provides a conditional renewal notice 45 days prior to expiration. The agent and policyholder immediately start shopping the risk. At renewal they still have not received alternative quotes, so the policyholder is forced to renew at the new terms and rates. But, 10 days later, the agent finds a superior deal for the client. We believe the client should be able to cancel the policy on a pro rata basis in order to accept the better offer. Otherwise, the short rate penalty could wipe out any advantage to the insured in accepting the alternative quote.

The inquirer concludes that if the insured finds alternative coverage only after the expiration of the original policy and therefore does not cancel until after the renewal policy is in effect, the insured still is entitled to cancel the policy on a pro rata premium basis until 60 days after the late conditional renewal notice was mailed or delivered by the insurer, whether such notice was given more than or less than 30 days before the renewal date. The inquirer is of the opinion that any other interpretation, which concludes that the insurer may impose a short rate premium penalty if the policy so provides, upon cancellation by the insured, would frustrate the law’s apparent intent of giving the insured at least 60 days to find alternative coverage. The one policy provision the inquirer believes that the law intends to set aside in this case would be any short rate cancellation premium penalty. If this interpretation is not correct, the inquirer observes that there is not incentive for the insurer to provide notice of conditional renewal any more than 30 days in advance of renewal and that does not allow adequate time to shop

Analysis:

A covered policy of commercial lines insurance remains in full force and effect pursuant to the same terms, conditions and rates under N.Y. Ins. Law § 3426(e)(1) (McKinney 2000) unless written notice is mailed or delivered by the insurer to the insured indicating its intention otherwise. Under subsection (e)(1)(B) of the statute, the policy’s renewal may be conditioned upon a change of limits, change in type of coverage, reduction of coverage, increased deductible or addition of exclusion, or upon increased premiums in excess of 10%. The statute further provides in § 3426(e)(3) that notice of a conditional renewal shall be mailed or delivered by the insurer at least 60, but not more than 120, days before the expiration date of the policy, except that for an excess liability policy or a policy issued to a jumbo risk the notice shall be mailed or delivered at least 30, but not more than 120, days before the expiration date of the policy.

A notice of conditional renewal that is not mailed or delivered in accordance with the time frames of the statute, as stated in the foregoing paragraph, is called a late conditional renewal notice. A late conditional renewal notice is one that is mailed or delivered less than 60 days before the expiration date of a covered policy, except that for an excess liability policy or a policy issued to a jumbo risk, it means a notice that is mailed or delivered less than 30 days before the expiration of the policy, under N.Y. Ins. Law § 3426(e)(3) (McKinney 2000). A late conditional renewal notice effectuates a conditional renewal, although its lateness has an effect upon the terms, conditions and rates for the policy renewal. Subsection (5), Subparagraph (B) specifies, among other things, the effect on a policy renewal of the issuance of a late conditional renewal notice, in pertinent part, as follows:

(B) In the event that a late conditional renewal noticeis provided by the insurer prior to the expiration date of the policy, coverage shall remain in effect, at the same terms and conditions of the expiring policy and at the lower of the current rates or the prior period’s rates until sixty days after such notice is mailed or delivered, except to the extent that, prior thereto, the insured has replaced the coverage or elects to cancel, in which event such cancellation shall be on a pro rata premium basis; provided, however, that if the insured elects to renew on the basis of the conditional renewal notice, then such terms, conditions and rates shall govern the policy upon expiration of such sixty day period unless such notice was provided at least thirty day prior to the expiration date of the policy, in which event the terms, conditions and rates set forth in the conditional renewal notice shall apply as of the renewal date. [Emphasis added]

If a late conditional renewal notice is mailed prior to, but less than 60 days in advance of policy expiration, coverage must remain in full force and effect at the same terms and conditions of the expiring policy for 60 days beyond the date such notice is mailed or delivered. The rates for the period extending beyond the policy expiration are the lower of the rates for the expiring policy or the insurer’s rate level based upon the conditional renewal.

Section 3426 of the N.Y. Ins. Law (McKinney 2000) was amended by Chapter 235 of the Laws of 1989 to, among other things, add the language regarding the pro rata premium basis upon cancellation by the insured following a late conditional renewal notice. When a policy of commercial risk, professional liability or public entity insurance is affected by a late conditional renewal notice, but the notice is issued before the policy expires, the return of premium, if the insured cancels the policy, should to be made on a pro rata basis. The statutory provision cited above requires that under such circumstances, despite what the policy itself may provide for, any such cancellation is made on a pro rata premium basis. Further, this is the case whether the insured cancels the policy before expiration or after, so long as the cancellation is effected within the sixty day extension of coverage period specified in the statute. Indeed, the cancellation may occur after the expiration of the policy upon which the policy would automatically renew. We agree with the inquirer’s understanding of the return of premium basis upon cancellation by the insured.

The 30 day period specified in the second portion, following the semicolon, of Subparagraph (B) of N.Y. Ins. Law § 3426(e)(5) (McKinney 2000) affects the question of which policy terms, conditions and rates apply to the renewal policy should it be cancelled, for purposes of determining what the appropriate premium is upon which to apply the pro rata premium basis. Where the insured "elects to renew on the basis of the conditional renewal notice" which can only be effectuated through an affirmative action of the insured, not by a passive insured in allowing the policy to renew due to the statutory 60 day continuation, this extends the conditions and rates of the expiring policy until the end of the 60 day period. If the insured affirmatively takes steps to accept the conditional renewal terms and if the insurer had given at least 30 days advance notice of the conditional renewal, then the terms, conditions and rates contained in the conditional renewal notice apply as of the renewal date.

In conclusion, the inquirer’s understanding of the applicability of the pro rata premium basis to cancellations by the insured following the issuance of a late conditional renewal notice but within the 60 day period following the mailing or delivery of the late conditional renewal notice is correct. Such a cancellation might be made after the expiration date and therefore during the renewal policy period. Thus, under the statutory scheme the insured is not penalized by the insurer giving late notice of conditional renewal. The insured has a full 60 days following the giving of the conditional renewal notice to locate an alternative policy and this period may run to a date after the expiration date. Under these circumstances the insured would be entitled to a return of unearned premium calculated on a pro rata premium basis. The statutory provision which sets the premium basis as pro rata supersedes any cancellation provision to the contrary in the policy that may, for example, call for a short rate premium basis to be used upon cancellation.

For further information you may contact Associate Attorney Barbara A. Kluger at the New York City Office.