The Office of General Counsel issued the following informal opinion on June 23, 2004, representing the position of the New York State Insurance Department.
Re: Increased premium after audit
If an insurer of a commercial liability policy audits the insureds records from the preceding year, and finds that the current premium fails to reflect the current risk, may the insurer increase the premium of the current insurance policy to cover the risk, and cancel the current policy if the increased premium billed after the audit is not paid?
Yes. Failure to pay a premium amount due on a current risk as the result of an audit on the prior policy period constitutes nonpayment of premium under N.Y. Ins. Law § 3426 (McKinneys Supp. 2004), which prohibits insurers from canceling commercial lines insurance policies mid-term except for specified reasons enumerated therein, including, nonpayment of premium.
The inquirer provided the following example as a basis for your question. An insurer issued a general liability policy for one year with a premium based on a $40,000 payroll. This policy is renewed at the end of the first year, the premium still based on the $40,000 payroll. During the second policy year, the insurer audited the insured and found that the payroll for year one is $80,000. Based on this audit, the insurer issued an endorsement to the current policy that increases the premium for the current year to reflect the $80,000 payroll. The insurer separately issued a demand for payment of the premium that was due for the prior year.
The inquirer wants to know if the insurer can cancel the current policy if the insured fails to pay the additional premium for the current policy imposed by the endorsement. The inquirer specifically asks about the impact, in this situation, of an April 19, 2004, Office of General Counsel Opinion.
Previously, the Department opined that policy cancellation by an insurer because of an insureds nonpayment of premium as allowed by N.Y. Ins. Law § 3426(c)(McKinneys Supp. 2004), only related to nonpayment of premium for the current years premium. Office of General Counsel Opinion, April 19, 2004 states, in pertinent part:
Because the insurer has renewed the policy, the insured is entitled to coverage for the current policy year and the insurer may not apply the payment of a quarterly renewal premium for the current policy year to payment of an audit premium on the prior years policy since the payment was tendered for the current premium year.
The April 19 opinion also cites to an Office of General Counsel Opinion, March 15, 2002, which states, in pertinent part:
The prior policy is not the current covered policy and does not affect the insureds rights under the current 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.
N.Y. Ins. Law § 3426 (McKinneys Supp. 2004) states in pertinent part:
(e)(1) A covered policy shall remain in full force and effect pursuant to the same terms, conditions and rates unless written notice is mailed or delivered by the insurer to the first-named insured, at the address shown on the policy, and to such insureds authorized agent or broker, indicating the insurers intention:
. . . .
(B) to condition its renewal upon change of limits, change in type of coverage, reduction of coverage, increased deductible or addition of exclusion, or upon increased premiums in excess of ten percent (exclusive of any premium increase generated as a result of increased exposure units, pursuant to subsection (d) of this section, or as a result of experience rating, loss rating, retrospective rating or audit), . . .
Pursuant to N.Y. Ins. Law § 3426(e)(1)(B)(McKinneys Supp. 2004), an insurer may increase the premium on the current policy to reflect the actual risk being covered under the current policy after learning the size of the actual risk after an audit. Such an increase must be paid by the insured, or the policy may be cancelled pursuant to N.Y. Ins. Law § 3426(c)(McKinneys Supp. 2004) which states in pertinent part:
After a covered policy has been in effect for sixty days unless cancelled pursuant to subsection (b) of this section, or on or after the effective date if such policy is a renewal, . . . and such cancellation is based on one or more of the following:
. . . .
(1)(A) nonpayment of premium;
In summary, an insurer may increase the premium of a current policy based upon an audit that reflects the current risk; and the current policy may be cancelled for nonpayment of this additional premium. An insurer may not cancel a current policy for nonpayment of premium that represents a recovery of premiums due to the insurer for prior years in which the insurer undercharged the insured.
For further information one may contact Senior Attorney Susan A. Dess at the New York City Office.