New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
ONE COMMERCE PLAZA
ALBANY, NEW YORK 12257

David A. Paterson
Governor

Eric R. Dinallo
Superintendent

OGC Op. No. 08-05-07

The Office of General Counsel issued the following opinion on May 16, 2008, representing the position of the New York State Insurance Department.

RE: Insurer designating a contractor to repair, rebuild or replace

Question Presented:

May a property/casualty insurer designate any contractor to rebuild an insured property that has been partially destroyed by fire, if, pursuant to the policy, the insurer has an option to repair, rebuild or replace the property with other property of like kind and quality?

Conclusion:

Nothing in the New York Insurance Law prohibits a property/casualty insurer from designating the contractor of its choosing to repair or rebuild an insured property that has been partially destroyed by fire, pursuant to an insurance policy vesting the insurer with an option to repair, rebuild or replace the property with other property of like kind and quality.

Facts:

The inquirer represents an authorized foreign property/casualty insurer that issues commercial lines insurance policies, which provide that the insurer has an option to repair, rebuild or replace insured property with other property of like kind and quality in the event of covered loss or damage to such property. The insurer asks whether it may lawfully designate the construction company that would perform the repair, rebuilding or replacing rather than allow the insured to select the contractor.

Analysis:

N.Y. Ins. Law § 3404 (McKinney 2007), which sets out the “standard fire insurance policy of the state of New York,” is germane to the inquirer’s question. Insurance Law § 3404(b)(1) specifies that no policy or contract of fire insurance shall be made, issued, or delivered on any property in this state unless "it shall conform as to all provisions, stipulations, agreements and conditions” with the form specifically set forth elsewhere in that statute. However, an insurer may use a different policy form that, inter alia, contains terms and conditions no less favorable to the insured than those specified in the standard fire insurance policy. See Ins. Law § 3404(b)(1) and (f).

An insurer that pays a claim under a fire insurance policy may not require the insured to select a particular contractor. See Opinion of General Counsel No. 06-07-04 (July 10, 2006). However, as an alternative to paying a claim under the standard fire insurance policy, the insurer may, pursuant to the policy, elect to “repair, rebuild or replace the property destroyed or damaged with other of like kind and quality within a reasonable time” by giving proper notice of its intention to do so. See Insurance Law § 3404(e) (policy lines 144-7). Nothing in the Insurance Law prohibits an insurer having made such an election from employing the contractor of its choosing to undertake the repair, rebuilding, or replacement.

Nevertheless, the insurer must use due care in selecting an appropriate, qualified contractor, and should guarantee the contractor’s work.1 An insurer that deviates from these expectations, as a general business practice, could be found by the Superintendent to have engaged in unfair claims practices within the meaning of Insurance Law § 2601.

Moreover, by electing to repair, rebuild or replace the property rather than paying the claim, a court could determine that an insurer has entered into a building contract with the insured, separate and in place of the insurance policy. See, e.g., Morell v. The Irving Fire Ins. Co., 33 N.Y. 429, 437 (1865); Eisenberg v. Motors Ins. Corp., 62 Misc. 2d 1 (Sup. Ct. N.Y. Co. 1970) (insurer that elected to repair an automobile created a new contract that could not be discharged until the insurer had fully performed the repair and returned the vehicle). In that circumstance, an insurer that fails to deliver property of like kind and quality may be liable for damages for breach of contract, irrespective of the limits of the policy. See Morell, 33 N.Y. at 437. And, the insurer could be liable for negligence of the contractor employed by the insurer. See, e.g., Kleeman v. Rheingold, 81 N.Y.2d 270, 274 (1993) (noting that party may be found negligent in selecting, instructing or supervising the contractor).

Finally, the insurer’s contractor may not act as an independent adjuster without a license. See Insurance Law § 2102. An independent adjuster is defined in Insurance Law § 2101(g)(1) as:

[A]ny person, firm, association or corporation who, or which, for money, commission or any other thing of value, acts in this state on behalf of an insurer in the work of investigating and adjusting claims arising under insurance contracts issued by such insurer and who performs such duties required by such insurer as are incidental to such claims and also includes any person who for compensation or anything of value investigates and adjusts claims on behalf of any independent adjuster . . . .

This opinion is limited to an interpretation of the Insurance Law. The Department expresses no opinion about any other laws that may be applicable to the inquiry.

For further information you may contact Senior Attorney Brenda Gibbs at the Albany Office.

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1 Insurers have similar obligations with respect to automobile claims pursuant to N.Y. Comp. Codes R. & Regs. tit. 11, § 216.7(b)(15) (2003) (Regulation 64). That regulation requires an insurer that recommends a repair shop to an insured (at the insuredís request) to restore the damaged motor vehicle to its pre-loss condition if the insured uses the recommend repair shop, and the shop fails to repair the vehicle in accordance with generally accepted standards for safe and proper repair.