The Office of General Counsel issued the following opinion on May 8, 2008, representing the position of the New York State Insurance Department.
RE: Conditional Renewal Notice Based on Increased Premium on E & O Liability Insurance Policy
Must an insurer on an errors and omissions liability insurance policy issue a conditional renewal notice if it increases the renewal premium by greater than 10% after removing a 10% direct bill credit after making a new rate filing with the Department?
Yes. Under N.Y. Ins. Law § 3426(c)(1)(B) (McKinney 2007), an insurer on an errors and omissions liability insurance policy must issue a conditional renewal notice if the renewal premium is increased by over 10%, even if generated as a result of removing a direct bill credit upon making a new rate filing with the Department, and not because of increased exposure units, experience rating, loss rating, retrospective rating, or audit.
It is reported that a licensed property/casualty insurance agency is insured under an errors and omissions professional liability insurance policy issued by an authorized insurer. Last year, the premium was calculated using a .74 base rate, with a 10% direct bill credit, a 20% claims-free credit, a 10% education credit, and a 9% brokerage debit. The premium came to $58,242.
This year, with the same base rate, the insurer made a new filing with the Department, by which the insurer removed the 10% direct bill credit, even though the agency had the same 80% of its policies on a direct bill basis in both years. The agency also lost its 20% claims-free credit but retained the 10% education credit and a 9% brokerage debit. The premium this year came to $86,428.
The insurer stated that the loss of the direct bill credit was an exposure change. Consequently, the insurer asserted that it did not have to issue a conditional renewal notice under Insurance Law § 3426 advising the insured of a premium increase greater than 10%. The agency’s position is that due to the filing with the Department, and without any factual exposure change, the requirements of Insurance Law § 3426 apply. The question is whether the agency’s understanding of the law is correct.
Insurance Law § 3426(a)(1) is germane to the inquiry. That statute defines the term “covered policy” as follows:
“Covered policy” means, for purposes of this section, a policy of commercial risk insurance, professional liability insurance or public entity insurance, and shall include any contract, certificate or other evidence of such insurance.
Insurance Law § 3426(e)(1) also is relevant here. It provides, in pertinent part:
(e)(1) A covered policy shall remain in full force and effect pursuant to the same terms, conditions and rates unless written notice is mailed or delivered by the insurer to the first-named insured, at the address shown on the policy, and to such insured's authorized agent or broker, indicating the insurer's intention:
* * * *
(B) to condition its renewal upon change of limits, change in type of coverage, reduction of coverage, increased deductible or addition of exclusion, or upon increased premiums in excess of ten percent (exclusive of any premium increase generated as a result of increased exposure units, pursuant to subsection (d) of this section, or as a result of experience rating, loss rating, retrospective rating or audit). . . (Emphasis added.)
Thus, although as a general matter an insurer must issue a conditional renewal notice any time it increases premiums more than 10%, it need not issue such notice if the increase is the result of increased exposure units, experience rating, loss rating, retrospective rating, or audit.
Here, the insurer must issue a conditional renewal notice on the policy because it increased premium by more than 10%, and none of the exceptions set forth in Insurance Law § 3426(e)(1) applies. The increased premium resulted solely from the insurer changing its rating rules by eliminating a credit that it previously provided; there was no increase in exposure risk, or any of the other statutory exceptions.
For further information you may contact Associate Attorney Jeffrey A. Stonehill at the New York City Office.