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 July 28, 2005, representing the position of the New York State Insurance Department.

RE: Minimum Earned Premiums

Questions Presented:

1) May an authorized insurer that issues a commercial general liability policy, which is auditable based on either the insured’s annual sales or estimated payroll, impose a percentage-based minimum earned premium?

2) May such insurer do so with respect to a policy written on a special risk insurance basis (commonly referred to as the Free Trade Zone)?

3) May an unauthorized insurer that issues a commercial general liability policy through a licensed excess line broker impose a percentage-based minimum earned premium?

4) If the premium is financed and the policy is canceled, may the insurer withhold a minimum earned premium?

Conclusions:

1) Whether an authorized insurer that issues a commercial general liability policy, which is auditable based on either the insured’s annual sales or estimated payroll, may impose a percentage-based minimum earned premium is dependent upon the insurer’s ability to prove that the minimum earned premium filed equals the cost associated with issuing the policy. A percentage-based (rather than a flat charge) minimum earned premium would not be acceptable unless the percentage was limited so that it did not exceed the expenses of writing the business.

2) Although an insurer that is writing a special risk insurance policy (commonly referred to as the Free Trade Zone) is not required to file the rates or policy forms for such insurance, the insurer "must still satisfy the governing standards set forth in the Insurance Law and regulations." N.Y. Comp. Codes R. & Regs. tit. 11, § 16.0 (1995) (Reg. 86). Thus, whether such insurer may impose a percentage-based minimum earned premium is dependent upon the insurer’s ability to prove that the minimum earned premium filed equals the cost associated with issuing the policy. A percentage-based (rather than a flat charge) minimum earned premium would not be acceptable unless the percentage was limited so that it did not exceed the expenses of writing the business.

3) An unauthorized insurer that issues a commercial general liability policy through a licensed excess line broker is not prohibited from imposing a percentage-based minimum earned premium, subject to N.Y. Ins. Law § 3428(a) and (d) (McKinney 2000) as amended by the Laws of NY 2004, chapter 743.

4) Where the premium has been financed and the policy has been canceled, an authorized insurer may not retain more than ten percent of the gross premium, or $60, whichever amount is greater. This maximum retention does not apply to unauthorized insurers. N.Y. Ins. Law § 3428 (McKinney 2000), as amended by Chapter 743 of the 2004 Laws of New York.

Facts:

No specific facts were presented.

Analysis:

N.Y. Ins. Law § 2303 (McKinney 2000) sets the standards for property/casualty insurance rates and it states: "Rates shall not be excessive, inadequate, unfairly discriminatory, destructive of competition or detrimental to the solvency of insurers. …"

The Department has not disapproved minimum earned premium filings where the insurer has provided supportable evidence that the minimum earned premium equals the cost associated with issuing the policy. The purpose of allowing a minimum earned premium is to permit the insurer to recover the expenses of writing the business should the policy be canceled prior to expiration, or in the case of an auditable policy, where the audit results in a premium lower than the amount needed to cover the cost of writing the policy.

N.Y. Ins. Law § 3428(a) (McKinney 2000) states:

Except as provided in subsection (e) of this section, whenever an insurance contract made or issued in this state is cancelled or otherwise terminated by the insured before the expiration thereof in accordance with the terms of such contract, the earned premium to be retained by the insurer shall be determined by the applicable rate filing, if any, otherwise in accordance with the provisions of such contract.

Thus, where an insured cancels a commercial general liability insurance policy, in accordance with the cancellation provisions of such contract, the insured is entitled to the return of any unearned premium based on the rates that the insurer filed with the Department, or where no rates have been filed (such as where the insurance is written in the Free Trade Zone, discussed infra), the unearned premium should be calculated based on the policy’s provisions.

The Department has allowed minimum earned premium rates that have been in the form of a flat charge, rather than a percentage of the premium. Whether an authorized insurer that issues a commercial general liability policy, which is auditable based on either the insured’s annual sales or estimated payroll, may impose a percentage-based minimum earned premium is dependent upon the insurer’s ability to prove that the minimum earned premium filed equals the cost associated with issuing the policy. A percentage-based (rather than a flat charge) minimum earned premium would not be acceptable unless the percentage was limited so that it did not exceed the expenses of writing the business.

Free Trade Zone

N.Y. Ins. Law § 6301(a) (McKinney 2000), subject to § 6301(b) and (c), authorizes the Superintendent to create exemptions from the requirement of the filing of special risk insurance policy forms and rates for authorized insurers. It states:

(a) Notwithstanding any provision of this chapter, the superintendent shall, pursuant to regulations promulgated by him, permit exemption from filing requirements only with respect to rates and policy forms, where applicable, for any of the kinds of insurance authorized to be written in this state.

(b) No exemption pursuant to subsection (a) hereof shall be permitted in relation to the kinds of insurance set forth in paragraph one, two, three, fifteen, eighteen or twenty-three of subsection (a) of section one thousand one hundred thirteen of this chapter, or to coverage for personal lines to natural persons for non-business purposes. However, any risk pursuant to paragraph one, two or three of such subsection of such section of this chapter or personal lines risk (except private passenger, non-fleet automobile insurance) shall be exempt pursuant to subsection (a) hereof if it is included by the superintendent on the list maintained by him pursuant to subsection (a) of section six thousand three hundred three of this article.

(c) An exemption granted pursuant to this section shall apply only to authorized insurers complying with this chapter, except that it shall not apply to insurers subject to article sixty-six of this chapter. The exemption shall not be an exemption for joint underwriting or joint reinsurance transactions pursuant to section two thousand three hundred seventeen of this chapter.

N.Y. Comp. Codes R. & Regs. tit. 11, § 16.0 (1995) (Reg. 86) states:

This part implements article 63 of the Insurance Law and establishes methods, procedures and reports for licensing, facilitating, monitoring and verifying compliance with the requirements of the Insurance Law. In effect, article 63 allows special risks that are jumbo in dimensions [sic] or exotic in nature to be written, free of filing rates or policy forms, in what is sometimes called the "Free Trade Zone." Although filing is not required, rates and policy forms applied to special risks must still satisfy governing standards set forth in the Insurance Law and regulations.

Although the rates and policy forms for insurance written in the Free Trade Zone are exempt from filing, an insurer is still bound by the same standards that are applied to rates that are required to be filed. N.Y. Comp. Codes R. & Regs. tit. 11, §16.5 (1995) (Reg. 86) states:

The rates applies [sic] to policies issued pursuant to section 6301 of the Insurance Law shall not be excessive, inadequate, unfairly discriminatory, destructive of competition, detrimental to insurer solvency, or otherwise unreasonable. Each insurer shall maintain in its files the premium charged for each special risk and the basis for the rate or premium.

Thus, for the same reasons discussed above with respect to insurers that are subject to rate filing requirements, an insurer writing in the Free Trade Zone "must still satisfy the governing standards set forth in the Insurance Law and regulations." N.Y. Comp. Codes R. & Regs. tit. 11, § 16.0 (1995) (Reg. 86). Thus, whether such insurer may impose a percentage-based minimum earned premium is dependent upon the insurer’s ability to prove that the minimum earned premium filed equals the cost associated with issuing the policy. A percentage-based (rather than a flat charge) minimum earned premium would not be acceptable unless the percentage was limited so that it did not exceed the expenses of writing the business.

Unauthorized Insurers

N.Y. Ins. Law § 2302(a) (McKinney 2000) states in relevant part: "This article shall apply to all kinds of insurance written on risks or operations in this state by an insurer authorized to do business in this state…." (emphasis added.) Thus, unauthorized insurers are not subject to Article 23 of the New York Insurance Law. In that regard, an unauthorized insurer that issues a commercial general liability insurance policy through a licensed excess lines broker is not prohibited from imposing a percentage-based minimum earned premium.

N.Y. Ins. Law § 3428(a) and (d) (McKinney 2000), as amended by the Laws of New York 2004, chapter 743, apply to unauthorized insurers. The minimum earned premium that an unauthorized insurer may retain upon policy cancellation is the amount provided for in the policy, whether shown in a flat dollar, percentage or other amount.

Financed Insurance Premiums

Chapter 743 of the 2004 Laws of New York added a subsection (e) to N.Y. Ins. Law § 3428, which states:

Whenever an insurance contract, issued by or on behalf of an authorized insurer or insurers, the premiums for which are advanced under a premium finance agreement as defined in section five hundred fifty-four of the banking law, is cancelled, upon such cancellation the authorized insurer or insurers shall return the gross unearned premiums due under the insurance contract or contracts, on a pro rata basis to the bank, lending institution, premium finance agency or premium finance company, for the benefit of the insured, provided, however, that such authorized insurer or insurers shall be entitled to retain a minimum earned premium on the policy of ten percent of the gross premium or sixty dollars, whichever is greater.

Thus, when a policy’s premiums have been financed, and the policy is canceled, an authorized insurer may not retain more than ten percent of the gross premium, or $60, whichever amount is greater. This maximum retention does not apply to unauthorized insurers.

For further information you may contact Associate Attorney Sally Geisel at the New York City Office.