OGC Op. No. 04-04-06:
The Office of General Counsel issued the following opinion on April 2, 2004, representing the position of the New York State Insurance Department.
Re: Homeowners" Insurance Policy/Changes in Valuation of Property
When is it permissible for an insurer to modify the value assigned to the property insured (change the limits of coverage) under a policy of homeowners" insurance increase?
N.Y. Ins. Law § 3425 establishes requirements regarding certain non-commercial property/casualty insurance policies, including homeowners" insurance, N.Y. Ins. Law § 3425(a)(2)(A) (McKinney Supp. 2004). Section 3425(a)(7) (McKinney Supp. 2004) establishes a required policy period of three years from the date the policy is first issued or is voluntarily renewed. Generally, the insurer may not initiate change in limits or any diminution in coverage during the required policy period. This would prohibit changing the value assigned to the property insured during the required policy period, unless accomplished with the consent of the insured.
An appraisal of the property insured under a homeowners" policy reveals that the actual cash value and/or the cost of replacement is higher than the valuation that was used in calculating the premium on the policy. Under that circumstance, the question being considered is whether the insurer may unilaterally modify the values assigned to the property insured (which will also result in an increase in premium due) at the following times: (1) midterm during an annual policy period; (2) at an annual renewal, which is not the end of a three-year required policy period; or (3) at the conclusion of the three-year required policy period.
Section 3425(a)(7) (McKinney Supp. 2004) establishes, for homeowners" insurance, a required policy period of three years from the date the policy is first issued or is voluntarily renewed. Section 3425(d) (McKinney Supp. 2004) reads as follows:
(1) Unless the insurer, at least forty-five but not more than sixty days in advance of the end of the policy period, 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. This paragraph shall not apply when the named insured, an agent or broker authorized by the named insured, or an insurer of the named insured, has mailed or delivered written notice to the insurer that the policy has been replaced or is no longer desired.
(2) If an insurer has the right to cancel a policy it may, in lieu of cancellation, condition continuation of such policy upon change of limits or elimination of any coverage not required by law, if written notice of such intention is mailed or delivered to the insured at the address shown in the policy at least twenty days prior to the effective date of such action.
(3) At its discretion, the insurer may, in lieu of renewing the policy in the form as last issued, substitute at the annual renewal date another approved policy form which contains at least substantially equivalent value in the aggregate of benefits, as determined by the superintendent. Notice of intention to substitute a different policy form on a renewal shall be made in the same manner as is prescribed in paragraph one of this subsection for a conditioned renewal but with respect to automobile insurance policies shall not be subject to the percentage limitations contained in subsection (f) of this section applicable to a conditioned renewal. Notice of intention to substitute a different policy form shall be accompanied by a full and clear comparison of the differences between the policy form as last issued and the substitute policy form.
Under the foregoing provisions, an insurer may not unilaterally impose any change in limits or diminution of coverage during the required three-year policy period, except in an instance where the insurer has the right to cancel the policy. At the end of the three-year period, the insurer may issue a conditional renewal whereby continued coverage is offered only if the insured accepts a change in limits and/or diminution of coverage.
This letter does not address the subject of "inflation guard" or "guaranteed replacement cost" endorsements to homeowners" policies. As a condition for securing such coverage, an insured may agree to allow changes to the value assigned to the property insured (and corresponding premium increases) during the three-year policy period.
In summary, an insurer generally may not unilaterally change the coverage limits or eliminate or decrease coverage during the three-year required policy period.
For further information you may contact Associate Attorney Sam Wachtel at the New York City Office.