Ask Tim

Can the Mortgage Company Require Full Replacement Cost for Flood?

Question from an IIABNY member: I know that banks cannot require more insurance than the replacement value of a dwelling.  My question is, if a loan is less than the replacement value, can the bank require that the home be insured for full replacement.  I have an account that has flood insurance at $72k while the homeowner’s policy covers it for over $300k.  The loan is for $50k and the bank is requiring that the flood insurance be increased to the $250k maximum available under FEMA.  Can they insist on that?

Answer: The issue is the guidelines the federal government gives to lenders with regard to flood insurance. They encourage lenders to require RC coverage for flood. This document tells lenders that the flood limit must be, but is not limited to, the least of:

• The mortgage balance
• The maximum amount available from the NFIP, or
• The building’s RC.

It goes on to state,

“A sound flood insurance risk management approach follows the insurance industry practice of insuring buildings to full RCV. Such a risk management strategy meets or exceeds the minimal compliance requirements and is the easiest approach for lenders to implement. Security interests in (special flood hazard areas) should be protected with flood insurance to the full insurable value, to the extent possible under the NFIP.”

Essentially, the lender is just doing what it’s being told, and nothing in New York law prohibits it from requiring the higher limit.

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Can an Insurer Non-Renew a Business That's in Chapter 11 Bankruptcy?

Question from an IIABNY member: We have a situation where one of our insurance companies is non-renewing a commercial middle market client due to bankruptcy / Chapter 11. One of our other carrier reps has informed us that this might be illegal; if the insured is in Chapter 11 bankruptcy and is working with the courts to have it remedied, the Bankruptcy Court can force the insurance company to renew the policy at the same/similar rate. If all the alternatives we were able to find were significantly more expensive (E&S or standard), our insured could claim that the insurance company is preventing them from reorganizing by forcing them to pay the more expensive premium with other carriers. If the insurance company had non-renewed because of the outstanding loss control or because of the significant losses, this may not be the case, but the non-renewal notices were for bankruptcy only. Do you have any information relating to this topic?

Answer: While the U.S. Bankruptcy Code is way outside my area of expertise, I found an article from the July 30, 2009 issue of the Insurance Journal, written by the president of NIP Specialty Brokerage, a wholesaler that has created a special Bankruptcy Facility to help risks in Chapter 11. He wrote in part:

Bankruptcy laws do not prevent an insurer from canceling or refusing to renew. Rather state laws or specific policy cancellation or non-renewal terms control whether the insurer may terminate coverage. Even in states with restrictive cancellation laws, a bankruptcy filing may be considered a material change in hazard, which many states recognize as a legitimate reason for mid-term policy termination with the proper advance notice.

I also found a 2007 New York Insurance Department advisory legal opinion stating that New York law does not prohibit an insurer from non-renewing a policy due to the insured’s bankruptcy.

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Rental Vehicle Coverage for a U-Haul Truck?

Question from an IIABNY member: Does the rental vehicle coverage endorsement (PP 0346 0890) on an insured's personal auto policy extend when renting a moving truck such as a U-haul?  Is there a size limit?

Answer: According to a 1994 Insurance Department advisory legal opinion, this coverage does not apply to a U-Haul. The attorney wrote:

In your letter, you specifically cite the Insurance Department Bulletin for April, 1991, in which an article appeared offering "Some Questions and Answers" about CDW coverage. One question concerned whether an individual, who has (Rental Vehicle Coverage) under his or her auto liability policy, would be covered for the rental of a U-Haul truck used to move belongings to a new apartment. You ask how a U-Haul truck is distinguished from a delivery sedan or panel truck. Simply stated, since the "standard" U-Haul moving truck is not a delivery sedan, panel truck or van, no RVC coverage would be available.

The department did not begin posting opinions to its Web site until 2000, so unfortunately this one is not online.

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What Should Be the Effective Date for a Binder?

Question from an IIABNY member: Can you clear something up for our agency?  If a customer is purchasing a home and needs a binder for closing, do we issue the binder with the closing date as the effective date?  Or do we date it effective the date we send it?  Would you ever back date it without a closing date?

Answer: I look at it this way. A binder is a temporary substitute for the policy (This is from a 1900 New York court decision: “The object of a binder is to provide temporary insurance pending an inquiry by the company as to the character of the risk, or if that be known, during any delay in issuing the policy.")  It’s legally enforceable, like the policy, so if the insured submits a claim under the binder, the insurer is obligated to honor the claim. However, insurance is not enforceable unless the insured has an insurable interest in the property (N.Y. Insurance Law Sect. 3401 states this specifically.) Therefore, a binder that is effective before the closing date is unenforceable until the closing actually occurs. It makes more sense to make the binder effective on the closing date. If the attorneys or the lender postpone the closing, all the insured need do is comply with the cancellation condition in the HO policy (“You may cancel this policy at any time by returning it to us or by letting us know in writing of the date cancellation is to take effect.”) A simple note stating that the insured wishes to cancel the binder flat because the closing date changed should be sufficient.

I expect that an insurer would not be happy about its agent issuing backdated binders. It’s hard to imagine needing to backdate one anyway.  When we bought our houses, the lawyers stopped just short of specifying the font on the binders, let alone letting us close without one.

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Accepted a Gift From an Auto Glass Shop? Get Out Your Checkbook

Twice over the past summer, IIABNY reported that the New York Insurance Department has begun fining agencies for accepting referral gifts from auto glass repair shops, or for improperly supervising employees who accepted them. In the wake of the September disciplinary action report which listed another round of fines for this, the department has gone public. Newspapers and TV stations around the state picked up the story of insurance agents taking "kickbacks" for steering business to glass repair shops.

Now, I have a problem with the word "kickback" being applied to the act of accepting a mall gift card; "kickback" conjurs up images of cash passed in plain paper bags. I don't think a gift card is in the same league. Nevertheless, New York Insurance Law Sect. 322 makes it very clear that accepting any gifts from these shops is illegal; the department's pursuit of agencies that have done it should emphasize the point. While I would like to see the law amended so that it sets a dollar amount below which a gift is acceptable (should an agency be vulnerable to a fine for accepting donuts?), that's not what it says at this time. So, again, for the sake of your agency's balance sheet and its reputation, politely decline any proffered gifts from auto repair shops, and instruct your staffs to do likewise. Unless, that is, you too would like to see your agency's name in an Insurance Department press release.

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Does New York State DBL Cover a Mental Illness?

Question from an IIABNY member: One of my clients has an employee who has missed work due to mental illness. Is this employee eligible for benefits under the New York disability benefits law?

Answer: Article 9 of the New York Workers’ Compensation Law pertains to disability benefits. Sect. 201 states:

As used in this article:…

8. " Injury " and " sickness " mean accidental injury, disease, infection or illness or incapacitation as a result of being an organ donor in a transplant operation.

9. A. " Disability " during employment means the inability of an employee, as a result of injury or sickness not arising out of and in the course of an employment, to perform the regular duties of his employment or the duties of any other employment which his employer may offer him at his regular wages and which his injury or sickness does not prevent him from performing. "Disability" during unemployment means the inability of an employee, as a result of injury or sickness not arising out of and in the course of an employment, to perform the duties of any employment for which he is reasonably qualified by training and experience.

 B. " Disability " also includes disability caused by or in connection with a pregnancy.

Sect. 205 states:

No employee shall be entitled to benefits under this article:

1. For more than twenty-six weeks during a period of fifty-two consecutive calendar weeks or during any one period of disability;

2. For any period of disability during which an employee…with respect to a disability resulting from a condition which may lawfully be treated by a duly registered and licensed psychologist of the state of New York…for any period of such disability during which an employee is neither under the care of a physician…nor a psychologist…and provided such employee shall submit to all physical examinations as required by this chapter…

Based on this, it appears that an employee can receive disability benefits for a condition that may lawfully be treated by a psychologist if the employee is under a psychologist’s care. Interesting question.

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Does My License Apply on Indian Reservations?

One of the great things about this job is that, on a regular basis, I get asked a really interesting question that I never had to think about before. Today's question is one of them; when I think about it, I'm surprised I've never gotten it before.

Question from an IIABNY member: The account I'm working on is located on an Indian reservation in New York. Since reservations are sovereign territories, does my New York State agent's license allow me to write business there?

Answer: I found a 2003 New York Insurance Department opinion that answered the question, "Would a risk located on an Indian reservation physically within New York be considered to be inside New York State?" The questioner pertained to compliance with the laws governing excess lines placements, but I think the principle is the same. The attorney wrote:

The first source for guidance as to whether a risk is considered in or out-of-state is N.Y. State Law §§ 2, 3, 4, 5, 6, and 7,... which establishes the boundaries of New York State. Nothing in the State Law excludes Indian reservations from being included within New York State. Also, Indian reservations are considered municipalities within the state for certain purposes. See N.Y. Exec. Law § 412(4); N.Y. Gen. Mun. Law § 854(3). Moreover, the Indian Law specifically regulates activities pertaining to reservations in New York, which further evinces legislative intent that such reservations are considered within New York.

Accordingly, it is our opinion that the Indian reservation should, for these purposes, be considered an in-state risk...

Based on this, it appears to me that a New York agent's or broker's license gives the holder authority to write business on Indian reservations.

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Order in the Court: Independent Contractor or Employee; You Didn’t Tell Me You Moved

The Ask Tim blog has been on an extended hiatus for some time now. Hopefully, this is the first of many regular posts. If you got out of the habit of checking for new content, I hope you'll start coming back.

New York courts have weighed in on the difference between an independent contractor and an employee and acceptable reasons for late notice of a claim in the first few weeks of October.

• The City of Rome hired Michael Brown “to provide guidance to certain community organizations and to develop and implement various urban renewal initiatives.” When he filed a workers’ compensation claim after suffering an injury at work, the City sought to have his claim denied on the grounds that he was an independent contractor, not an employee. The New York Workers’ Compensation Board ruled in Brown’s favor in late 2007, and last week the state Supreme Court’s Appellate Division, Third Department agreed. Though his contract with the City labeled him as an independent contractor, the court noted that City employees supervised him and required him to work specific hours and attend department meetings; the City had authority to fire him; it provided him with equipment and supplies; and it required him to obtain its prior approval for his expenses. “In our view,” the court said, “these facts constitute substantial evidence supporting the Board’s determination, notwithstanding the presence of evidence that could support a contrary result.”
  
• The second case involved another man named Brown who had a 2002 car accident with Albertano Batista, whose auto insurance was provided by American Transit Insurance Co. (ATIC.) ATIC paid Brown’s property damage claim in early 2003. Days before the three-year statute of limitations for filing an injury claim expired, Brown filed a claim against Batista and sent copies of the suit to ATIC at the address shown on the company’s 2003 correspondence. However, ATIC moved to a new location in late 2003; by the time Brown’s attorney mailed the suit documents, the post office was no longer forwarding mail to the new address. When Batista failed to respond to the suit, a court awarded $81,000 to Brown, who then demanded payment from ATIC. The company promptly denied coverage because the demand for payment was its first notice of the suit, some 21 months after Brown took the action.
  
  Brown sued and lost in trial court, but the Appellate Division’s First Department overturned the verdict, saying that Brown, “demonstrated a valid excuse for forwarding the summons and complaint to ATIC’s former address in that he was never notified of its change of address.” Two members of the five-judge panel disagreed. Associate Justice James M. Catterson wrote, “In my opinion, the majority has placed the burden on the wrong party. There is no legal obligation on ATIC to establish what sufficient efforts it made, if any, to notify a potential plaintiff of a change of address. Certainly, there is no legal authority whatsoever for the majority's demand that ATIC should have sent a specific notification to the counsel of a plaintiff whose property claim had been settled almost a year prior to ATIC's move to a new location…In the absence of any legal authority for such a position, it appears the majority is willing to accept an attorney's lack of diligence in failing to spend three-tenths of a second to verify an address on the Internet as a valid excuse for the failure to satisfy an insurer's notice requirement.”

Thanks once again to Roy Mura for posting about the American Transit case on his Coverage Counsel blog.

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Episode #15 -- 'Can They Do That?'

Autumn is approaching, and you know what that means...my colleagues here at IIABNY headquarters have reached their limit of me and are kicking me out on the road. Starting in Buffalo on Sept. 16, I'll be teaching a continuing education class titled Can They Do That? I gave it that title because it seems to be the underlying question in most of the research queries I get. New York Insurance Law and regulations can be complicated; hopefully, attendees will understand a bit better after three hours of listening to me talk.

Episode 15 of Ask Tim gives a sneak preview of the course. In a few short minutes, I discuss the requirements for cancellation, non-renewal and conditional renewal of commercial lines policies in New York. We even dusted off an old pro-rata wheel for the occasion. Actually, I think someone in the office swiped it from a museum...

Notice: The post-production software fracked out on us, so you'll only get sound from one speaker. We apologize for the problem.

Update: Sound problems have been resolved.

Have follow up questions? Drop 'em in the comments and I'll do my best to give you an intelligent answer.

Download Ask Tim Episode #15 -- 'Can They Do That '

 

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Everyone Who Drives and Owns a Cell Phone Should Watch These Videos

Roy Mura of the Coverage Counsel blog posted the two videos embedded below on his Web site yesterday. Ordinarily, I would simply link to someone else's blog and let the reader make the effort to access the content. However, these videos are too important. Do you drive? Own a cell phone? Both? Do you know and love someone who does both? Make sure you watch these and make sure your friends watch them, too. They drive home the point like nothing I've seen before: It only takes a second to ruin the lives of dozens of people. Please note, the first video is You Tube rated for viewers 18 and older, due to very graphic content. Both videos are heartbreaking.

Let's be careful out there, folks.

Update: YouTube pulled the first video off its site the day after I originally posted this, apparently believing that it is too shocking. It's incredibly shocking and disturbing, and for that reason all drivers should see it. Roy Mura sent me an alternative link which appears to work. I heard from at least one IIABNY member that the second video was also not working. I've updated the code, and it too seems to be working now.

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