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STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

David A. Paterson
Governor

James J. Wrynn
Superintendent

OGC Op. No. 09-12-02

The Office of General Counsel issued the following opinion on December 15, 2009, representing the position of the New York State Insurance Department.

Re: Dishonored Check

Questions Presented:

1) Is an otherwise valid notice of cancellation for non-payment of premium of a non-commercial package1 policy, which includes homeowners, automobile, and umbrella liability insurance, effective if, after notice is mailed, the insurer receives a check from the insured in payment of the premium and informs the agent that the policy will be reinstated, but the check is thereafter dishonored?

2) Is the insurer statutorily required to inform the agent under the circumstances set forth in question one above that the policy will not be reinstated?

Conclusions:

1) An otherwise valid notice of cancellation for nonpayment of premium of a non-commercial package policy, which includes homeowners, automobile, and umbrella liability insurance, is effective under the circumstances presented.

2) No. The insurer is not statutorily required to inform the agent that the policy will not be reinstated under the scenario presented.

Facts:

An inquirer presented the following facts: a property/casualty insurer wrote a non-commercial package policy providing homeowners, automobile, and umbrella insurance on a direct-bill, installment basis. Because the insured failed to remit an installment premium payment on its due date, the insurer sent a notice of cancellation to the insured. Prior to the cancellation date stated in the notice, the insurer received a check from the insured. Thereafter, the insurance agent contacted the insurer, which informed the agent that it had received the insured’s check and would reinstate the policy. After the cancellation date, the agent contacted the insurer, and was informed that because the insured’s check had been dishonored, the policy would not be reinstated. The inquirer asked whether the notice of cancellation was effective, and whether the insurer was obligated by statute to inform the agent that the policy would not be reinstated.

Analysis:

I. Effectiveness of Cancellation Notice

Insurance Law § 3425, which governs the cancellation provisions of most non-commercial insurance policies, is relevant to the first inquiry. A non-commercial package policy providing homeowners, automobile, and umbrella liability insurance is a “covered policy” as defined by Insurance Law § 3425(a), which reads as follows:

(a) This section shall apply to covered policies of insurance as defined in paragraphs one, two and three hereof.

(1) “Covered policy” means a contract of insurance, referred to in this section as “automobile insurance”, issued or issued for delivery in this state, on a risk located or resident in this state, insuring against losses or liabilities arising out of the ownership, operation, or use of a motor vehicle, predominantly used for non-business purposes, when a natural person is the named insured under the policy of automobile insurance.

(2) “Covered policy” also means a contract of insurance, referred to in this section as “personal lines insurance”, other than a contract of insurance defined in paragraph one hereof, issued or issued for delivery in this state, on a risk located or resident in this state, insuring any of the following contingencies:

(A) loss of or damage to real property used predominantly for residential purposes and which consists of not more than four dwelling units, other than hotels and motels;

(B) loss of or damage to personal property in which natural persons have an insurable interest, except personal property used in the conduct of a business; and

(C) other liabilities for loss of, damage to, or injury to persons or property, not arising from the conduct of a business, when a natural person is the named insured under the policy.

(3) A personal umbrella liability policy shall be considered a “covered policy” under paragraph two, and not paragraph one, of this subsection.

A covered policy may be canceled for nonpayment of premium in conformity with Insurance Law § 3425(b) and (c), which read in relevant part as follows:

(b) During the first sixty days a covered policy is in effect, no notice of cancellation shall be issued or be effective unless it states or is accompanied by a statement of the specific reason or reasons for such cancellation.

(c) After a covered policy has been in effect for sixty days, or upon the effective date if the policy is a renewal, no notice of cancellation shall be issued to become effective unless . . . it is based on one or more of the following:

(1) With respect to automobile insurance policies:

(A) nonpayment of premium, provided, however, that a notice of cancellation on this ground shall inform the insured of the amount due;

* * *

(2) With respect to personal lines insurance policies:

(A) nonpayment of premium, provided, however, that a notice of cancellation on this ground shall inform the insured of the amount due;

“Nonpayment of premium” is defined by Insurance Law § 3425(a)(10) as follows:

(10)“Nonpayment of premium” means the failure of the named insured to discharge any obligation in connection with the payment of premiums on a policy of insurance or any installment of such premium, whether the premium is payable directly to the insurer or its agent, or indirectly under any premium finance plan or extension of credit. Payment to the insurer, or to an agent or broker authorized to receive such payment, shall be timely, if made within fifteen days after the mailing to the insured of a notice of cancellation for nonpayment of premium. (Emphasis added.)

A non-commercial package policy providing automobile, homeowners, and umbrella insurance thus may be canceled for non-payment of an installment, direct-billed premium. The notice of cancellation must state (a) that the policy is being canceled due to non-payment of premium, and (b) the installment amount due, if the policy is being canceled more than sixty days after its effective date.

Specifically, it was inquired whether an otherwise valid notice of cancellation for non-payment of premium of a non-commercial package policy, which includes homeowners, automobile, and umbrella liability insurance, is effective if, after notice is mailed, the insurer receives a check from the insured in payment of the premium and informs the agent that the policy will be reinstated, but the check is thereafter dishonored.

Provided that the notice of cancellation under such circumstances otherwise conforms to the cancellation provisions of Insurance Law § 3425, and any other applicable laws, such as Vehicle and Traffic Law § 313, the cancellation notice remains in effect, because a dishonored check is not payment of premium. Previous opinions issued by the Insurance Department’s Office of General Counsel conclude that an insured’s remittance of a dishonored check to an insurer does not constitute premium payment. For instance, OGC Op. 8/30/94 reads in part:

If the check is dishonored, the premium has not been remitted, regardless of the date it is postmarked. . . . A dishonored check is not a premium payment.

Similarly, OGC Op. 4/25/96 states:

The basic issue is whether or not cancellation may be based upon “non-payment” of premium. . . . A dishonored check amounts to nonpayment of premium and provides a valid reason for mid-term cancellation of the policy.

These opinions have not been superseded, and remain the position of the Department.

II. Advisement to Agent

The inquirer also asked whether under the facts presented, the insurer was required to inform the agent that the policy would not be reinstated after the check was dishonored, because the insurer previously had informed the agent that the insured’s check had been received and the policy would be reinstated. There are no provisions in the Insurance Law that require the insurer to inform the agent that the policy would not be reinstated under such circumstances. Assuming there were no defects in the cancellation notice, the notice of cancellation effectively canceled the policy due to nonpayment of premium.

Pursuant to Insurance Law § 3425(h)(1), proof of mailing a notice of cancellation to the named insured at the address stated in the policy is sufficient proof of giving notice. Insurance Law § 3425(h)(2) makes ineffective a notice of cancellation that fails to include a provision required by Insurance Law § 3425. Insurance Law § 3425(h)(3) further provides, in relevant part:

A copy of every notice of cancellation, . . .including the reasons therefor, or a summary of such notice, shall be mailed, delivered or transmitted to the insured's authorized agent or broker within seven days of the time such notice is mailed to the named insured. Electronic transmission or any other means of delivery or transmission of information commonly used by the insurer to communicate with agents or brokers shall be deemed sufficient for compliance with this paragraph. Failure to mail, deliver or transmit a copy of such notice to the insured's authorized agent or broker pursuant to this paragraph shall not render any such notice ineffective, provided that all of the other requirements of this section are met and shall not be considered failure to include a provision required by this section for purposes of paragraph two of this subsection. (Emphasis added.)

Under the circumstances that described, whether the agent was sent a copy of the notice of cancellation would not control the notice’s efficacy. Provided the notice of cancellation otherwise complied with Insurance Law § 3425(b) or (c), and Vehicle and Traffic Law § 313, the notice was effective to cancel the policy due to nonpayment.

For further information you may contact Associate Attorney Sally Geisel at the New York City Office.

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1 Although the inquiry references a “package policy,” that phrase does not appear in the Insurance Law. Nevertheless, it is commonly understood to connote two or more policies administered together under a single policy number for the convenience of the premium payment. Be that as it may, the coverages are easily severable. Accordingly, each separate policy contained in a “package policy” is considered a single, discrete policy that is subject to appropriate minimum statutory requirements. For example, New York Vehicle and Traffic Law § 313(1)(a) (McKinney 2005 & Supp. 2009) requires at least fifteen days’ notice to cancel an automobile insurance policy for nonpayment of premium.