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 September 16, 2005, representing the position of the New York State Insurance Department.

Re: Prospective Cancellation of Non-Automobile Personal Lines Insurance Renewal Policies.

Question Presented:

When: (1) an insured fails to pay its authorized New York insurer the premium for the renewal of a personal lines non-automobile insurance policy by the effective date of renewal (i.e., the expiration date of the expiring policy); (2) the policy period of the expiring policy ends; (3) the insurer mails, several days after the effective date of renewal, a cancellation notice to the insured that provides nineteen days (the "grace period") to pay the premium in order to reinstate the renewal policy without a lapse of coverage; and (4) the insured fails to pay the premium within the grace period; may the effective date of cancellation be the effective date of renewal?

Conclusion:

No. Under the facts presented, the effective date of cancellation may not be the effective date of renewal, which is the expiration date of the expiring policy, because that would constitute a retroactive cancellation in violation of N.Y. Ins. Law § 3425 (McKinney Supp. 2005).

Facts:

With respect to a personal lines non-automobile insurance policy subject to N.Y. Ins. Law § 3425 (McKinney Supp. 2005), the following scenario was provided to the Office of General Counsel:

Prior to the end of a policy period, 45-60 days in advance of a renewal, Company A mails a renewal offer. 18 days in advance of the renewal, the company sends a bill for the renewal term due on the effective date of the policy. If no payment is received on or before the effective date of the policy, the company will send the insured a notice of cancellation which states that coverage has expired but gives the insured 15 additional days to pay or reinstate the policy without a lapse of coverage. If no payment is received in the additional time period, the insured is sent a final notice that confirms cancellation of the policy. If the payment is received in the additional time period, the policy remains in force with no gap in coverage.

In other words, if the company fails to receive payment within the redemption period, the company cancels back to the renewal date of the policy.

An example was presented as follows:

For a policy with a renewal effective date of March 15, 2005:

- Renewal policy paper is mailed January 14, 2005.

- Renewal bill is mailed February 25, 2005, with payment due March 15, 2005 (the renewal effective date).

- If no payment is received, a cancellation notice is mailed March 25, 2005, stating that payment is due April 13, 2005.

- The cancellation notice says that coverage will cease April 14, at 12:01a.m.

- If no payment is received, the renewal never comes into being, and the coverage is cancelled flat as of the renewal effective date, March 15, 2005.

Analysis:

Barring a contractual or statutory provision to the contrary (for example, N.Y. Ins. Law § 3404(e) (McKinney 2000) requires insurers to provide a five days’ written notice of cancellation for fire insurance policies, including all homeowners insurance policies), cancellation notices sent under personal lines non-automobile insurance policies subject to N.Y. Ins. Law § 3425 (McKinney Supp. 2005) may take effect immediately. However, all such notices are restricted by § 3425’s provision of a fifteen day "grace" period, which is discussed below.

N.Y. Ins. Law § 3425 (McKinney Supp. 2005), inter alia, governs the cancellation and renewal provisions of certain personal lines property/casualty insurance policies. § 3425 provides the following in pertinent part:

(a) This section shall apply to covered policies of insurance as defined in paragraphs one, two and three hereof.. . . .

(2) "Covered policy" also means a contract of insurance, referred to in this section as "personal lines insurance", other than a contract of insurance defined in paragraph one hereof, issued or issued for delivery in this state, on a risk located or resident in this state, insuring any of the following contingencies:

(A) loss of or damage to real property used predominantly for residential purposes and which consists of not more than four dwelling units, other than hotels and motels;

(B) loss of or damage to personal property in which natural persons have an insurable interest, except personal property used in the conduct of a business; and

(C) other liabilities for loss of, damage to, or injury to persons or property, not arising from the conduct of a business, when a natural person is the named insured under the policy.

. . . .

(6) "Renewal" or "to renew" means the issuance and delivery by an insurer, at the end of the policy period, of a policy superseding a policy previously issued and delivered by the same insurer, or the issuance and delivery of a certificate or notice extending the term of a policy beyond its policy period or term; provided, however, that any policy with a policy period or term of less than one year shall, for the purpose of this section, be considered as if written for a policy period or term of one year, or any policy with no fixed expiration date, shall, for the purpose of this section, be considered as if written for successive policy periods or terms of one year.

. . . .

(10) "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, if made within fifteen days after the mailing to the insured of a notice of cancellation for nonpayment of premium.

. . . .

(c) 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:

. . . .

(2) With respect to personal lines insurance policies:

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

. . . .

(d)(1) Unless the insurer, at least forty-five but not more than sixty days in advance of the end of the policy period, mails or delivers to the named insured, at the address shown in the policy, a written notice of its intention not to renew a covered policy, or to condition its renewal upon change of limits or elimination of any coverages, the named insured shall be entitled to renew the policy upon timely payment of the premium billed to the insured for the renewal. The specific reason or reasons for nonrenewal or conditioned renewal shall be stated in or shall accompany the notice. This paragraph shall not apply when the named insured, an agent or broker authorized by the named insured, or an insurer of the named insured, has mailed or delivered written notice to the insurer that the policy has been replaced or is no longer desired.

It has long been held that, in the absence of a notice of nonrenewal in compliance with § 3425, "renewal is automatic upon billing for the renewal term, and a notice of cancellation is required to terminate coverage." Victor v. Turner, 113 A.D.2d 490, 499 (2d Dep’t 1985). This is true regardless of whether the insured paid the premiums. Zeman v. Zack Agency, 75 A.D.2d 261 (2d Dep’t 1980). § 3425(d)(1) expressly states that an insured may renew a policy upon the timely payment of premium if the insurer has neither mailed or delivered a written notice of its intention not to renew the insured’s policy, nor conditioned its renewal upon the change of policy limits or the elimination of any policy coverages. And § 3425(a)(10) provides the insured with fifteen days (after the mailing to the insured of a notice of cancellation for nonpayment of premium) to remit the premium in order to reinstate such policy. Thus, barring a contractual or statutory provision to the contrary (e.g., N.Y. Ins. Law § 3404), cancellation notices sent under personal lines non-automobile insurance policies are effective immediately. However, payment of the premium within the fifteen day "grace period" will reinstate the policy without any lapse in coverage in accordance with § 3425(a)(10).

Under the facts presented, the policy was automatically renewed because the insurer billed the insured for the renewal term and did not issue a notice of nonrenewal. And rather than mail a notice of cancellation on the renewal date, March 15, 2005, the insurer mailed a cancellation notice on March 25, 2005 (ten days after the renewal date), stating that payment was due April 13, 2005 (nineteen days from the date of the cancellation notice) and that coverage would continue until April 14, 2005. However, as stated above, the insurer may not retroactively cancel the policy to a date before coverage had been effectively terminated (in this case, March 25, 2005). In other words, the effective date of the policy’s cancellation cannot be a date when the insurer was still providing the insured with coverage because the policy had been renewed automatically, was still in effect and had not been cancelled at such time for the purpose of fulfilling the requirements of § 3425. Moreover, even if the insurer had not extended coverage until April 14th, but had cancelled the policy as of the March 25th cancellation notice, the insurer still may not retroactively cancel back to March 15th once coverage had been provided.

For further information you may contact Associate Attorney Kristian Earl Lynch at the New York City Office.