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 June 17, 2005, representing the position of the New York State Insurance Department.

RE: Use of credit to cancel or nonrenew a commercial risk insurance policy

Questions Presented

1. May an insurer refuse to increase coverage midterm based upon the reasons specified under N.Y. Ins. Law § 3426 (McKinney 2000 & Supp. 2005).

2. Does an increase in value of livestock constitute a "material physical change in the property insured" or "material change in the nature or extent 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?"

3. May an insurer cancel or nonrenew a commercial risk insurance policy based upon the insured’s credit score?

Conclusions

1. An insurer is not limited by N.Y. Ins. Law § 3426 in determining whether to increase coverage midterm. Absent a policy provision or underwriting rule to the contrary, and so long as the insurer does not unfairly discriminate, an insurer may generally refuse to increase coverage midterm for any reason not prohibited by law.

2. An increase in value of livestock does not constitute a "material physical change in the property insured". Since the increase in value is what the insured seeks coverage for, there would not appear to be a "material change in the nature or extent 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."

3. An insurer may not cancel a commercial risk insurance policy based upon the insured’s credit score but may nonrenew it.

Facts

An insurer issued a farm owner’s policy covering livestock. The insured requested that the insurer increase the amount of the insurance to reflect an increase in value of the livestock. The number of livestock did not increase and may have actually decreased.

The insurer ran the insured’s credit history while reviewing the account prior to issuing an endorsement to the policy. The inquirer states that, as a result, the insurer expressed its intention to cancel or nonrenew the policy at its first legal opportunity. Specifically, the insurer stated that "poor credit history combined with several personal mortgages on cattle and machinery make the risk unacceptable for the farm program." The insurer declined the request to increase the value of the livestock. The inquirer states that a representative of the insurer advised that the insurer can decline a midterm change based upon the reasons for cancellation specified in § 3426. In particular, the representative cited the provision regarding material physical changes in the property insured and material changes in the nature or extent of the policy, causing the risk to be materially increased.

Analysis

The farm owner’s policy in question is a commercial risk insurance policy, as defined in N.Y. Ins. Law § 107(a)(47) (McKinney 2000). N.Y. Ins. Law § 3426, which governs cancellation and nonrenewal of commercial lines insurance policies, provides, in pertinent part:

(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:

(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;

In the context of cancellation of the policy, the livestock increasing in value does not constitute a material physical change. The livestock did not change in any way; just the value. In any case, a mere increase in value under these circumstances would not make the property uninsurable.

Similarly, in the context of cancellation of the policy, increased value of the livestock could be a material change in the nature or extent of the risk if the policy covered the increased value. However, since the increase in value is for what the insured seeks additional coverage and, absent an increase in policy limits, there would not be insurance for such increased value, there would not be a material change in the nature or extent of the risk.

In any event, an insurer, in determining whether to increase coverage under a policy, is not limited by the grounds of cancellation specified in § 3426. Absent a policy provision or underwriting rule to the contrary, and so long as the insurer does not unfairly discriminate, an insurer may generally refuse to increase coverage midterm for any reason not prohibited by law.

New N.Y. Ins. Law Art. 28, which was added by Chapter 215 of the Laws of 2004, governs the use of credit information for personal lines insurance, which is defined in N.Y. Ins. Law Art. § 2801(i) to mean "property/casualty insurance sold to individuals and families for primarily noncommercial purposes." Article 28 does not apply to a commercial risk policy such as the subject farm owner’s policy. Accordingly, there is nothing in the Insurance Law that prohibits an insurer in utilizing credit information in underwriting or nonrenewing such a policy. However, the Department does not see that credit risk would have much bearing on the risk under such a policy. Accordingly, an insurer may not cancel the policy because of the credit risk of the insured.

For further information one may contact Principal Attorney Paul A. Zuckerman at the New York City Office.