The Office of General Counsel issued the following opinion on April 29, 2003, representing the position of the New York State Insurance Department.
Re: Cancellation of Insurance Policy for Non-Payment of Premium Installment Fee, Late Payment Fee, and Reinstatement Fee
May an insurance company cancel an automobile insurance policy for non-payment of an installment fee, late payment fee, or reinstatement fee? 1
Yes. An insurer may cancel an automobile insurance policy for non-payment of an installment fee, late payment fee, or reinstatement fee.
The inquiry was general in nature and no specific facts were presented.
The Department makes a distinction between the meaning of the terms "late payment fee" and "reinstatement fee." A "late payment fee" refers to a fee associated with premium payment that is made at a time later than the premium due date, but prior to both policy cancellation and the time in which an insurer may reject premium payment. A "reinstatement fee" refers to a fee associated with the reinstatement of a policy after the cancellation date, or after the time in which an insurer may reject premium payment.
The Department views late payment fees, reinstatement fees, and premium installment fees to be properly classified as fees that are outside of the rating structure, and which do not have to be filed with the Department, or included as part of the manual rates. Such fees may be charged separately and apart from the policy premium because the expenses that such fees are meant to deflect arise independently from the issuance, underwriting, or general maintenance of insurance policies. 2 These fees arise in relation to the way an insured opts to pay the premium, or are incurred because of an individual insureds lateness in paying the premium, and not in relation to the expenses incurred on behalf of insureds generally. Certain other fees, such as "policy placement fees" and "origination fees," are part of the policy rate because they are part of the insurers expenses in issuing the policy. Such fees generally relate to underwriting and arise in relation to every policy issued.
An insurer may charge late payment fees, reinstatement fees, and premium installment fees provided that the insured was made aware of these fees prior to being charged such fees. These service fees, and any consequences an insured would experience for failure to pay them, must be clearly stated to the insured (i.e., by including this information in the insurance policy form or in the billing statement). To preclude discrimination, the amounts and conditions of these service fees must be applied equally to all insureds of the same class that are subject to the fees. In addition, the service fee charged must be reasonable.
The failure by an insured to pay these insurer service fees, where the insured was made aware of the amount of, and the conditions placed upon, such fees prior to being charged them, may provide the basis for policy cancellation under N.Y. Ins. Law §§ 3425(a)(10) and 3426(a)(3), which are written in identical terms, and state in relevant part:
"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 . . . ."
For example, an insured receives a billing statement that indicates the charge of a late payment fee if premium is not paid by the due date. The insured does not make payment on the due date. The insurer sends a notice of cancellation that states that the policy will be canceled for non-payment of premium and the late payment fee if both are not received by the date specified in the notice. The insured sends payment of premium within the 15-day grace period provided by N.Y. Ins. Law §§ 3425(a)(10) and 3426(a)(3), but does not remit the late payment fee within that time frame. The insurer may cancel the policy for non-payment of the late fee under these conditions.
For further information you may contact Associate Attorney Sally Geisel at the New York City Office.
1 An automobile insurance policy is subject to the cancellation (and other) provisions contained in N.Y. Ins. Law § 3425 (McKinney 2003 Supp.) where the predominant use of the vehicle is for non-business purposes and the named insured is a natural person. In all other instances, N.Y. Ins. Law § 3426 (McKinney 2000) applies. 2 This opinion does not address whether these fees are part of the premium for tax purposes.