OGC Op. No. 10-09-11

The Office of General Counsel issued the following opinion on September 27, 2010, representing the position of the New York State Insurance Department.

Re: “Inflation-Guard” Endorsements - Protection Against Inflation

Question Presented:

Is an insurer that has issued a homeowners, renters or commercial lines insurance policy containing an “inflation-guard” endorsement, designed to protect the covered property’s value against inflation, required to issue a conditional renewal notice to the insurance agent, broker, or insured each year advising of the specific dollar amount of the resulting increase in coverage, if any?

Conclusion:

No. The insurer would not have to send a conditional renewal notice in this situation because any increase in coverage would be arising from the terms of the policy itself.

Facts:

The inquiry is of a general nature, without reference to particular facts. Through an “inflation-guard” endorsement, a policy provides for the value of the covered property to be automatically adjusted depending upon a formula specified in the policy.

Analysis:

Homeowners and renters insurance policies are considered policies of personal lines insurance governed by N.Y. Ins. Law (“Insurance Law”) § 3425 (McKinney Supp. 2010), while commercial lines insurance policies are generally governed by Insurance Law § 3426. Both of these statutes contain provisions that require an insurer to send a notice of conditional renewal to its insured under certain circumstances. For example, Insurance Law § 3425(d)(1) provides, in pertinent part, as follows:

Unless the insurer . . . mails or delivers to the named insured, at the address shown in the policy, a written notice of its intention not to renew a covered policy, or to condition its renewal upon change of limits or elimination of any coverages, the named insured shall be entitled to renew the policy upon timely payment of the premium billed to the insured for the renewal. The specific reason or reasons for nonrenewal or conditioned renewal shall be stated in or shall accompany the notice . . . [Emphasis supplied.]

As to commercial lines insurance policies, Insurance Law § 3426(e)(1) contains a similar conditional renewal notice requirement. It provides, in relevant part:

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. . .)

Insurance Law § 3426(d)(1) provides, in relevant part, that “no premium increase for the term of the policy shall be made to become effective unless due to and commensurate with insured value added, subsequent to issuance or the last renewal date, pursuant to the policy or at the insured’s request ….”

Homeowners, renters, and commercial lines policies that contain an “inflation-guard” endorsement that automatically adjusts the value of the property being insured to protect against the impact of inflation do not require insurers to provide conditional renewal notices under either Insurance Law § 3425 or § 3426. This mechanism is required by, and set forth in, the policy itself and thus is not equivalent to an insurer conditioning a renewal based upon a change of limits. See Office of General Counsel Opinions No. 02-04-10 (April 8, 2002) and No. 04-04-06 (April 2, 2004). Therefore, such an endorsement does not trigger the conditional renewal notice requirement provisions contained in either Insurance Law § 3425(d) or § 3426(e).

For further information you may contact Associate Attorney Jeffrey A. Stonehill at the New York City Office.