Permits an insurer to rescind or retroactively cancel a policy in circumstance involving an accident staged to defraud an insurer

Summary of provisions

Section 1 adds new section 3455 to the Insurance Law. Subsection A provides insurance companies the ability, within the first sixty days of an automobile, commercial automobile or assigned risk plan policy being issued, to retroactively rescind the policy if the initial premium payment is dishonored due to (1) the nonexistence of a bank account, (2) the unauthorized use of the account, or (3) the unauthorized use of a credit card account.

Subsection B provides that a person injured during this sixty day period and could have recovered under an insurance policy that was cancelled pursuant to subsection (a) may recover under his or her own policy or, if he or she is uninsured, the motor vehicle accident indemnification corporation. Such recovery is available only if the injured party did not participate in any fraudulent activity, such as staging the accident to defraud the insurer. Additionally, the vehicle accident indemnifica- tion corporation may not subrogate its claim against the rescinding insurance company.

Section 2 amends Subsection (d) of section 3420 of the Insurance Law requires insurers that deny a claim for death or bodily injury because the policy was rescinded pursuant to new section 3455 to provide notice of the disclaimer or denial to the claimant under the uninsured motorist endorsement by any occupant of a motor vehicle involved in a staged accident who is without knowledge of the staging or arranging of the staged or arranged accident.

Section 3-Paragraph 1 of subsection (f) of Section 3420 of the insurance law, as amended by chapter 305 of the laws of 1995, is amended to add rescinded policies to the list of scenarios that a driver would be insured against in the event of bodily injury or death.

Section 4-Subparagraph A subsection (f) of section 3420 of the insurance law is amended to deal with supplementary uninsured/underinsured cover- age.

Section 5-Section 5103 of the insurance law is amended to address indi- viduals who are involved in a staged accident without knowledge of the staging or arranging of the staged or arranged accident.

Section 6-subsection (2) of section 5103 of the insurance law is amended to. account for vehicles whose coverage has been rescinded or cancelled.

Section 7-Paragraph (a) of subdivision 1 of section 313 of the vehicle and traffic law is amended to exempt section 3455 of the insurance law from the 20 day mailing notice to cancel an insurance policy.

Section 8-sets forth in the Motor Vehicle Insurance Indemnification Law coverage for innocent victims of staged accidents

Existing law

Currently, automobile insurers are not permitted to retroactively cancel policies for non-payment of premiums.

Justification

Automobile no-fault states have higher average premiums than tort states. One of the reasons for this is that fraud tends to be more prevalent in no-fault systems, as the rules under which they are implemented make it relatively easy for bad actors to submit fraudulent claims. Additionally, an accident can create a multiplicity of lawsuits, since providers and collection attorneys may initiate a lawsuit for each and every bill. New York's generous no-fault benefits, with minimal oversight, provide huge incentives for unbundling of services and supplies.

Staged accidents are one type of fraudulent claim that is becoming more and more prevalent in New York. Staged accidents begin with bad actors procuring an automobile insurance policy with the intent of submitting a fraudulent claim. In many cases, they procure a policy by submitting a bad payment (either using a nonexistent bank account or stolen credit card information). Most states allow the retroactive cancellation of a policy in the case of a reversed payment to prevent this type of activ- ity. New York, however, does not permit retroactive cancellations; rath- er cancellations are currently only prospective in nature. That turns into a gold mine where no-fault is involved. The time between the policy is "purchased" to the time it is cancelled provides ample opportunity for no-fault fraud.

This bill allows for retroactive cancellation in New York of newly issued automobile insurance policies to prevent this type of fraud. This would bring New York in line with the other large no-fault states. In fact, only seven other states (AZ, CO, KS, ME, MD, NC and SD) do not allow for retroactive cancellation. Innocent victims of uninsured driv- ers (i.e. mandatory uninsured motorist coverage), would be covered under their own policy or the Motor Vehicle Accident Indemnification Corpo- ration.

The proposal would allow retroactive cancellation of the automobile policy, in the first thirty days, where the payment is made with insuf- ficient funds or the identity used to procure the policy turns out to be fraudulent. The automobile insures would be allowed to cancel a policy retroactively in these cases.

By permitting retroactive cancellations, New York would join the great majority of other states, and would remove many of the incentives for staged accidents.

Legislative history

2012: S.7746 - Passed Senate

Fiscal implications

None to the State

Effective date

This act shall take effect two hundred seventy days after it shall have become a law.