New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

George E. Pataki
Governor

Howard Mills
Superintendent

The Office of General Counsel issued the following opinion on May 18, 2005, representing the position of the New York State Insurance Department.

RE: Insurer’s Right to Cancel for Non-payment of Additional Premium

Questions Presented:

May an insurer cancel the entire insurance policy for non-payment of premium when the annual premium for the original policy already in effect has been paid but the additional premium billed, due to an increase in the amount of building fire coverage, the addition of physical damage coverage to a liability-only automobile policy, or the addition of an automobile to an existing automobile policy, has not been paid by the insured?

Conclusion:

An insurer may cancel the entire insurance policy for non-payment of premium when the annual premium for the original policy already in effect has been paid but the additional premium billed, due to an increase in the amount of building fire coverage, has not been paid. However, the insurer may not cancel the entire automobile policy when the additional premium is due is for the addition of physical damage coverage to a liability-only policy or the addition of an additional automobile.

Facts:

No specific facts were provided but the inquirer requested that the answer to the question presented address commercial lines policies, personal lines policies, and policies issued through the New York Automobile Plan.

Analysis:

N.Y. Ins. Law § 3425 (West, WESTLAW through L.2004, c. 121 legislation) contains the cancellation and renewal provisions for personal lines insurance.

N.Y. Ins. Law § 3425(a)(10) states:

"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, whether the premium is payable directly to the insurer or its agent, or indirectly under any premium finance plan or extension of credit. Payment to the insurer, or to an agent or broker authorized to receive such payment, shall be timely for the purpose of this section if made within fifteen days after the mailing to the insured of a notice of cancellation for nonpayment of premium.

N.Y. Ins. Law § 3425(b) (West, WESTLAW through L.2004, c. 121 legislation) states:

During the first sixty days a covered policy is in effect, no notice of cancellation shall be issued or be effective unless it states or is accompanied by a statement of the specific reason or reasons for such cancellation.

N.Y. Ins. Law § 3425(c) (West, WESTLAW through L.2004, c. 121 legislation) states in pertinent part:

After a covered policy has been in effect for sixty days, or upon the effective date if the policy is a renewal, no notice of cancellation shall be issued to become effective unless required pursuant to a program approved by the superintendent as necessary because a continuation of the present premium volume would be hazardous to the interests of policyholders of the insurer, its creditors or the public, or unless it is based on one or more of the following:

(1) With respect to automobile insurance policies:

(A) nonpayment of premium, provided, however, that a notice of cancellation on this ground shall inform the insured of the amount due;…

N.Y. Ins. Law § 3426 (West, WESTLAW through L.2003, c. 675 legislation) contains the cancellation and renewal provisions for commercial lines insurance. N.Y. Ins. Law § 3426(a)(3) (West, WESTLAW through L.2004, c. 121 legislation) defines "non-payment of premium" for personal lines insurance and is substantively identical to N.Y. Ins. Law § 3425(a)(10).

N.Y. Ins. Law § 3426(b) (West, WESTLAW through L.2003, c. 675 legislation) states:

During the first sixty days a covered policy is initially in effect, except for the bases for cancellation set forth in paragraph one, two or three of subsection (c) of this section, no cancellation shall become effective until twenty days after written notice is mailed or delivered to the first-named insured at the mailing address shown in the policy and to such insured's authorized agent or broker.

N.Y. Ins. Law § 3426(c) states:

(c) 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, no notice of cancellation shall become effective until fifteen days after written notice is mailed or delivered to the first-named insured and to such insured's authorized agent or broker, and such cancellation is based on one or more of the following:

(1) With respect to covered policies:

(A) nonpayment of premium provided, however, that a notice of cancellation on this ground shall inform the insured of the amount due;

Pursuant to the above-cited statutes, within the first 60 days that a covered policy is in effect, an insurer’s right to cancel a commercial or personal lines insurance policy is limited by the requirement in the Insurance Law that the insured be afforded proper notice and that the reason for cancellation not be otherwise unlawful. After 60 days, a policy may only be cancelled for one of the reasons specified in the applicable statute.

Cancellation of commercial and personal New York Automobile Insurance Plan policies is governed by § 18.2 of the New York Automobile Insurance Plan Manual that states in pertinent part:

An insurer which has issued a policy or binder under this Plan shall have the right to cancel the entire insurance policy by giving notice in accordance with § 313 for private passenger and commercial vehicles other than for-hire vehicles and § 370 for for-hire vehicles of the New York Vehicle and Traffic Law as required in the policy or binder if the insured:

* * *

(5) has failed to pay any premiums due under the policy, except that a Notice of Cancellation for nonpayment of premium shall not be effective if payment is timely in accordance with Section 14.E.2.h

It is important to note that while the insurer is permitted by the New York Automobile Insurance Plan Manual to cancel insurance policies for failure to pay additional premium, the manual limits how the insurer may collect additional premium due as a result of policy changes.

In First Savings and Loan Association of Jersey City v. American Home Assurance Company, 316 N.Y.S.2d 233 (1st Dept. 1970), aff’d 327 N.Y.S.2d 609 (1971), an insured under a fire policy increased the limits of the liability on the existing coverage by an endorsement. The endorsement did not add any new coverage nor did it add any new risks to the existing policy. Subsequently, the insured failed to pay the additional premium due for the increased limits of liability. The insurer sought to cancel the entire policy based upon the non-payment. The Court ruled that the insurer could cancel the entire policy, reasoning that because the endorsement increased the amount of coverage for the same property and risk, the endorsement merged into the underlying insurance policy and the policy and the endorsement were not divisible. First Savings and Loan Association of Jersey City v. American Home Assurance Company, 316 N.Y.S.2d 233, 235 (1st Dept. 1970), aff’d 327 N.Y.S.2d 609, 611 (1971).

Based upon this rationale, an insurer may cancel the entire insurance policy for non-payment of premium when the annual premium for the original policy already in effect has been paid but the additional premium billed, due to an increase in the amount of building fire coverage, has not been paid.

However, in Nationwide Mutual Insurance Company v. Mason, 322 N.Y.S.2d 164 (2nd Dept. 1971) the court held that if an insured failed to pay the premium due on an endorsement which added an additional vehicle, the insurer could only cancel the coverage for that additional vehicle.

Therefore, if a subsequent endorsement either adds a coverage for an existing risk or covers a new risk, like adding physical damage coverage to a commercial or personal liability-only automobile policy or adding an additional automobile, the endorsement will generally be treated as being divisible from the policy, provided that such coverage is separately stated and the premium is separately fixed. In this particular situation, when a statutory basis for cancellation, including non-payment of premium, exists with respect to the endorsement, the entire policy cannot be cancelled. Rather, the insurer may only cancel the coverage added by the endorsement.

While the case law has not specifically addressed this issue with regard to automobile policies issued through the New York State Automobile Insurance Plan, we believe that the courts would interpret these policies similarly. Therefore, it is our opinion that this rule of divisibility would also be applied by the courts to automobile policies issued through the New York Automobile Insurance Plan.

However, it should be noted that a court might decline to apply the rule of divisibility if the insurance policy clearly stated that for purposes of cancellation, it was indivisible from any subsequent written endorsements.

For further information please contact Special Counsel Athan Shinas at the Albany Office.