OGC Op. No. 10-11-05
The Office of General Counsel issued the following opinion on November 18, 2010 representing the position of the New York State Insurance Department.
Re: Personal Lines Policy: Calculation of Return Premium on a Short-Rate Basis
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?
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.
The inquiry is of a general nature, without reference to specific facts.
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
N.Y. Ins. Law
(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.
(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.
Pursuant to Insurance Law
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
For further information you may contact Senior Attorney Brenda M. Gibbs at the Albany Office.