OGC Op. No. 10-11-05

Re: Personal Lines Policy: Calculation of Return Premium on a Short-Rate Basis

Question Presented:

When an insured cancels a New York personal lines property/casualty insurance policy, may the insurer calculate the return premium due to the insured on a short-rate basis?

Conclusion:

Yes. When an insured cancels a New York personal lines property/casualty insurance policy, the insurer may calculate the return premium due to the insured on a short-rate basis, provided that the calculation of return premium is consistent with the insurer’s rates and rules filed with the Department, and the premiums were not financed.

Facts:

The inquiry is of a general nature, without reference to specific facts.

Analysis:

The inquirer asks whether an insurer may calculate the return premium due to an insured on a short-rate basis when the insured cancels a New York personal lines property/casualty policy midterm. The term “short-rate” refers to a method of calculating the return premium on a policy that takes an insurer’s costs of writing the policy into account by applying a penalty for cancelling a policy early.

The Office of General Counsel (“OGC”) has previously opined that, pursuant to N.Y. Ins. Law § 3428 (McKinney 2010), where an insured cancels a commercial package policy, the premiums of which are not financed, an insurer may calculate the return premium due the insured on a short rate basis, provided that the calculation of the return premium is consistent with the insurer’s rates and rules filed with the Department, or where no rates and rules have been filed (such as where the insurance is written in the Free Trade Zone (see Insurance Law § 6301), the unearned premium should be calculated based on the policy’s provisions. See, e.g., OGC Opinion No. 07-01-07 (January 26, 2007). But no OGC opinion states whether the same conclusion applies to a personal lines property/casualty insurance policy.

N.Y. Ins. Law § 3428 (McKinney’s 2010) states in pertinent part:

(a) Except as provided in subsection (e) of this section, whenever an insurance contract made or issued in this state is cancelled or otherwise terminated by the insured before the expiration thereof in accordance with the terms of such contract, the earned premium to be retained by the insurer shall be determined by the applicable rate filing, if any, otherwise in accordance with the provisions of such contract.

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(e) Whenever an insurance contract, issued by or on behalf of an authorized insurer or insurers, the premiums for which are advanced under a premium finance agreement as defined in section five hundred fifty-four of the banking law, is cancelled, upon such cancellation the authorized insurer or insurers shall return the gross unearned premiums due under the insurance contract or contracts, on a pro rata basis to the bank, lending institution, premium finance agency or premium finance company, for the benefit of the insured, provided, however, that such authorized insurer or insurers shall be entitled to retain a minimum earned premium on the policy of ten percent of the gross premium or sixty dollars, whichever is greater.

Insurance Law § 3428 does not distinguish between commercial and personal lines property/casualty insurance policies, and thus, it applies equally to both.

Pursuant to Insurance Law § 3428, an insurer must calculate the return premium for a property/casualty insurance policy cancelled by an insured in a manner consistent with the insurer’s rates and rules filings for the policy. As stated in OGC Opinion No. 07-01-07 (January 26, 2007) for a commercial lines property/casualty policy, an insurer is permitted to file a short-rate table with the Insurance Department for a personal lines property/casualty policy, whereby the costs of writing a policy are amortized through the policy term, and the insurer may charge a larger “penalty” to recoup those costs if the policy is cancelled earlier in the term. Thus, where an insured cancels a personal lines property/casualty insurance policy, the premiums of which are not financed, an insurer may calculate the return premium due the insured on a short rate basis, provided that the calculation of the return premium is consistent with the insurer’s rates and rules filed with the Department, or where no rates and rules have been filed (such as where the insurance is written in the Free Trade Zone (Insurance Law § 6301), the unearned premium should be calculated based on the policy’s provisions. However, as with a commercial lines property/casualty policy, when personal lines insurance policies are financed under premium finance agreements by banks, lending institutions, finance companies, or finance agencies, insurers must return unearned premiums on a pro-rata basis – not on a short-rate basis. See N.Y. Ins. Law § 3428(e).

Finally, to the extent that an insurer includes a short-rate penalty in its filing, the insurer must uniformly apply that penalty following any midterm cancellation by an insured. Any deviation from the rate filing, including the waiver of a short-rate cancellation penalty, would be a violation of Insurance Law § 2314, and would constitute an unlawful rebate. See OGC Opinion No. 07-01-07 (January 26, 2007) (waiving a short-rate cancellation penalty constitutes an unlawful rebate).

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