The Office of General Counsel issued the following opinion on February 8, 2005, representing the position of the New York State Insurance Department.
Re: Mid-term premium increase/cancellation on commercial insurance policies
Questions Presented:
1. May an insurer double the premium on a commercial general liability policy, businessowners policy, or workers compensation policy because the insured has not permitted the insurer to audit the insureds books and records?
2. May an insurer cancel a commercial general liability policy, businessowners policy, or workers compensation policy mid-term because the insured has not permitted the insurer to audit the insureds books and records?
3. May an insurer cancel a workers compensation policy mid-term because the insured has not permitted the insurer to audit the insureds books and records?
Conclusions:
1. No. N.Y. Comp. Codes R. & Regs. tit. 11, § 161.10(c) (1996) specifically states that if an insured fails to cooperate with the insurer in its attempt to conduct an audit of a policy subject to audit to determine a proper premium, then the insurer shall nonrenew such insured upon completion of the current policy period in accordance with N.Y. Ins. Law § 3426, due to an inability to establish a proper premium for such insured. Doubling the policy premium without an underwriting basis approved by the insurance department would constitute an impermissible deviation from the rate filing.
2. N.Y. Comp. Codes R. & Regs. tit. 11, § 161.10(c) (1996) specifically states that if an insured fails to cooperate with the insurer in its attempt to conduct an audit of a policy subject to audit to determine a proper premium, then the insurer shall nonrenew such insured upon completion of the current policy period in accordance with N.Y. Ins. Law § 3426, due to an inability to establish a proper premium for such insured.
3. Yes, subject to the terms of the actual policy, workers compensation insurance policies are exempted by N.Y. Ins. Law § 3426(l)(2) from the limitations on cancellation imposed by N.Y. Ins. Law § 3426(e) for other commercial insurance policies. N.Y. Workers Comp. Law § 54 permits cancellation upon 30 days notice.
Facts:
The insurer uses audits on three types of policies to determine exposure base for premium: workers compensation, businessowner, and commercial general liability. The exposure base is either sales or payroll, depending on classification. The insurer begins its audit after the conclusion of the policy year.
For those insureds who do not cooperate with an audit, the insurer would like to double the exposure base and change the current term premium to a premium based upon the doubled exposure base.
Analysis:
N.Y. Ins. Law § 2314 (McKinneys 2000) states:
No authorized insurer shall, and no licensed insurance agent, no employee or other representative of an authorized insurer, and no licensed broker shall knowingly, charge or demand a rate or receive a premium which departs from the rates, rating plans, classifications, schedules, rules and standards in effect on behalf of the insurer, or shall issue or make any policy or contract involving a violation thereof.
Generally, this section prohibits an insurer from departing from its rate filings. An insurer may not double a policy premium because of an insureds failure to respond to the insurers request for a premium audit of without a sound underwriting basis approved by the insurance department in the insurers rate filing. This would constitute an impermissible deviation from the rate filing.
N.Y. Comp. Codes R. & Regs. tit. 11, § 161.10 (1996) states:
(a) An audit to determine final premium for policies under which the initial premium is based on an estimate of the insured's exposure base shall be conducted within 180 days after expiration of such policy, and may not be waived except in the following circumstances:
(1) the total annual premium attributable to the auditable exposure base is not reasonably expected to exceed $1,500;
(2) the policy requires notification to the insurer with the specific identification of any additional exposure units for which coverage is requested (i.e., motor vehicles); or
(3) the policy is a commercial umbrella for which the rate or premium is determined by the application of a factor to the rate or premium of an auditable underlying policy.
(b) The insurer shall, as soon as practicable following such audit, refund or credit the insured's account for any return premium due the insured, or bill and make a good faith effort to collect any additional premium due the company, as a result of the audit.
(c) If an insured fails to cooperate with the insurer in its attempt to conduct such audit, including failure to return any questionnaires or self-audit worksheets, the insurer shall nonrenew such insured upon completion of the current policy period, in accordance with the provisions of section 3426 of the Insurance Law, due to the insurer's inability to establish a proper premium for such insured.
With respect to a commercial general liability policy and a businessowners policy, N.Y. Comp. Codes R. & Regs. tit. 11, § 161.10 (1996) addresses situations pertaining to policies subject to audit and specifically directs insurers to nonrenew an insured upon the completion of the current policy period in accordance with N.Y. Ins. Law 3426, in the event that the insured fails to respond to the insurers attempt to audit the insured, due to the insurers inability to establish a proper premium.
One of the primary policy purposes of this regulation was to stabilize the market by preventing large price swings while promoting competition with a flexible rating system. To achieve this goal, the regulation requires cooperation from the insured with premium audits. However, the regulation directs a specific action by the insurer and does not permit an insurer to double premiums or to cancel a policy mid-term.
The insurer asks whether the failure to cooperate with a premium audit qualifies as grounds for mid-term cancellation pursuant to N.Y. Ins. Law § 3426(c)(1)(D), on the basis that the failure to cooperate with the premium audit after renewal constitutes and act or omission, or violation of a policy condition, that substantially and materially increases the hazard insured against, and which occurs subsequent to the inception of the current policy period. The insurer also would like to know whether the failure to cooperate with a premium audit, after renewal, constitutes a material change in the nature of the risk which causes the risk of loss to be substantially and materially increased beyond that contemplated at the time the policy was renewed which would permit mid-term cancellation under N.Y. Ins. Law § 3426(c)(1)(E)
N.Y. Ins. Law § 3426(c) (McKinneys Supp. 2005) states in pertinent part:
(c) After a covered policy has been in effect for sixty days unless cancelled pursuant to subsection (b) of this section, or on or after the effective date if such policy is a renewal, no notice of cancellation shall become effective until fifteen days after written notice is mailed or delivered to the first-named insured and to such insured's authorized agent or broker, and such cancellation is based on one or more of the following:
(1) With respect to covered policies:
* * *
(D) after issuance of the policy or after the last renewal date, discovery of an act or omission, or a violation of any policy condition, that substantially and materially increases the hazard insured against, and which occurred subsequent to inception of the current policy period;
(E) material physical change in the property insured, occurring after issuance or last annual renewal anniversary date of the policy, which results in the property becoming uninsurable in accordance with the insurer's objective, uniformly applied underwriting standards in effect at the time the policy was issued or last renewed; or material change in the nature or extent of the risk, occurring after issuance or last annual renewal anniversary date of the policy, which causes the risk of loss to be substantially and materially increased beyond that contemplated at the time the policy was issued or last renewed;
There is no basis in the hypothetical facts presented that would suggest that failure of the insured to cooperate with a premium audit would constitute an act or omission, or a violation of a policy condition, that substantially and materially increases the hazard insured against under N.Y. Ins. Law § 3426(c)(1)(D). There is also no basis in the hypothetical facts presented that would suggest that failure of the insured to cooperate with a premium audit would constitute a material change in the nature or extent of the risk which causes the risk of loss to be substantially and materially increased beyond that contemplated at the time the policy was renewed that would permit mid-term cancellation under N.Y. Ins. Law § 3426(c)(1)(E).
Since workers compensation policies are exempted by N.Y. Ins. Law § 3426(l)(2) from the limitations on cancellation imposed by N.Y. Ins. Law § 3426(e) for other commercial insurance policies, the preceding analysis regarding mid-term cancellation does not apply to workers compensation policies.
Cancellation of a workers compensation policy in is governed by N.Y. Workers Comp. Law § 54(5) (West, WESTLAW through 1993 legislation).
1. Cancellation and termination of insurance contracts. No contract of insurance issued by an insurance carrier against liability arising under this chapter shall be cancelled within the time limited in such contract for its expiration unless notice is given as required by this section. When cancellation is due to non-payment of premiums such cancellation shall not be effective until at least ten days after a notice of cancellation of such contract, on a date specified in such notice, shall be filed in the office of the chair and also served on the employer. When cancellation is due to any reason other than non-payment of premiums such cancellation shall not be effective until at least thirty days after a notice of cancellation of such contract, on a date specified in such notice, shall be filed in the office of the chair and also served on the employer; provided, however, in either case, that if the employer has secured insurance with another insurance carrier which becomes effective prior to the expiration of the time stated in such notice, the cancellation shall be effective as of the date of such other coverage. No insurer shall refuse to renew any policy insuring against liability arising under this chapter unless at least thirty days prior to its expiration notice of intention not to renew has been filed in the office of the chair and also served on the employer.
2. Such notice shall be served on the employer by delivering it to him, her or it or by sending it by mail, by certified or registered letter, return receipt requested, addressed to the employer at his, her or its last known place of business; provided that, if the employer be a partnership, then such notice may be so given to any of one of the partners, and if the employer be a corporation then the notice may be given to any agent or officer of the corporation upon whom legal process may be served; and further provided that an employer may designate any person or entity at any address to receive such notice including the designation of one person or entity to receive notice on behalf of multiple entities insured under one insurance policy and that service of notice at the address so designated upon the person or entity so designated by delivery or by mail, by certified or registered letter, return receipt requested, shall satisfy the notice requirement of this section.
Subject to the terms of the actual policy, N.Y. Workers Comp. Law § 54 permits mid-term cancellation of workers compensation policies with 30 days notice provided that the insurer complies with the extensively detailed notice procedures required by the statute.
For further information you may contact Special Counsel Athan Shinas at the Albany Office.