OGC Opinion No. 08-06-06
The Office of General Counsel issued the following opinion on June 10, 2008 representing the position of the New York State Insurance Department.
RE: Application of New York Insurance Law § 3425(f) and (o) to a Run-Off Company
Question Presented:
Does the Superintendent of Insurance have the authority to permit an insurer in the latter stages of a run-off to effect a phased non-renewal of its remaining New York private passenger automobile policies in excess of the otherwise applicable annual two-percent limit established by law?
Conclusion:
No. The Superintendent does not have the authority to permit an insurer in the latter stages of a run-off to effect a phased non-renewal of its remaining New York private passenger automobile policies in excess of the otherwise applicable annual two-percent limit unless, pursuant to N.Y. Ins. Law § 3425(c) (McKinney Supp. 2008), the Superintendent determines that continuation of the insurer’s business will be hazardous to the interests of the public or the insurer’s policyholders or creditors, or the insurer relinquishes its relevant licenses pursuant to Insurance Law § 1105.
Facts:
The XYZ Insurance Company (the “Company”) is in a state of wind-down, and is executing a run-off plan approved by the New Jersey Department of Business and Insurance (its domiciliary regulator). At present the largest group of in-force policies remaining are 1,000 New York automobile policies written between September 1, 1999 and October 1, 2000. During that period more than 60,000 such policies were written, so that at present, only two percent of those original policies remains.
The Company is obligated to pay a policy administration fee linked to the number of policies administered, subject to a minimum fee should the number of policies fall below a certain level. At present, the number of Company policies is below this level and the Company is paying the minimum fee of $30,000 monthly.
The Company is concerned that the small number of remaining policies are disproportionately expensive to administer, and that strict application of the Insurance Law’s nonrenewal rule1 would require the Company to maintain and administer an ever smaller number of policies for an inordinately long period of time2 and at proportionately greater expense every year.
Analysis:
The inquiry implicates the Insurance Law § 3425, which reads in relevant part as follows:
(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 …
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(f) (1) With respect to automobile insurance policies, the total number (rounded to the nearest whole number) of notices of intention not to renew a covered policy, and of notices to condition renewal upon reduction of limits or elimination of any coverages, which an insurer may issue shall be limited for each calendar year to two percent of the total number of covered policies of the insurer in force at last year end in each such insurer’s rating territory in use in this state which have completed their required policy period under this section. However, the insurer may non-renew or conditionally renew one policy in any such insurer’s rating territory in use in this state, if the applicable percentage limitation results in less than one policy.
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(o)(1) An insurer that intends to materially reduce its volume of policies written, covered by this section, shall submit to the superintendent, at least thirty days in advance of implementing such actions, a plan for orderly reduction that: (i) describes the contemplated actions; (ii) sets forth the reasons for such actions; (iii) describes the measures such insurer intends to take in order to minimize market disruption; and (iv) provide such other information as the superintendent may require.
Insurance Law § 3425(f), which limits nonrenewals in any geographic territory to two percent each year, provides for some degree of policyholder protection. According to the Governor’s Approval Memorandum to L. 1979, Ch. 690, 1979 McKinney’s Session Laws 1825-1826, the Legislature’s purpose behind the nonrenewal limit is to prevent insurers from avoiding certain areas of the state:
Some automobile insurers have refused to issue or renew private passenger automobile insurance based upon the geographical location of the risk. In addition, they have terminated or not renewed the contracts of automobile insurance agents or brokers who have written private passenger auto insurance in certain geographical locations or whose offices are located within such locations. These practices are undesirable and create a selectivity of market which forecloses many of our citizens from obtaining private passenger insurance coverage.
This bill adds new provisions to the Insurance Law which will prohibit insurers from terminating or non-renewing private passenger car insurance policies and the contracts of those who write such insurance when such action is based on geographical location.
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These provisions should convey a clear warning to insurers that New York State will not countenance failure to write automobile insurance based upon geographical location. … In other words, insurers will be obligated to underwrite individual risks, rather than neighborhoods, a most reasonable requirement.
Insurance Law § 3425(o) requires only that the Superintendent receive notice of any proposed material reduction3 in the volume of any insurer’s automobile or personal lines business in New York. That provision was enacted subsequent to Insurance Law § 3425(f) to ensure an orderly reduction and minimize market disruption. See Letter of Superintendent Curiale dated July 13, 1992 to Elizabeth D. Moore, Counsel to the Governor. There is nothing in the legislative history to suggest that Insurance Law § 3425(o) is intended to trump or supersede § 3425(f).
The situation described – an insurer in run-off winding down its operations and not writing any new business, and seeking to nonrenew the small number of its remaining policies as a matter of economic practicality – does not constitute the sort of abusive geographic “redlining” situation that Insurance Law § 3425(f) targets. Nevertheless, the statute does not provide for any “hardship” exceptions – its application is absolute by its terms.
The Department recognizes that application of the two-percent limitation each year could result in the Company potentially being forced to administer a dwindling number of policies for many years and at disproportionately greater expense. However, the Company can hardly claim to have been unaware of the law (enacted in 1992) at the time the Company wrote the policies in question (1999 to 2000). Moreover, the fact that the Legislature, in setting the two-percent limit, also included a nonrenewal minimum of one policy per territory per year demonstrates that the Legislature contemplated precisely the kind of situation presented here. It is no accident that the statute affirmatively requires application of the limitation on nonrenewals even where an insurer’s book of business dwindles precipitously.
Nor is a withdrawal along the lines proposed contemplated by Insurance Law § 3425(o). That section requires only that an insurer intending to reduce its business volume inform the Superintendent in advance before implementing its plan. The statute does not grant the Superintendent any power to prohibit, or even mandate, amendments to the plan. Thus, to interpret Insurance Law § 3205(o) as permitting an insurer to reduce its business volume at a rate that exceeds the limitation prescribed by the two-percent rule of Insurance Law § 3425(f) simply by filing a plan with the Superintendent would render Insurance Law § 3425(f) superfluous. Furthermore, the amendment of Insurance Law § 3425(o) by the addition of paragraph (2) thereto4 does not change this conclusion; the absence of a more comprehensive definition of “material reduction” along the lines of what is provided for homeowners insurance in no way implies that the Legislature intended for Insurance Law § 3425(o)(1) to provide a means to circumvent the two-percent limit.
In short, in the circumstances presented here, the Superintendent does not have discretion to permit the Company to effect a phased non-renewal of its remaining New York private passenger automobile policies in excess of the generally applicable annual two-percent limit.5 That is not to say, however, that the Company lacks other lawful options to address the present situation. The Company could:
1. Increase rates on the policies in question to the point that they are adequate to cover their disproportionately and increasingly burdensome administrative costs;
2. Offer incentives to remaining policyholders to transfer to another insurer; or
3. Surrender the Company’s New York licenses to do business, pursuant to Insurance Law § 1105.6
The very fact that the Company has these options at its disposal refutes any suggestion that the continuation of coverage “forces” the Company into a situation where it experiences a violation of its due process rights.7
The Department acknowledges that the result mandated here by the interplay between Insurance Law §§ 3425(f) and (o) may require the Company to service the few remaining policies for the foreseeable future. But in the absence of a legislative change to the statutory framework, the Company is constrained by the governing law.
For further information you may contact Supervising Attorney Michael Campanelli at the New York City Office.
1 Generally, an insurer may only non-renew two percent of noncommercial motor vehicle insurance policies. Insurance Law § 3425(f)(1).
2 It is noted that in certain territories of New York State, if the rule set forth in Insurance Law § 3425(f)(1) is strictly applied, it will take many decades for the company to run off its policies.
3 The statute provides no definition as to what constitutes a “material reduction” in the case of automobile policies, although 11 NYCRR § 19.1(b) does with regard to homeowners policies. In any event, a total withdrawal from writing new business constitutes a material reduction within the meaning of the governing legal framework.
4 Insurance Law § 3425(o)(2) sets forth the requirements for the submission of a plan to “materially reduce” the number of homeowners policies, and contains much greater specificity than paragraph (1).
5 The inquiry does not address whether continuation would be “hazardous” to policyholders, creditors or the public under Insurance Law § 3425(c). However, the Department interprets that provision to apply only in situations where an insurer can demonstrate that continuation of coverage imperils its very survival. See O.G.C. Memorandum dated February 2, 1981 (M.L. Freedman to First Deputy Gabay). The Company has made no such showing here.
6 In order to secure relief, the Company would have to surrender all licenses needed to write automobile coverage in New York, namely – any licenses issued pursuant to Insurance Law §§ 1113(a)(13), (14), and (19) .
7 Whether Insurance Law § 3425(f) violates the due process rights of the Company (specifically, that application of the statute allegedly would constitute a regulatory “non-per se taking” in violation of the takings clause of the Fifth Amendment) requires an analysis of three factors: (1) the economic impact of the challenged statute on the Company; (2) the extent to which the statute interferes with investment-backed expectations; and (3) the nature of the challenged action. See Vesta Fire Insurance Corporation v. Florida,143 F.3d 1427 (11th Cir. 1998) (concluding that district court improperly granted summary judgment motion dismissing plaintiff insurer’s claim that Florida’s Moratorium Phaseout Statute, a measure enacted to slow the departure of insurers from the Florida market following Hurricane Andrew). The inquiry presents no discussion of these factors, and the Department’s Office of General Counsel questions whether the Company could make the requisite showing.