Commercial Crime Coverage Exclusions

NY-ADR

12/21/16 N.Y. St. Reg. DFS-41-16-00012-A
NEW YORK STATE REGISTER
VOLUME XXXVIII, ISSUE 51
December 21, 2016
RULE MAKING ACTIVITIES
DEPARTMENT OF FINANCIAL SERVICES
NOTICE OF ADOPTION
 
I.D No. DFS-41-16-00012-A
Filing No. 1112
Filing Date. Dec. 06, 2016
Effective Date. Jul. 01, 2017
Commercial Crime Coverage Exclusions
PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following action:
Action taken:
Addition of Part 76 (Regulation 209) to Title 11 NYCRR.
Statutory authority:
Financial Services Law, sections 202 and 302; Insurance Law, sections 301 and 2307; and arts. 23, 24 and 34
Subject:
Commercial Crime Coverage Exclusions.
Purpose:
To prohibit certain insurance exclusions for loss/damage caused by an employee previously convicted of criminal offense.
Text of final rule:
I, Maria T. Vullo, Superintendent of Financial Services, pursuant to the authority granted by Sections 202 and 302 of the Financial Services Law and Sections 301 and 2307 and Articles 23, 24 and 34 of the Insurance Law, do hereby promulgate Part 76 of Title 11 of the Official Compilation of Codes, Rules and Regulations of the State of New York (Insurance Regulation 209), to take effect on July 1, 2017, with respect to all policies issued, renewed or delivered in this State on or after that date, to read as follows:
PART 76
(INSURANCE REGULATION 209)
COMMERCIAL CRIME COVERAGE EXCLUSIONS
Section 76.0 Preamble and purpose.
(a) Correction Law section 753 states that the public policy of New York, as expressed in Correction Law Article 23-A, is to encourage the licensure and employment of persons previously convicted of one or more criminal offenses. Correction Law section 752 forbids discrimination based upon a conviction for a previous criminal offense unless there is a direct relationship between one or more of the previous offenses and the specific employment sought or held by the individual; or the granting or continuation of employment would involve an unreasonable risk to property or to the safety or welfare of specific individuals or the general public. Correction Law section 753 specifies eight factors, including the public policy of the state, to be considered in making a determination pursuant to section 752.
(b) However, commercial crime insurance policies often have provisions that will exclude coverage for loss or damage caused by an employee who has been convicted of a criminal offense, where the employer knew about the conviction prior to the loss or damage. This puts employers in the untenable position of either not being able to obtain insurance or violating the Correction Law by not hiring the individual, even though a review of the Correction Law factors would weigh in favor of employment. Given the strong public policy of the State, the Superintendent has determined that it would be an unfair method of competition or an unfair or deceptive act and practice in the conduct of the business of insurance in this state for an insurer that writes commercial crime insurance policies in this state to exclude coverage where the employer has weighed the factors set out in Correction Law Article 23-A and made a determination favorable to the employee.
Section 76.1 Definitions.
For purposes of this Part:
(a) Commercial crime coverage means coverage under a policy of commercial risk insurance that provides burglary and theft insurance or fidelity insurance; and
(b) Commercial risk insurance has the meaning ascribed by Insurance Law section 107(a)(47).
Section 76.2 Prior convictions.
No policy issued, renewed or delivered in this state that provides commercial crime coverage may exclude or limit coverage for loss or damage caused by an employee on the basis that the employee was convicted of one or more criminal offenses in this state or any other jurisdiction prior to being employed by the employer, if, after learning about an employee’s past criminal conviction or convictions, the employer made a determination to hire or retain the employee utilizing the factors set out in Correction Law Article 23-A.
Section 76.3 Determined violation.
A contravention of this Part shall be deemed to be an unfair method of competition or an unfair or deceptive act and practice in the conduct of the business of insurance in this state, and shall be deemed to be a trade practice constituting a determined violation, as defined in section 2402(c) of the Insurance Law, in violation of section 2403 of such law.
Final rule as compared with last published rule:
Nonsubstantial changes were made in sections 76.0(a) and 76.2.
Text of rule and any required statements and analyses may be obtained from:
Celeste Koeleveld, NYS Department of Financial Services, One State Street, New York, NY 10004, (212) 709-1640, email: Celeste.Koeleveld@dfs.ny.gov
Revised Regulatory Impact Statement
1. Statutory authority: Sections 202 and 302 of the Financial Services Law and Sections 301 and 2307 and Articles 23, 24 and 34 of the Insurance Law. Financial Services Law Sections 202 and 302 and Insurance Law Section 301 authorize the Superintendent of Financial Services (the “Superintendent”) to prescribe regulations interpreting the provisions of the Insurance Law and to effectuate any power granted to the Superintendent under the Insurance Law.
Insurance Law Section 2307 sets forth the requirement that property/casualty insurance policies shall not be misleading or violative of public policy. Articles 23 (Property/Casualty Insurance Rates) and 34 (Insurance Contracts-Property/Casualty) are the general articles applicable to most property/casualty insurance policies. Article 24 prohibits any insurer from engaging in unfair methods of competition or unfair and deceptive acts or practices.
2. Legislative objectives: Correction Law section 753 states that the public policy of New York, as expressed in Correction Law Article 23 -A, is to encourage the licensure and employment of persons previously convicted of one or more criminal offenses. The law forbids discrimination based upon a conviction for a previous criminal offense unless there is a direct relationship between one or more of the previous offenses and the specific employment sought or held by the individual; or the granting or continuation of employment would involve an unreasonable risk to property or to the safety or welfare of specific individuals or the general public. Section 753 of the Correction Law specifies eight factors, including the public policy of the state, to be considered in making a determination pursuant to section 752.
However, commercial crime insurance policies often have provisions that will exclude coverage for loss or damage caused by an employee who has been convicted of a criminal offense, where the employer knew about the conviction prior to the loss or damage. This puts employers in the untenable position of either not being able to obtain insurance or violating the Correction Law by not hiring the individual, even though a review of the Correction Law factors would weigh in favor of employment. Given the strong public policy of the State, the Superintendent has determined that it would be an unfair method of competition or an unfair or deceptive act and practice in the conduct of the business of insurance in this state for an insurer that writes commercial crime insurance policies in this state to exclude coverage where the employer has weighed the factors and made a determination favorable to the employee.
3. Needs and benefits: This rule will prohibit an insurer that writes a commercial crime insurance policy from excluding coverage for loss or damage caused by an employee on the basis that the employee was convicted of one or more criminal offenses in this state or any other jurisdiction prior to being employed by the employer, provided that, after learning about the employee’s past criminal conviction or convictions, the employer made a determination to hire or retain the employee utilizing the factors set out in Correction Law Article 23-A. This requirement will further the public policy of New York as stated in Correction Law Article 23-A. Because the employer would have to make a determination utilizing the statutory factors, the risk to insurers should be mitigated. The Department is not aware of any data that would indicate that an employee with a criminal history who has undergone a background check consistent with Article 23-A is any more of an insurance risk than an employee without such a criminal history. These factors include the specific duties and responsibilities necessarily related to the employment sought; the bearing, if any, the offense or offenses will have on the person’s ability to perform these duties; the time that has elapsed since the time of the offense; the age of the person at the time of the offense, the seriousness of the offense, information about the person’s rehabilitation and good conduct; and the legitimate interest of the employer in protecting property and safety.
4. Costs: Insurers that write commercial crime insurance will incur some one-time costs to revise their policy forms and, where the forms have to be filed with the Superintendent, to refile those forms with the Superintendent.
This rule does not impose compliance costs on state or local governments. The Department of Financial Services does not anticipate that it will incur additional costs, although there will be an increased number of filings.
5. Local government mandates: This rule does not impose any program, service, duty or responsibility upon a city, town, village, school district or fire district.
6. Paperwork: Insurance companies will have to submit appropriate filings.
7. Duplication: This rule will not duplicate any existing state or federal rule.
8. Alternatives: One alternative would be to continue to allow insurers to exclude the coverage. However, it is unacceptable not to protect employers against losses when they are complying with the strong public policy of the State in hiring individuals who have been convicted of criminal offenses. Another alternative would be simply to prohibit insurers from excluding coverage, regardless of whether the employer considered the Article 23-A factors. However, that would impose a greater risk on insurers than would be necessary to implement the State’s public policy mandate.
9. Federal standards: There are no federal standards.
10. Compliance schedule: The rule would be effective 90 days after publication in the State Register with respect to all policies issued, renewed or delivered in this State on or after that date. This should give insurers sufficient time to revise their policy forms and to make appropriate policy form filings with the Superintendent.
Revised Regulatory Flexibility Analysis
The non-substantive changes made to the proposed rule have no bearing on the last published Regulatory Flexibility Analysis for small businesses and local governments. Therefore, no changes have been made to the RFA.
Revised Rural Area Flexibility Analysis
The non-substantive changes made to the proposed rule have no bearing on the last published Rural Area Flexibility Analysis. Therefore, no changes have been made to the RAFA.
Revised Job Impact Statement
The Department of Financial Services finds that this rule should not have any negative impact on jobs and employment opportunities. The rule simply requires property/casualty insurers that write commercial crime insurance policies to provide coverage for loss or damage caused by an employee on the basis that the employee has been convicted of one or more criminal offenses in this state or any other jurisdiction (prior to being employed by the employer), provided that, after learning about the employee’s past criminal conviction or convictions, the employer made a determination to hire or retain the employee utilizing the factors set out in Correction Law Article 23-A. If anything, the rule may make the policies more desirable to insureds and may increase the likelihood that they would purchase the coverage.
Initial Review of Rule
As a rule that requires a RFA, RAFA or JIS, this rule will be initially reviewed in the calendar year 2019, which is no later than the 3rd year after the year in which this rule is being adopted.
Assessment of Public Comment
The Department of Financial Services (“Department”) received written and oral comments from several associations that represent property/casualty insurers and an organization that describes itself as a “coalition of advocates who work to change laws and policies to ensure that people who have had contact with the criminal justice system have a fair chance to succeed as full community members” (“Coalition”).
Comment
Several insurance association commenters expressed concern that, by prohibiting an exclusion that is typical in the vast majority of commercial crime policies, the proposed regulation would undermine how risk is addressed under a commercial crime policy, and could make commercial crime policies less available or more expensive.
Department’s Response
The Department recognizes these concerns, but no data has been provided to the Department supporting increased risk or increased rates. No documentation has been provided to indicate that convicted persons present a greater risk of loss than those who have not been convicted where a Correction Law Article 23-A analysis has been performed and a determination to hire is made taking the Article 23-A factors into account. If there is any such data, it would appropriately be addressed as part of a rate filing.
Comment
Some insurance association commenters noted that the proposed regulation addresses only the employer’s knowledge of prior convictions, and not fraudulent or dishonest acts that have not led to a criminal conviction.
Department’s Response
The regulation only addresses convictions, in furtherance of the New York public policy set forth in Correction Law Article 23-A. The regulation does not change any current practices where fraudulent or dishonest acts have not led to a criminal conviction.
Comment
Some commenters questioned how an insurer would be able to determine whether the employer has properly engaged in an Article 23-A analysis, and recommended that the insurer be able to review the reasonableness of the employment decision, particularly because it is the insurer who will be bearing the risk of an incorrect determination.
Department’s Response
It would defeat the purpose of the Article 23-A analysis to allow the insurer to second-guess the hiring decision and the insurer may have an incentive to do so in hindsight once a claim has been submitted. Insurers may properly audit employers, however, and require them to maintain adequate records to demonstrate that the employer in fact conducted the full Article 23-A analysis.
Comment
Several insurance association commenters noted that the prohibition should only be applied prospectively.
Department’s Response
As is generally the case for the Department’s regulations regarding policy form requirements, the regulation is prospective and applies only to policies issued, renewed or delivered in New York on and after July 1, 2017. Although the proposal utilized an effective date of 90 days after publication in the State Register, the effective date provision has been extended in order to afford insurers time to make any filings that will be necessitated by this regulation and for the Department to issue any necessary approvals, such as for policy forms.
Comment
One insurance association commenter suggested clarifying the regulation to make clear that the commercial crime exclusion would still apply if the employer was aware of the prior conviction and hired the employee without due consideration of the Article 23-A factors. The coalition suggested language that would clarify that the regulation applies only where the insurer excludes or limits coverage for loss or damage caused by an employee on the basis that the employee was convicted of one or more criminal offenses in this state or any other jurisdiction prior to being employed by the employer.
Department’s Response
The regulation expressly states that the insurer must provide coverage only if the employer made a determination to hire or retain the employee utilizing the factors in Article 23-A. Hence no clarification is necessary. As noted, the insurer will be able to audit the insured to ensure that the determination has in fact been made. The Department has clarified that the regulation applies only where the insurer excluded or limited coverage for loss or damage caused by an employee on the basis that the employee was convicted of one or more criminal offenses in this state or any other jurisdiction prior to being employed by the employer.
Comment
A number of insurance association commenters suggested as an alternative to the regulation the Federal Bonding Program established by the Department of Labor.
Department’s Response
While the federal program is laudable and employers should not be discouraged from using it where appropriate, it is an inadequate alternative to address the Correction Law 23-A situation because it provides only six months of free bonding coverage. Although the employer does have the option of purchasing coverage through the program, there would be an additional cost for obtaining a separate policy.
Comment
One insurance association commenter suggested that the concern this proposed regulation seeks to address can be resolved under current commercial crime insurance policy endorsements that are already available in the marketplace, including riders to the effect that certain prior convictions will not exclude a person from coverage, or that prior dishonesty or fraud will not preclude coverage if the offense amounted to less than a certain dollar threshold or was committed prior to a certain time period. Additional questions can be raised at the time of underwriting with new endorsements tailored to the needs of the employer, and other adjustments like a lower limit or higher deductible.
Comment
While such alternative policy provisions may work in some circumstances and should remain available, the Department does not believe that they are available on a scale sufficient to meet the policy concerns addressed by the regulation.
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