The Office of General Counsel issued the following informal opinion on December 7, 2001, representing the position of the New York State Insurance Department.
RE: Premium Audits
1. To determine the final premium on a commercial risk insurance policy, must the insurer conduct a premium audit within 180 days after expiration of the policy when the initial premium was based on an estimate of the insureds exposure base?
2. Was the insurer required by law to include the 180 day time limit in its contract?
3. May an insurer conduct a premium audit past the 180 day time limit imposed by the contract rider drafted by the insurer?
1. New York insurance law requires an insurer to conduct an audit to determine the final premium on a commercial risk insurance policy when the initial premium was based on an estimate of the insureds exposure base; such audit shall be conducted within 180 days after expiration of the policy. N.Y. Comp. Codes R. & Regs. tit. 11, § 161.10 (1996)(Regulation 129).
2. Nothing in this regulation requires an insurer to include such a time limit in its contract.
3. Once 180 days has passed, this contract clause may preclude the insurer from fulfilling the regulatory requirement of conducting an audit. However, this is essentially a contract dispute which would have to be determined by a court of competent jurisdiction.
According to the facts presented in this inquiry, an insured was covered by an insurer under a commercial risk insurance policy. Although the original contract included no deadline by which a premium audit had to be performed, a contract rider limited the time in which an audit could be performed to 180 days past the end of the contract. This policy ran from November 1, 1999 to November 1, 2000. Approximately one year after the termination of this contract, the insurer notified the insured of its intention to conduct a premium audit.
The inquiry requested to learn whether the insurer acted pursuant to statute or regulation when it included the 180 day limit in the rider. This inquiry was expanded to consider the impact of the contract on the insurers ability to belatedly comply with the applicable regulation. More specifically, the inquirer needed to know whether the insured is required by statute to comply with the audit request even though the contract protects it from a tardy audit.
The relevant provision is N.Y. Comp. Codes R. & Regs. tit. 11, § 161.10 (2001), which states:
An audit to determine final premium for policies under which the initial premium is based on an estimate of the insureds exposure base shall be conducted within 180 days after expiration of such policy, and may not be waived except in the following circumstances:
the total annual premium attributable to the auditable exposure base is not reasonably expected to exceed $1,500;
the policy requires notification to the insurer with the specific identification of any additional exposure units for which coverage is requested (i.e., motor vehicle); or the policy is a commercial umbrella for which the rate or premium is determined by the application of a factor to the rate or premium of an auditable underlying policy.
The insurer shall, as soon as practicable following such audit, refund or credit the insureds account for any return premium due the insured, or bill and make a good faith effort to collect any additional premium due the company, as a result of the audit.
Assuming that none of the exceptions of Section 161.10 apply, the insurer is required to conduct an audit within 180 days of the expiration of the policy. An insurer violates Section 161.10 once 180 days has passed without an audit. If the insurer conducts the audit after 180 days, the insurer may be subject to the general penalty section of N.Y. Ins. Law § 109 (McKinney 2000), which imposes monetary fines for violations of the Insurance Law.
In this case, the contract also provides that an audit must be conducted within 180 days of the expiration of the policy. "[H]e who brought the agreement into existence and thus is primarily responsible for its inadequacy should justly suffer for its shortcomings . . . the one who draws the contract and offers it should have the ambiguity resolved against him." Posner v. United States Fidelity & Guaranty Company, 33 Misc. 2d 653, 226 N.Y.S.2d 1011 (N.Y. Sup. Ct. 1962). In this case, there appears to be no ambiguity as to the meaning of the policy; however, the contract is inadequate from the insurers perspective because it prevents a late audit by which the insurer might come into compliance with the law.
Such inadequacy would usually be resolved against the drafter, which is the insurer. Since the insurer drafted the contract, it should not be allowed to prevail in a contract action arguing the late audit is necessary to comply with the law. However, a court would have to hear all the relevant facts to make a finding.
A major purpose of Regulation 129 was to stabilize the market by preventing large price swings, yet promote competition with a flexible-rating system. N.Y. Comp. Codes R. & Regs. tit. 11, § 161.0 (1986). To obtain this goal, the regulation requires cooperation from the insured with the audit. Failure to cooperate will result in nonrenewal of the insured. Section 161.10 states:
If an insured fails to cooperate with the insurer in its attempt to conduct such audit, including failure to return any questionnaires or self-audit worksheets, the insurer shall nonrenew such insured upon completion of the current policy period, in accordance with the provisions of section 3426 of the Insurance Law, due to the insurers inability to establish a proper premium for such insured.
In this case, however, the threat of nonrenewal is not available to the insurer because the insured is no longer a customer of the insurer. For further information you may contact Senior Attorney Susan A. Dess at the New York City Office.