The Office of General Counsel issued the following opinion on April 14, 2008, representing the position of the New York State Insurance Department.
RE: Binding Rate Guarantees
Does the Insurance Law or regulations promulgated thereunder permit an insurer to bind an insured to a rate guarantee that is attached to an already executed binder?
No. The rate guarantee that is attached to an already executed binder contravenes (1) N.Y. Ins. Law § 2307 (McKinney 2006), by using a form that was not filed with or approved by the Superintendent of Insurance; and (2) Insurance Law § 2314, by departing from the rates in effect for the insurer. The rate guarantee also constitutes valuable consideration or an inducement that is not permitted pursuant to Insurance Law § 2324. In addition, the use of such a binder could constitute an unfair method of competition or an unfair or deceptive act or practice within the meaning of Article 24 of the Insurance Law.
It is reported that the inquirer is an insurance consultant and that the inquirer’s client entered into a two-year fixed rate guarantee with a New York authorized insurer through a New York licensed insurance producer1 that was not part of the workers’ compensation, general liability or commercial automobile policies issued to the inquirer’s client. The guarantee was attached to the already executed binder,2 and provides that the insured will not market the account for the renewal term nor accept unsolicited quotations from other insurers in exchange for the two-year guarantee. The policies were issued in New York and cover New York risks or operations. The inquirer asks whether the inquirer’s client is lawfully bound by such guarantee.
Insurance Law § 2307 is relevant to the inquiry. It provides that an insurer generally may not use policy forms that have not been filed with and approved by the Superintendent of Insurance. That statute governs most property/casualty policy forms, and reads in pertinent part as follows:
(a) Except as otherwise provided herein, no policy form shall be delivered or issued for delivery unless it has been filed with the superintendent and either he has approved it, or thirty days have elapsed and he has not disapproved it as misleading or violative of public policy.
The rate guarantee here, by modifying the terms of the policy, is a policy form. Based on the facts presented, the insurer contravened Insurance Law § 2307 by using a policy form that was not filed with or approved by the Superintendent.3
Also germane to the inquiry is Insurance Law § 2314, which governs the rates for most property/casualty policies. That statute reads as follows:
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 or on behalf of the insurer, or shall issue or make any policy or contract involving a violation thereof.
Based upon the facts presented here, the insurer contravened Insurance Law § 2314 by imposing a two-year guarantee that may depart from “the rates, rating plans, classifications, schedules, rules and standards in effect or on behalf of the insurer.” In particular, new workers’ compensation rates are filed by the New York Workers’ Compensation Insurance Rating Board (“CIRB”) every year, and all insurers writing such insurance, pursuant to Insurance Law § 2306, are bound by such rates (subject to any modification filed by the insurer). This year’s move to the exclusive filing of loss costs by CIRB pursuant to Chapter 11 of the Laws of 2008 necessitates additional rate filings by each insurer. But in any case, an insurer may not renew a policy at a different rate other than as provided in its rate filings.4
Insurance Law § 2324 also is relevant to the inquiry. That statute governs rebating and discrimination with regard to most property/casualty practices, and reads in pertinent part as follows:
(b) No authorized insurer, no licensed insurance agent, no licensed insurance broker, and no employee or other representative of any such insurer, agent or broker shall make, procure, or negotiate any contract of insurance other than as plainly expressed in the policy or other written contract issued or to be issued as evidence thereof, or shall directly or indirectly, by giving or sharing a commission or in any manner whatsoever, pay or allow or offer to pay or allow to the insured or to any employee of the insured, either as an inducement to the making of insurance or after insurance has been effected, any rebate from the premium which is specified in the policy, or any special favor or advantage in the dividends or other benefit to accrue thereon, or shall give or offer to give any valuable consideration or inducement of any kind, directly or indirectly, which is not specified in such policy or contract, other than any article of merchandise not exceeding fifteen dollars in value which shall have conspicuously stamped or printed thereon the advertisement of the insurer, agent or broker, or shall give, sell or purchase, or offer to give, sell or purchase, as an inducement to the making of such insurance or in connection therewith, any stock, bond or other securities or any dividends or profits accrued thereon, nor shall the insured, his agent or representative knowingly receive directly or indirectly, any such rebate or special favor or advantage, provided, however, a licensed insurance agent or a licensed insurance broker may retain the usual commission or underwriting fee on insurance placed on his own property or risks, if the aggregate of such commissions or underwriting fees received by such licensed insurance agent or insurance broker during the calendar year.
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(f) Any person or corporation violating the provisions of this section shall, in addition to all other penalties provided by law, pay to the people of this state as a penalty the sum of five hundred dollars for each such violation.
Therefore, a New York insurer is generally prohibited from offering or giving as an inducement, or interdependent with any policy, or binder, any valuable consideration that is not specified in the policy or contract of insurance to a New York insured. See Office of General Counsel (“O.G.C.”) Opinion No. 04-10-14 (October 15, 2004).
By promising not to increase premiums for two years, the insurer’s rate guarantee here constitutes valuable consideration or an inducement not specified in the policy (the rate guarantee was not approved by the Superintendent).
The insurer’s actions here may violate Article 24 of the Insurance Law, which governs unfair trade practices. An act prohibited by Insurance Law § 2324 is a “defined violation” pursuant to Insurance Law § 2402(b). With respect to Insurance Law §§ 2307 and 2314, the Superintendent could conclude, after notice and a hearing, that violations of these sections are “determined violations” pursuant to Insurance Law § 2402(c). A “determined violation is defined as “any unfair method of competition or any unfair or deceptive trade practice, which is not a defined violation but is determined by the superintendent pursuant to section two thousand four hundred five of this article5 to be such method, act or practice.” In particular, the Superintendent could find that forcing an insured to stay with the insurer for two years, and prohibiting the insurer from canceling or non-renewing the policy, is unfair.
In sum, the rate guarantee at issue here was attached to the binder and designed to bind the insured after the policy was issued. For the reasons set forth above, the rate guarantee provision, whether attached to the binder or included in the policy, contravenes the Insurance Law, and is not binding on the insured.
Please be advised that this opinion is limited to the specific facts provided, and is hereby referred to the Department’s Consumer Services Bureau for further investigation.
For further information you may contact Associate Counsel Alexander Tisch at the New York City Office.
1 Pursuant to Insurance Law § 2101(k), an “insurance producer means an insurance agent, insurance broker, reinsurance intermediary, excess lines broker, or any other person required to be licensed under the laws of this state to sell, solicit or negotiate insurance.”
2 In Springer v. Allstate, 94 N.Y.2d 645, 710 N.Y.S.2d 298 (2000), the New York Court of Appeals noted that an insurance binder is a temporary or interim policy until a formal policy is issued. A binder, like a policy, may not contain terms inconsistent with the Insurance Law or the regulations promulgated thereunder, or that depart from the insurer’s rate filings.
3 Insurance Law § 6301 allows for an exemption from filing requirements with respect to rates and policy forms for certain types of risks at issue here (but not workers’ compensation). Insurance Law § 6303 limits the exemption to business that “is underwritten and transacted from an office within this state; and (i) the risk, as defined in the regulations of the superintendent, produces a minimum annual premium in excess of one hundred thousand dollars or such higher amount as the superintendent may prescribe by regulations; or (ii) the coverage is for a risk or class of risks which is of an unusual nature, a high loss hazard, or difficult to place, pursuant to a list promulgated or amended by the superintendent.” Section 16.0 of N.Y. Comp. Codes Rules & Regs., tit. 11, pt. 16 (Regulation 86) governs such exemptions and reads in pertinent part “[a]lthough 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.”
4 An insurer may always issue a policy for a two-year term and thereby bind itself to the rates then in effect, but that is not the fact pattern here.
5 Insurance Law § 2405 sets forth a hearing and report process for both defined and determined violations.