The Office of General Counsel issued the following opinion on December 29, 2004, representing the position of the New York State Insurance Department.
Re: NYAIP Policy Premium
Questions Presented:
1) May an insurer send a premium invoice of a commercial automobile liability policy, insured by the insurer through the New York Automobile Insurance Plan, to a policyholder that applies the correct experience rating if the renewal quote previously sent to the policyholder contained an incorrect, or no, experience rating?
2) Assuming the answer to the first question is no, may the insurer send a premium invoice to the policyholder for new vehicles added subsequently to the issuance of the policy that applies the correct experience rating if the renewal quote previously sent to the policyholder contained an incorrect, or no, experience rating?
Conclusion:
1) Yes. An insurer that has miscalculated a renewal policy premium must correct its error by collecting the correct premium from the insured even after it has sent the insured an incorrect renewal quote.
2) An insurer that has miscalculated a policy premium must correct its error by collecting the correct amount of premium from the insured even after the policy is bound and in effect, unless the insurer is prohibited from doing so pursuant to N.Y. Ins. Law § 3426(d)(1) (McKinney Supp. 2004). However, a policy issued through the New York Automobile Insurance Plan is not subject to N.Y. Ins. Law § 3426 and the insurer is not prohibited from collecting additional premium from the insured.
Facts:
A policyholder is insured by an insurer through the New York Automobile Insurance Plan (NYAIP). The insurer issued the policyholder a commercial automobile liability insurance policy from March 1, 2003 to March 1, 2004. On January 7, 2004, the insurer issued a renewal premium quotation for the policy that included the quotation for a renewal policy for the period from March 1, 2004 to March 1, 2005. The quotation issued to the policyholder computed the premium using an incorrect experience rating. The premium charged on the invoice sent to the policyholder reflected the correct premium based upon the application of the correct experience rating.
Analysis:
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 insurance 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.
Unless the insurer is prohibited from collecting additional premium by N.Y. Ins. Law § 3426 (McKinney Supp. 2004), the insurer is required by N.Y. Ins. Law § 2314 to collect the correct amount of premium, even if it has sent the policyholder an incorrect premium quotation. If an insurer determines that it has collected an incorrect amount of premium it must either return the over-paid amount of premium to the insured or collect the additional premium, in an under-payment situation, from the insured. See American Motorists Ins. Co. v. New York Seven-Up Bottling Co., 18 A.D.2d 36, 238 N.Y.S.2d 80 (1st Dep't 1963), aff'd, 13 N.Y.2d 1157, 247 N.Y.S.2d 386 (1964). The obligation to repay or collect the differing premium amount extends for six years from the policy expiration date (or cancellation date if the policy is cancelled) pursuant to N.Y. C.P.L.R. 213 (6) (West, WESTLAW through L. 2004 Ch. 403 legislation), which is the statute of limitations period applied to contracts, unless the policy provides otherwise.
N.Y. Ins. Law § 3426(d)(1) (West, WESTLAW through L.2003, c. 675 legislation) states:
After a covered policy has been in effect for sixty days, or on and after the effective date if such policy is a renewal, no premium increase for the term of the policy shall be made to become effective unless due to and commensurate with insured value added, subsequent to issuance or the last renewal date, pursuant to the policy or at the insured's request or, in lieu of cancellation, where such increase is based upon one or more of the grounds for cancellation set forth in subparagraph (D) or (E) of paragraph one of subsection (c) of this section.
N.Y. Ins. Law § 3426(a)(1) (West, WESTLAW through L.2003, c. 675 legislation) defines a "covered policy" as "a policy of commercial risk insurance, professional liability insurance or public entity insurance, and shall include any contract, certificate or other evidence of such insurance."
The cancellation provisions set forth in N.Y. Ins. Law § 3426(c)(1)(D) and (E) (West, WESTLAW through L.2003, c. 675 legislation) as referred to N.Y. Ins. Law § 3426(d)(1) state:
(D) after issuance of the policy or after the last renewal date, discovery of an act or omission, or a violation of any policy condition, that substantially and materially increases the hazard insured against, and which occurred subsequent to inception of the current policy period;
(E) material physical change in the property insured, occurring after issuance or last annual renewal anniversary date of the policy, which results in the property becoming uninsurable in accordance with the insurer's objective, uniformly applied underwriting standards in effect at the time the policy was issued or last renewed; or material change in the nature or extent of the risk, occurring after issuance or last annual renewal anniversary date of the policy, which causes the risk of loss to be substantially and materially increased beyond that contemplated at the time the policy was issued or last renewed;
Unless there is a situation where N.Y. Ins. Law § 3426(c)(1)(D) or (E) would apply, an insurer may not increase the premium on a policy covered by N.Y. Ins. Law § 3426 after 60 days from the effective date of the insurance policy.
However, it is important to note that pursuant to N.Y. Ins. Law § 3426(l)(1) a policy issued through the New York Automobile Insurance Plan is not subject to N.Y. Ins. Law § 3426(d)(1) and the insurer issuing the policy must collect the additional premium from the insured.
Therefore, an insurer that has miscalculated the premium on a policy issued through the NYAIP must correct its error by collecting the correct premium from the insured even after it has sent the insured an incorrect renewal quote. The requirement to collect the correct premium extends to a situation where the insurer has miscalculated a policy premium and the policy is already bound and in effect.
For further information you may contact Special Counsel Athan Shinas at the Albany Office.