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 10, 2006 representing the position of the New York State Insurance Department.

Re: Restoration company paying part of insured’s deductible and an insurer forcing an insured to use specific contractors

Questions Presented:

1. May a restoration company advertise that it will pay part of an insured’s deductible for flood insurance?

2. May a property/casualty insurer or any of its agents mandate that an insured under a homeowner’s policy use a specific contractor for repair and restoration?

Conclusions:

1. If by paying part of the deductible, the restoration company is charging less for the services than the charges specified on the bill that is provided to the insurer, such company and the insured may be committing insurance fraud pursuant to N.Y. Penal Law § 176.05(1) (McKinney 1999) and N.Y. Ins. Law § 403 (McKinney 2006).

2. No, absent a clause in the insurance policy, a property/casualty insurer and its agents may not mandate that an insured use a specific contractor for repair and restoration because there is nothing in the policy that requires it.

Facts:

The inquirer is a restoration company located in New York State and recently saw a competitor’s ad on the Internet. The competitor, located in Texas, offers flood services and advertises:

"We pay up to $250 of your deductible on all flood work and payment plans for self pay."

Analysis:

N.Y. Insurance Law § 3444 (McKinney 2006) states:

1. Insurers shall provide to their homeowners and dwelling fire personal lines insureds a notice prescribed or approved by the superintendent, explaining clearly and in plain language that: (a) such policies do not provide coverage for loss caused by mudslide or flood; and (b) insurance is available under separate policies issued in accordance with the National Flood Insurance Program, 42 U.S.C. § 4001 et seq., including information regarding flood insurance eligibility and access.

In New York, homeowners’ insurance policies generally do not cover most flood-related losses. The Federal Government offers federally backed flood insurance under the National Flood Insurance Program (NFIP) and property/casualty insurers in New York may write flood insurance under the federal program.

There is nothing in the New York Insurance Law that prevents a restoration company from advertising that it will pay part of an insured’s deductible for flood insurance. In essence, the company is merely providing a discount to the customer in the amount of the deductible, and such discount is not prohibited under the Insurance Law.

However, N.Y. Penal Law § 176.05(1) (McKinney 1999) provides as follows:

A fraudulent insurance act is committed by any person who, knowingly and with intent to defraud presents, causes to be presented, or prepares with knowledge or belief that it will be presented to or by an insurer, self insurer, or purported insurer, or purported self insurer, or any agent thereof, any written statement as part of, or in support of, an application for the issuance of, or the rating of a commercial insurance policy, or certificate or evidence of self insurance for commercial insurance or commercial self insurance, or a claim for payment or other benefit pursuant to an insurance policy or self insurance program for commercial or personal insurance which he knows to: (i) contain materially false information concerning any fact material thereto; or (ii) conceal, for the purpose of misleading, information concerning any fact material thereto.

N.Y. Ins. Law § 403(c) (McKinney 2006) authorizes the Superintendent of Insurance to impose a civil penalty for insurance fraud and provides as follows:

In addition to any criminal liability arising under the provisions of this section, the superintendent shall be empowered to levy a civil penalty not exceeding five thousand dollars and the amount of the claim for each violation upon any person, including those persons and their employees licensed pursuant to this chapter, who is found to have: (i) committed a fraudulent insurance act or otherwise violates the provisions of this section; or (ii) knowingly and with intent to defraud files, makes, or assists, solicits or conspires with another to file or make an application for a premium reduction, pursuant to subsection (a) of section two thousand three hundred thirty-six of this chapter, containing any materially false information or which, for the purpose of misleading, conceals information concerning any fact material thereto.

If the company submits a bill to an insurer that does not accurately reflect the discount, both it and the insured may be guilty of insurance fraud. For example, if a policy contained a $500 deductible and the restoration company’s bill stated that its charge for services was $10,000 instead of $9,500, which reflects the $500 deductible, then the bill would contain materially false information. Under such circumstances, the restoration company may be committing insurance fraud. In addition, an insured who submits such a claim to his or her insurer knowing that the restoration company has reduced its fee in the amount of the deductible may also be guilty of insurance fraud.

With respect to the second question, absent a clause in the insurance policy, a property/casualty insurer or any of its agents may not mandate that an insured under a homeowner’s policy use a specific contractor for repair and restoration.

In addition, N.Y. Ins. Law § 3404 (McKinney 2006) sets forth the standard policy provisions for a fire insurance contract and does not include a clause mandating use of a specified contractor. Section 3404(b)(1) states in relevant part:

No policy or contract of fire insurance shall be made, issued or delivered by any insurer or by any agent or representative thereof, on any property in this state, unless it shall conform as to all provisions, stipulations, agreements and conditions with such form of policy…

A clause mandating that the insured use a specific contractor would be a limitation on coverage with respect to fire and extended coverage and therefore would not be permissible under Section 3404.

For further information you may contact Senior Attorney Elizabeth Barrett at the New York City Office.