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

Eliot Spitzer
Governor

Eric R. Dinallo
Acting Superintendent

The Office of General Counsel issued the following opinion on January 26, 2007 representing the position of the New York State Insurance Department.

RE: Short-Rate Cancellation Penalty & No-Fault Subrogation/Surcharge

Questions Presented

1) May an insurer apply a short-rate cancellation penalty to an insured who cancels a commercial package insurance policy mid-term?

2) Where an insured is not at fault in an accident with a third party, may an insurer recoup from the third party’s insurer the medical benefits that it has paid under its No-Fault New York Mandatory Personal Injury Protection ("PIP") coverage?

3) Where an insured is not at fault in an accident with a third party, may an insurer who has paid first party benefits under its No-Fault New York Mandatory Personal Injury Protection Coverage surcharge the insured?

Conclusions

1) Yes. An authorized insurer may apply a short-rate cancellation penalty when an insured cancels its commercial package insurance policy midterm, but only if the insurer’s applicable rate filings so provide, and if the policy is not financed.

2) Subrogation recovery—the principle under which an insurer that has paid a loss under a policy is entitled to all the rights and remedies belonging to the insured against a third party with respect to any loss covered by the policy—is permissible only under the following limited circumstances: pursuant to N.Y. Ins. Law § 5105 (McKinney’s 2007), an insurer that has paid first party benefits to its insured may recover that amount from a third party’s insurer only if one of the vehicles involved in the accident is over 6,500 pounds unloaded, or where one of the vehicles is principally used for the transportation of persons or property for hire.

3) No. If an insured is 100% not at fault, a surcharge may not be imposed for a bodily injury, including a No-Fault injury subject to Article 51 of the Insurance Law.

Facts

1) The inquiry is of a general nature only, without reference to any facts.

2) & 3) The insured is a non-commercial motor vehicle operator who was rear-ended by a third party. The insured was admitted to a hospital, and the medical bill was sent to his insurer. The insurer paid the medical bills pursuant to the No-Fault New York Mandatory Personal Injury Protection ("PIP") endorsement. The insured claims to be 100% not at fault and would like to know whether the insurance company may subrogate the claim to the third party’s insurer, and if not, whether the insured can be surcharged.

Analysis

Short-Rate Cancellation

Short-rate is a method of calculating the return premium on a policy. In general, if an insurer cancels a policy, premiums are returned on a pro-rata basis, but the Insurance Law allows an insurer to return premiums on any other basis, including the short-rate basis, where an insured cancels the policy. An insurer is permitted to file a short-rate table with the Insurance Department, whereby the costs of writing a policy are amortized through the policy term, and the insurer may charge a larger "penalty" to recoup those costs if the policy is cancelled earlier in the term.

N.Y. Ins. Law § 3428 (McKinney’s 2007) provides in pertinent part:

(a) 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.

****

(e) 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.

N.Y. Ins. Law § 2314 (McKinney’s 2007) provides:

No authorized insurer shall, and no licensed insurance agent, no employee or other representative of an authorized insurer, and no licensed insurance broker shall knowingly, charge or demand a rate or receive a premium which departs from the rates, rating plans, classifications, schedules, rules and standards in effect on behalf of the insurer, or shall issue or make any policy or contract involving a violation thereof.

Thus, where an insured cancels a commercial package 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 (N.Y. Ins. Law § 6301 (McKinney’s 2007)), the unearned premium should be calculated based on the policy's provisions. The earned premium that the insurer retains is governed by the applicable rate filing. N.Y. Ins. Law § 3428(a) (McKinney’s 2007). The short-rate cancellation penalty should reasonably be related to the initial cost of writing the policy, which would otherwise have been amortized over the life of the policy. Any departure from the rate filing, including waiving the short-rate cancellation penalty, would result in the violation of N.Y. Ins. Law § 2314 (McKinney’s 2007). If, however, the premiums for insurance are financed under a premium finance agreement, the insurer must return the premiums to the bank, lending institution, premium finance agency or premium finance company on a pro-rata basis, and may not charge a short-rate cancellation penalty. N.Y. Ins. Law § 3428(e) (McKinney’s 2007).

Recoupment of No-Fault Payments

Your next question asks whether an insurer may recoup from a third party’s insurer medical benefits ("first party benefits") paid to the insured ("covered person") in accordance with PIP coverage, where the insured allegedly was not at fault in an accident with the third party.

N.Y. Ins. Law § 5105(a) (McKinney’s 2007) provides:

Any insurer liable for the payment of first party benefits to or on behalf of a covered person and any compensation provider paying benefits in lieu of first party benefits which another insurer would otherwise be obligated to pay pursuant to subsection (a) of section five thousand one hundred three of this article or section five thousand two hundred twenty-one of this chapter has the right to recover the amount paid from the insurer of any other covered person to the extent that such other covered person would have been liable, but for the provisions of this article, to pay damages in an action at law. In any case, the right to recover exists only if at least one of the motor vehicles involved is a motor vehicle weighing more than six thousand five hundred pounds unloaded or is a motor vehicle used principally for the transportation of persons or property for hire. However, in the case of occupants of a bus other than operators, owners, and employees of the owner or operator of the bus, an insurer which, pursuant to paragraph one of subsection (a) of section five thousand one hundred three of this article, provides coverage for first party benefits for such occupants under a policy providing first party benefits to the injured person and members of his household for loss arising out of the use or operation of any vehicle of such household, shall have no right to recover the amount of such benefits from the insurer of such bus.

(b) The sole remedy of any insurer or compensation provider to recover on a claim arising pursuant to subsection (a) hereof, shall be the submission of the controversy to mandatory arbitration pursuant to procedures promulgated or approved by the superintendent. Such procedures shall also be utilized to resolve all disputes arising between insurers concerning their responsibility for the payment of first party benefits.

(c) The liability of an insurer imposed by this section shall not affect or diminish its obligations under any policy of bodily injury liability insurance.

"First party benefits" means payments to reimburse a covered person for basic economic loss on account of personal injury arising out of the use or operation of a motor vehicle. N.Y. Ins. Law § 5102(b) (McKinney’s 2007). Under § 5102(a), basic economic loss is covered up to $50,000, but an insured may purchase additional PIP coverage.

The plain terms of § 5105(a) provide that, after a motor vehicle accident, an insurer that pays first party benefits to its insured and that seeks to collect that amount from the insurer of the other vehicle’s driver is limited to instances where one of the vehicles is more than 6,500 pounds unloaded, or where one of the vehicles is principally used for the transportation of persons or property for hire. Furthermore, under § 5105(b), intercompany loss transfer arbitration is the only method by which an insurer may recover on a claim under § 5105(a).

Surcharge

Your final question inquires whether an insurer who has paid first party benefits to an insured in accordance with PIP coverage may surcharge the insured, who allegedly was not at fault in the accident with a third party that gave rise to the claim.

N.Y. Comp. Codes R. & Regs. tit. 11, Pt. 169.1 (Regulation 100), which was promulgated pursuant to N.Y. Ins. Law § 2334 (McKinney’s 2007), regulates noncommercial motor vehicle insurance merit rating plans. It reads, in pertinent part, as follows:

(c) A surcharge may be imposed for an occurrence involving bodily injury (including a no-fault injury subject to article 51 of the Insurance Law), provided the motor vehicle was in operation and the insured was at fault. The establishment of a residual bodily injury liability reserve shall not in itself imply that the insured was at fault. An additional surcharge may not be imposed for bodily injury, if the accident which resulted in the bodily injury is already surchargeable under subdivision (a) of this section.

(d) Other exceptions and restrictions.

(1) No points or surcharge may be imposed for an accident occurring under the following circumstances:

(i) when the motor vehicle was lawfully parked; or

(ii) when the motor vehicle of the insured or other operator resident in the same household was struck in rear by another motor vehicle, and the insured or other resident operator has not been convicted of a moving traffic violation in connection with the accident; or

(iii) when the motor vehicle operated by the insured or other operator was struck by a hit-and-run vehicle, if the accident is reported to the proper authority within 24 hours by the insured or resident operator; or

(iv) when the insured or other resident in the insured's household operates a vehicle for hire or a motor vehicle other than a noncommercial motor vehicle, and the accident occurred while in the course of employment and said accident did not result in a conviction for a moving traffic violation; or

(v) when the insured has had an accident while operating, as an employee, a commercial motor vehicle in the course of employment and in the discharge of the employee's duties at the time of the accident, unless the accident is determined to have been caused by the intentional action or gross negligence of the insured. For purposes of this rule only, the term gross negligence shall not mean the insured's failure to refuse to drive or operate a commercial motor vehicle which has a defective condition that is known to the insured, provided the insured had reported such defective condition to the insured's immediate supervisor or employer.

Thus, under Regulation 100, an insured deemed by the insurer to be 100% not at fault, or who squarely fits within the exceptions of subsection (d) above, may not be surcharged. Given the circumstances that you present, no surcharge may be imposed.

For further information you may contact Assistant Attorney Sapna S. Maloor at the New York City Office.