The Office of General Counsel issued the following opinion on April 7, 2003, representing the position of the New York State Insurance Department.

Re: Premium Audit Conducted After 180 Days From Policy Expiration

Question Presented:

May an insurer conduct a premium audit of a commercial risk insurance policy after 180 days past the expiration date of the policy when the initial premium was based on an estimate of the insured’s exposure base?

Conclusion:

An insurer may conduct a premium audit of a commercial risk insurance policy after 180 days past the expiration date of the policy when the initial premium was based on an estimate of the insured’s exposure base.

Facts:

An insurance broker/agent stated that it "wrote a policy for a commercial insured" with an authorized insurer. The policy was written on an auditable premium basis. The insurer completed its audit and billed the additional premium nearly a year after the policy expired, in contravention of N.Y. Comp. Codes R. & Regs. tit. 11, § 161.10 (1996) (Reg. 129), which requires an insurer to conduct its audit within 180 days after policy expiration. The insurance broker/agent questioned whether Regulation 129 prohibits an insurer from conducting an audit after the 180-day period has lapsed.

Analysis:

N.Y. Comp. Codes R. & Regs. tit. 11, § 161.10 (1996) (Reg. 129) states in relevant part:

(a) An audit to determine final premium for policies under which the initial premium is based on an estimate of the insured's exposure base shall be conducted within 180 days after expiration of such policy, and may not be waived except in the following circumstances:

(1) The total annual premium attributable to the auditable exposure base is not reasonably expected to exceed $ 1500;

(2) The policy requires notification to the insurer with the specific identification of any additional exposure units for which coverage is requested (i.e., motor vehicles); or

(3) 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.

(b) The insurer shall, as soon as practicable following such audit, refund or credit the insured's 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 date of the policy. An insurer that conducts an audit after 180 days violates Section 161.10. Such violation may subject the insurer to the general penalty section of N.Y. Ins. Law § 109 (McKinney 2000), which imposes monetary fines for violations of the Insurance Law.

However, an insurer does not forfeit its right to conduct an audit once the 180-day period imposed by N.Y. Comp. Codes R. & Regs. tit. 11, § 161.10 (1996) has expired. N.Y. Ins. Law § 2314 (McKinney 2000) states:

No authorized insurer shall, and no licensed insurance agent, no employee or other representative of an authorized insurer, and no licensed broker shall knowingly, charge or demand a rate or receive a premium which departs from the rates, rating plans, classifications, schedules, rules and standards in effect on behalf of the insurer, or shall issue or make any policy or contract involving a violation thereof.

Generally, this section prohibits an insurer from departing from its rate filings.1 Thus, an insurer should conduct its policy audit despite the fact that it has allowed more than 180 days to lapse since the policy expired. The duty to collect, or repay, the differing premium amount resulting from the audit extends for six years from the policy expiration date (or cancellation date, if the policy was canceled) pursuant to N.Y. C.P.L.R. § 213(6) (McKinney 1990), which is the statute of limitations period applied to contracts.

For further information you may contact Associate Attorney Sally Geisel at the New York City Office.

1 See N.Y. Ins. Law § 3426(d)(1) and (e)(1) (McKinney 2000), which precludes an insurer from charging an additional premium. However, this statute does not apply to the present situation based on the facts provided.