The Office of General Counsel issued the following informal opinion on January 16, 2002, representing the position of the New York State Insurance Department.
Re: Cancellation of a Commercial Risk Insurance Policy Based on the Insureds Filing for Bankruptcy Under Chapter 11
May an insurance company cancel a commercial risk insurance policy during the first 60 days that a new policy is in effect if the insured files a petition for bankruptcy under Chapter 11?
Yes, under N.Y. Ins. Law § 3426 (McKinney 2000) an insurer may cancel a commercial risk insurance policy during its first sixty days if it issues a written notice of cancellation which specifies as the ground for cancellation the filing of a petition for bankruptcy under Chapter 11 by the insured, unless this is prohibited by a law other than the New York State Insurance Law.
The inquirer wishes to know about the effect of Chapter 11 bankruptcy filing on commercial accounts in New York State and seeks advice as to what are the legal rights of an insurance company during the first sixty days of coverage on a new line of business if, during this period, the insured company files for Chapter 11 bankruptcy. The inquiry is premised upon the fact that the insured has paid the premiums on the policy so that non-payment of premiums is not an issue.
N.Y. Ins. Law § 3426 (McKinney 2000) establishes minimum requirements for the cancellation and nonrenewal of certain insurance, including commercial risk insurance, as described in N.Y. Ins. Law § 3426(a)(1) (McKinney 2000). During the first sixty days that such an insurance policy is initially in effect, pursuant to subsection (b), an insurer may cancel the policy for any reason not otherwise prohibited by law. As described in N.Y. Ins. Law § 3426(h) (McKinney 2000), the grounds for the cancellation must be stated in the cancellation notice.
An insurer may cancel such a policy under the aforementioned 60-day "free-look" provision of the statute by sending the insured a written cancellation notice that specifies the ground for cancellation and, if the ground is listed under subsection (c) of the statute, a reference to the pertinent paragraph or subparagraph thereof must be included in such notice. In the situation posed, the ground would be the filing for Chapter 11 bankruptcy and not one of the grounds contained in subsection (c).
The cancellation of a commercial risk insurance policy during the first sixty days of coverage, based upon the filing of the insured for bankruptcy under Chapter 11 is not prohibited by any provision of the New York Insurance Law. Please refer to the federal bankruptcy law and whether it is illegal under federal law for an insurer to cancel a commercial risk insurance policy issued to a person or entity filing a petition for bankruptcy under Chapter 11 of the United States Code.
N.Y Ins. Law §3426 (McKinney 2000) provides a 60 day period in which the insurance company can complete its underwriting review of a new risk after policy issuance and allows the insurance company to cancel the policy during the first sixty days should the risk not meet its underwriting criteria. We note that while a particular insurance company may set underwriting standards that exclude from coverage those who have filed for bankruptcy, another insurer may not. Therefore, an insured who is cancelled on such grounds may seek and obtain insurance coverage elsewhere.
For further information you may contact Associate Attorney Barbara A. Kluger at the New York City Office.