My Insured Started a New Business Mid-Term. Can the Insurer Exclude It?
[This question came out of the Webinar presentation of my continuing education course, Can They Do That?, on August 17th]
Question from an IIABNY member: “We underwrite a program for forest products businesses, and it is quite limited. Occasionally, one of our sole proprietors will start a sideline business in his name when logging is slow. If the sideline business is not anticipated in the program, an exclusion is added to the policy. The other business is usually covered in the excess line market. The insureds are aware of this, and so far, none of them have had a problem with this process. After listening to your Can They Do That? program, I am wondering if this is okay to do mid-term or if it should be done only at renewal with a conditional renewal notice…”
Answer: New York Insurance Law Section 3426 states that a commercial lines policy:
Shall remain in full force and effect pursuant to the same terms, conditions and rates unless written notice is mailed or delivered by the insurer to the first-named insured, at the address shown on the policy, and to such insured’s authorized agent or broker, indicating the insurer’s intention…not to renew such policy; or…to condition its renewal upon change of limits, change in type of coverage, reduction of coverage, increased deductible or addition of exclusion, or upon increased premiums in excess of ten percent…
If an insurer does not deliver a conditional renewal notice to the insured before the policy expires, it cannot make unilateral mid-term changes to the renewal without the insured’s consent.
Unfortunately, Section 3426 doesn’t address your specific situation. The “no mid-term changes” provision was added to keep insurers from unilaterally deciding halfway through a policy term that they were going to exclude some major operation. Your situation is a little bit different because it’s an operation that the insurer did not contemplate when it wrote the policy. As I mentioned in the webinar, the law does give the insurer the right to cancel for a material change in the nature or extent of the risk. There doesn’t appear to be any New York Insurance Department circulars or advisory legal opinions that touch on a situation where an insurer wants to exclude coverage rather than cancel it.
I would say that, if your insureds do not object to this, the best course may be to continue as you have been. If an insured objects, the insurer has a legal right to cancel the policy, which I doubt is the outcome the insured is looking for. For a more definitive answer, you may want to ask the Office of General Counsel for an opinion (counsel@ins.state.ny.us), but I bet this question will stump them, too.
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