The Office of General Counsel issued the following informal opinion on March 15, 2002, representing the position of the New York State Insurance Department.
Re: Cancellation of Commercial Liability Insurance Policy Under N.Y. Ins. Law § 3426
May an insurer cancel a commercial liability insurance policy for nonpayment of premium when the nonpayment relates to an audit premium on the prior years policy?
No. Failure to pay a premium amount due as the result of an audit on a prior policy period is not nonpayment of premium under N.Y. Ins. Law § 3426 (McKinney 2000), which prohibits insurers from canceling commercial lines policies mid-term except for specified reasons indicated therein, and may not result in cancellation of the policy.
Most commercial liability insurance policies are subject to the cancellation and non-renewal provisions of N.Y. Ins. Law § 3426 (McKinney 2000). This statute limits the grounds for cancellation to certain specified events, including nonpayment of premium.
N. Y. Ins. Law § 3426(a)(3) (McKinney 2000) defines nonpayment of premium as follows:
"Nonpayment of premium" means the failure of the named insured to discharge any obligation in connection with the payment of premiums on a policy of insurance or any installment of such premium, whether the premium is payable directly to the insurer or its agent, or indirectly under any premium finance plan or extension of credit. Payment to the insurer, or to an agent or broker authorized to receive such payment, shall be timely for the purpose of this section if made within fifteen days after the mailing to the insured of a notice of cancellation for nonpayment of premium.
A covered policy, defined in N. Y. Ins. Law § 3426 (a)(1) (McKinney 2000), may not be cancelled under N. Y. Ins. Law § 3426 (c) (McKinney 2000) for nonpayment of a prior years audit premium since nonpayment of premium relates only to the current policy period. The prior policy is not the current covered policy and does not affect the insureds rights under the current covered policy. N. Y. Ins. Law § 3426 (c)(1)(A) (McKinney 2000) permits the cancellation of the covered policy for not paying a premium only in the current policy period.
The insured is entitled to have insurance coverage when the premium bill is paid. The insurer has every right, however, to pursue its legal remedies in court, if necessary, to obtain payment of the increased premium based on audit for the prior coverage.
Under N. Y. Ins. Law § 3426 (McKinney 2000), an insurer may nonrenew a policy upon issuance of timely notice and may use the nonpayment of premium from a prior policy period as the basis for that nonrenewal.
Any prior Department letters that are contrary to this letter are expressly overruled.
For further information you may contact Associate Attorney Jeffrey A. Stonehill at the New York City Office.