OGC Opinion No. 06-10-07
The Office of General Counsel issued the following opinion on October 25, 2006 representing the position of the New York State Insurance Department.
Re: Amending homeowners' policy to include a windstorm deductible.
Question Presented:
May an excess line insurer unilaterally amend a homeowners insurance policy to include a deductible for windstorm hazard after the policy has been in effect for more than 60 days?
Conclusion:
No. Except as provided in N.Y. Ins. Law § 3425, an insurer, including an excess line insurer, may not cancel or amend the terms of a personal lines insurance policy except under specific circumstances.
Facts:
An insurance agent inquired about a particular homeowners' excess line policy for a beach front property. The homeowners policy is effective from April 3, 2006 to April 3, 2007, and has a $2,500 water damage deductible and a $1,000 deductible for all other perils. On July 10, 2006, the agent received a letter from the insurer that effective immediately a 7.5% windstorm deductible had been added to the policy. The insured received the letter as well. The agent suggested that the insurer may have sent this letter after realizing that the property is located on a beach front. The insured did not consent to the change.
Analysis:
N.Y. Ins. Law § 3425(a) (McKinney's 2006) provides a definition for "personal lines insurance" and states in pertinent part:
(a) This section shall apply to covered policies of insurance as defined in paragraphs one, two and three hereof.
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(2) "Covered policy" also means a contract of insurance, referred to in this section as "personal lines insurance", other than a contract of insurance defined in paragraph one hereof, issued or issued for delivery in this state, on a risk located or resident in this state, insuring any of the following contingencies:
loss of or damage to real property used predominantly for residential purposes and which consists of not more than four dwelling units, other than hotels and motels;
(B) loss of or damage to personal property in which natural persons have an insurable interest, except personal property used in the conduct of a business; and
(C) other liabilities for loss of, damage to, or injury to persons or property, not arising from the conduct of a business, when a natural person is the named insured under the policy.
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(7) With respect to personal lines insurance, "required policy period" means a period of three years from the date as of which a covered policy is first issued or is voluntarily renewed.
A homeowners' insurance policy is a "covered policy" of personal lines insurance within the above definition. Unlike § 3426, which applies to commercial lines insurance, § 3425 does not exempt excess line policies. A homeowners' insurance policy, whether written by an authorized or excess line insurer, is subject to § 3425 if the policy is issued or issued for delivery in New York State (see § 3425(a)(2)(A) above), as is the case with this policy. A personal lines insurance policy may not be cancelled by the insurer and the coverage may not be amended by the insurer within the 3 year required policy period (see § 3425(a)(7) above), except as provided in § 3425.
N.Y. Ins. Law § 3425 states in pertinent part:
(b) During the first sixty days a covered policy is in effect, no notice of cancellation shall be issued or be effective unless it states or is accompanied by a statement of the specific reason or reasons for such cancellation.
(c) After a covered policy has been in effect for sixty days, or upon the effective date if the policy is a renewal, no notice of cancellation shall be issued to become effective unless required pursuant to a program approved by the superintendent as necessary because a continuation of the present premium volume would be hazardous to the interests of policyholders of the insurer, its creditors or the public, or unless it is based on one or more of the following:
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(2) With respect to personal lines insurance policies:
(A) nonpayment of premium, provided, however, that a notice of cancellation on this ground shall inform the insured of the amount due;
(B) conviction of a crime arising out of acts increasing the hazard insured against;
(C) discovery of fraud or material misrepresentation in obtaining the policy or in the presentation of a claim thereunder;
(D) discovery of willful or reckless acts or omissions increasing the hazard insured against;
(E) physical changes in the property insured occurring after issuance or last annual anniversary date of the policy which result 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 voluntarily renewed; or
(F) a determination by the superintendent that the continuation of the policy would violate or would place the insurer in violation of this chapter.
As stated in § 3425(b), during the first 60 days of the policy or the "free look" period, the insurer may cancel the policy for any reason as long as the specific reason is provided. Hence, as a practical matter, if the insured did not agree to the proposed change the insurer could instead cancel the policy outright.
However, once the initial 60 day period expires, absent the consent of the insured, the policy may not be amended or cancelled by the insurer except for the specific reasons contained in § 3425(c)(2) (see above). In the immediate inquiry, none of the above reasons appear to apply. Further, the insured did not consent to allow the insurer to amend the policy. Thus, the policy may not be amended or cancelled mid-term.
Moreover, even if insurer had proper grounds to cancel the policy, the policy may not be cancelled without proper notice to the insured. N.Y. Ins. Law § 3425(d) provides in pertinent part:
(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.
Therefore, in situations where a cancellation by the insurer is permitted, the insurer may instead conditionally continue the policy. The insurer may cancel certain coverage not required by law or increase the premium. In order for the conditional continuation to take effect, the insured must be notified 20 days prior to any such conditional continuation. No such notice was provided here. The policy should remain in effect as it was written before the insurer's amendment.
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.