The Office of General Counsel issued the following opinion on May 5, 2003, representing the position of the New York State Insurance Department.
Nonpayment of Initial Premium
If the check used to pay for an initial premium payment for a personal automobile insurance premium is dishonored, would a valid insurance contract have nonetheless existed?
Under New York law, an automobile liability policy that satisfies the financial responsibility requirements of the New York Vehicle and Traffic Law cannot be voided ab initio even if fraudulently obtained. Thus, coverage would exist until the policy was cancelled in accordance with the statutorily mandated procedure.
The inquirers inquiry is hypothetical and did not specify any facts. The inquirers concern is whether an insurer who accepted a "bad" check in payment for the initial premium for a personal automobile policy would be liable for providing coverage for claims made prior to the issuance of a notice of cancellation of the policy for nonpayment.
In the event that an automobile liability policy is procured with what turns out to be a bad check, the insurer could cancel the policy on the grounds of nonpayment. However, it could not deem the contract a nullity and avoid payment of claims made on the policy prior to its cancellation. The cancellation of an automobile liability policy that satisfies the financial responsibility requirements of the New York Vehicle and Traffic Law on the grounds of nonpayment may only be done prospectively. The applicable statute, N.Y. Veh. & Traf. Law § 313 (McKinney Supp. 2003), sets forth the mandatory procedure for policy cancellations, and provides, in pertinent part, as follows:
No contract of insurance for which a certificate of insurance has been filed with the commissioner shall be terminated by cancellation by the insurer until at least twenty days after mailing to the named insured at the address shown on the policy a notice of termination by regular mail, with a certificate of mailing, properly endorsed by the postal service to be obtained, except where the cancellation is for non-payment of premium in which case fifteen days notice of cancellation by the insurer shall be sufficient, provided, however, if another insurance contract has been procured, such other insurance contract shall, as of its effective date and hour, terminate the insurance previously in effect with respect to any motor vehicles designated in both contracts.
N. Y. Veh. & Traf. Law § 313(1)(a) (McKinney Supp. 2003).
Generally, a contract entered into under fraudulent grounds by one of the parties may be treated as void by the defrauded party. This is not the case with automobile liability insurance contracts, however. The law in New York specifically disallows the retroactive cancellation of such insurance contracts by reason of fraud. This issue has come up in numerous cases1 and courts have uniformly held that the contract may only be cancelled prospectively, although the insurer would have a valid cause of action for recovery against the applicant that obtained coverage fraudulently. See, e.g., Teeter v. Allstate Ins. Co., 192 N.Y.S. 2d 610 (4th Dept. 1959), affd 212 N.Y.S. 2d 71 (1961); Liberty Mutual Ins. Co. v. McClellan, et al., 512 N.Y.S. 2d 161 (2nd Dept. 1987).
In the above-cited cases, the courts stressed the public policy underlying the strict statutory rule that allows prospective cancellations only. The goal of the Motor Vehicle Financial Security Act, N.Y. Veh. & Traf. Law § 310 et seq. (McKinney 1996 & Supp. 2003) is universal mandatory financial responsibility for every motor vehicle registered or operated in this state. This goal would be undermined if coverage could be voided retroactively for any reason. Accordingly, such coverage may only be prospectively cancelled under New York law, and only by following the statutorily specified procedure set forth in N. Y. Veh. & Traf. Law § 313. An insurer must also comply with the provisions of N. Y. Ins. Law § 3425 (McKinney Supp. 2003) or § 3426 (McKinney 2000), as applicable.
For further information you may contact Supervising Attorney Michael Campanelli at the New York City Office.
1This has usually been the case in the context of misrepresentations in the policy application process. However, the intentional use of a bad check to procure a policy would also be regarded as fraudulent.