DFS-35-12-00003-P Unfair Claims Settlement Practices and Claim Cost Control Measures

8/29/12 N.Y. St. Reg. DFS-35-12-00003-P

NEW YORK STATE REGISTER

VOLUME XXXIV, ISSUE 35

August 29, 2012

RULE MAKING ACTIVITIES

DEPARTMENT OF FINANCIAL SERVICES

PROPOSED RULE MAKING

NO HEARING(S) SCHEDULED

 

I.D No. DFS-35-12-00003-P

Unfair Claims Settlement Practices and Claim Cost Control Measures

PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following proposed rule:

Proposed Action:

Amendment of Part 216 (Regulation 64) of Title 11 NYCRR.

Statutory authority:

Financial Services Law, sections 202 and 302; and Insurance Law, sections 301 and 2601

Subject:

Unfair claims settlement practices and claim cost control measures.

Purpose:

To require at a minimum the inclusion, and prohibition, of certain provisions contained in a claims release.

Text of proposed rule:

Subdivision 216.6(g) is hereby amended to read as follows:

(g) [Checks] Check, [or drafts] draft, other payment medium or device, or use of electronic transfer in payment of claims; releases.

(1) For the purpose of this subdivision, release shall mean a written document whereby a person or entity relinquishes rights and discharges an insured and/or insurer from obligations in exchange for settlement of a claim.

(2) [No] An insurer shall not:

(i) issue a check, [or] draft, or other payment medium or device or make an electronic transfer in payment of a [first-party] claim or any element thereof, arising under any policy subject to this Part, that contains any language or provision that expressly or impliedly states that acceptance of such check, [or] draft, other payment medium or device, or electronic transfer shall constitute a final settlement or release of any or all future obligations arising out of the loss[.]; or

[No insurer shall] (ii) require execution of a release on a [first- or third-party] claim that:

(a) is broader than the scope of the settlement[.];

(b) unreasonably restricts the ability of the releasor to:

(1) discuss the terms and conditions of the settlement, provided, however, that the insurer shall not in any case prohibit the releasor from discussing the terms and conditions of the settlement with:

(i) the releasor's attorney, accountant, or financial advisor or planner;

(ii) any of the releasor's family members;

(iii) any court of law; or

(iv) any local, state, or federal agency; and

(2) make statements about the insurer, provided, however, that nothing herein shall prevent an insurer from requiring the execution of a release that prohibits the releasor from making false statements about the insurer.

(3) In addition to the prohibition set forth in paragraph (2) of this subdivision, with respect to any policy issued pursuant to Insurance Law § 1113(a)(4) through (14); (16); (19); or (20), with regard to inland marine insurance subject to the provisions of section 3425 of the Insurance Law; or (32) as a substantially similar kind of such insurance:

(i) an insurer shall not require execution of a release for any claim arising under the policy, unless the release sets forth:

(a) where the claim arises under a liability insurance policy, whether the claim is a property damage claim or a bodily injury liability claim;

(b) the nature of the occurrence from which the claim arises;

(c) the date and location of the occurrence from which the claim arises;

(d) the total amount of actual damages, except where the claim arises under a liability insurance policy; and

(e) where the claim arises under a motor vehicle liability insurance policy, the dollar or percentage reduction in damages as a result of an agreement between the parties or as a result of comparative negligence, where ascertainable; and

(ii) an insurer shall use separate releases for the property damage claim and the bodily injury liability claim for settlements that involve both property damage and bodily injury liability claims arising under a liability insurance policy.

(a) A release for a bodily injury liability claim shall state in its heading in bolded capital letters that the release is only for the bodily injury liability claim.

(b) A release for a property damage claim shall state in its heading in bolded capital letters that the release is only for the property damage claim.

(4) With regard to a motor vehicle property damage claim arising under a motor vehicle liability insurance policy, if an insurer requires execution of a release, then the insurer shall use the prescribed model "Release of Motor Vehicle Property Damage Liability Claim Only" form contained in section 216.12 of this Part, or a form that contains substantially equivalent language.

(5) An insurer shall not be subject to paragraphs (2)(ii)(b), (3), and (4) of this subdivision provided that the claimant is a large commercial claimant and the claimant agrees in writing that the insurer shall not be subject to such paragraphs. The insurer shall maintain a copy of the claimant's written agreement in the claim file. For the purpose of this subdivision, large commercial claimant means an entity that:

(i) has a net worth of at least ten million dollars, as determined by an independent certified public accountant, as of the claimant's fiscal year end immediately preceding the claim;

(ii) has gross assets exceeding thirty-three million dollars and a net worth of at least two million dollars, as determined by an independent certified public accountant, as of the claimant's fiscal year end immediately preceding the claim;

(iii) is a for-profit business entity that generates annual gross revenues exceeding thirty-three million dollars, and has a net worth of at least two million dollars, as determined by an independent certified public accountant, as of the claimant's fiscal year end immediately preceding the claim;

(iv) is a for-profit business entity that has gross assets exceeding thirty-three million dollars and generates annual gross revenues exceeding thirty-three million dollars as determined by an independent certified public accountant, as of the claimant's fiscal year end immediately preceding the claim; or

(v) is a not-for-profit organization or public entity with an annual budget exceeding thirty-three million dollars for each of its three fiscal years immediately preceding the claim.

(6) Nothing in this subdivision shall be construed as requiring an insurer to use a release.

(7) This subdivision shall not apply to any court-ordered settlement.

Section 216.12 is hereby amended by adding a new model "Release of Motor Vehicle Property Damage Liability Claim Only" form to read as follows:

RELEASE OF MOTOR VEHICLE PROPERTY DAMAGE LIABILITY CLAIM ONLY

Claim #

For and in consideration of the sum of $, which represents the total known property damages asserted reduced by , the undersigned hereby releases and forever discharges: % or $ ,

(NAME OF INSURER AND/OR INSURED)

his/her/its/their employees, agents, successors, heirs, executors, administrators, representatives, and assigns from all claims, demands, actions, causes of action, damages, and costs on account of any and all known property damage, including loss of use thereof, resulting from a motor vehicle accident that occurred on or about:

(DATE AND LOCATION OF ACCIDENT)

The above sum shall be distributed as follows:

Payable to:

Transmitted to:

It is understood and agreed that this settlement is the compromise of a disputed claim or matter, and that the payment is not to be construed as an admission of liability by the party or parties hereby released or for whose favor this release is given.

The undersigned declares and represents that no promise, inducement, or agreement not herein expressed has been made to the undersigned; that this release contains the entire agreement between the parties hereto; and that the terms of this release are contractual and not a mere recital.

The undersigned further agrees, acknowledges, represents, and warrants that the undersigned is the sole and lawful owner of all rights and title to, and all interests in, every claim or matter herein released, and has not assigned, transferred, or purported or attempted to assign or transfer to any person, firm, or entity any claim or other matter herein released, and that the undersigned shall not file, cause to be filed, or assist in the preparation or filing of any action or claim herein released.

Any person who knowingly and with intent to defraud any insurance company or other person files an application for commercial insurance or a statement of claim for any commercial or personal insurance benefits containing any materially false information, or conceals for the purpose of misleading, information concerning any fact material thereto, and any person who, in connection with such application or claim, knowingly makes or knowingly assists, abets, solicits or conspires with another to make a false report of the theft, destruction, damage or conversion of any motor vehicle to a law enforcement agency, the department of motor vehicles or an insurance company commits a fraudulent insurance act, which is a crime, and shall also be subject to a civil penalty not to exceed five thousand dollars and the value of the subject motor vehicle or stated claim for each violation.

I certify under penalty of perjury that the signature below is my signature.

(CLAIMANT) (DATE)

Text of proposed rule and any required statements and analyses may be obtained from:

David Neustadt, New York State Department of Financial Services, One State Street, New York, NY 10004-1511, [phone], email: [e-mail]

Data, views or arguments may be submitted to:

Joana Lucashuk, New York State Department of Financial Services, 25 Beaver Street, New York, NY 10004, [phone], email: [e-mail]

Public comment will be received until:

45 days after publication of this notice.

Regulatory Impact Statement

1. Statutory authority: Financial Services Law §§ 202 and 302 and Insurance Law §§ 301 and 2601.

Financial Services Law § 202 establishes the office of the Superintendent of Financial Services ("Superintendent").

Financial Services Law § 302 and Insurance Law § 301, in material part, authorize the Superintendent to effectuate any power accorded to the Superintendent by the Financial Services Law, Insurance Law, or any other law, and prescribe regulations interpreting the Insurance Law.

Insurance Law § 2601 prohibits an insurer from engaging in unfair claims practices, including knowingly misrepresenting pertinent facts or policy provisions; failing to acknowledge with reasonable promptness pertinent communications as to claims; failing to adopt and implement reasonable standards for the prompt investigation of claims; not attempting in good faith to effectuate prompt, fair, and equitable claim settlements submitted in which liability has become reasonably clear; and compelling policyholders to institute suits to recover amounts due by offering substantially less than the amounts ultimately recovered in suits brought by the policyholders.

In order to protect insurance claimants, the proposed amendment exercises the Superintendent's broad authority under Financial Services Law § 302 and Insurance Law §§ 301 and 2601 by setting forth minimum provisions that an insurer must include in a release if the insurer requires the execution of a release, and prohibiting certain other provisions in such a release.

2. Legislative objectives: Insurance Law § 2601 requires insurers to effectuate prompt, fair, and equitable claim settlements. Insurers must use releases in a manner that is fair and equitable to all parties, including third-party claimants. Further, Financial Services Law § 302 and Insurance Law § 301 authorize the Superintendent to prescribe regulations interpreting the Insurance Law, and to effectuate any power granted to the Superintendent under the Insurance Law to prescribe forms or otherwise make regulations.

3. Needs and benefits: Insurers often require a third-party claimant to execute a general release in exchange for settling the claim.¹ However, insurers frequently do not tailor these releases to the specific claim and often use one generic release for different types of claims. The generic language of releases often makes it difficult to ascertain exactly what the parties are settling, how the insurer has calculated the settlement amount, and what the settlement amount represents. As a result, releasors often execute releases that go far beyond the scope of the proposed claim settlement.

Pursuant to 11 NYCRR § 216.2, § 216.6(g) applies to all insurers authorized to do business in New York, provided, however, that § 216.6(g) does not apply to workers' compensation insurance; credit insurance; title insurance; inland marine insurance, unless the insurance is subject to Insurance Law § 3425; and ocean marine insurance. Note that § 216.6(g) does not apply to self-insured entities, such as local governments.

Therefore, the purpose of this amendment is to provide clarity regarding the scope of releases to: provide a level playing field for all authorized insurers; allow the Department of Financial Services ("Department") to more easily enforce this section; and ensure that releases are narrowly tailored to the claim being settled and are easy for all parties to understand.

4. Costs: This rule does not impose compliance costs on state or local governments. The Department does not anticipate that it will incur additional costs; there may be a cost savings due to a reduced number of complaints received by the Department.

The costs to authorized insurers should be negligible. Insurers already have release templates, which they will only need to alter to comport with the draft amendment.

In addition, while an insurer may need to draft two separate releases when a settlement involves both property damage and bodily injury liability claims, the cost to do so should be negligible, as many insurers already use separate releases for property damage and bodily injury liability claims.

5. Local government mandates: This rule does not impose any program, service, duty, or responsibility upon any county, city, town, village, school district, fire district, or other special district.

6. Paperwork: For settlements that involve both property damage and bodily injury liability claims, the draft amendment requires an insurer to use separate releases for the property damage claim and the bodily injury liability claim. As a result, there may be more paperwork in such situations, because an insurer must draft two releases instead of one, but the impact on the insurer and additional paperwork obligation would be minimal.

7. Duplication: This amendment will not duplicate, overlap, or conflict with any existing state or federal rule or other legal requirement.

8. Alternatives: The Department received comments on a September 2009 draft of the rule from a state agency, three insurance trade associations, and three insurers. A trade association and an insurer questioned the rationale of applying the draft amendment to claims where counsel represents the claimant. The Department added a carve-out for a "large commercial claimant," but does not think a carve-out would be appropriate for non-commercial claimants or small commercial claimants.

A trade association commented that the amendment, which would prohibit an insurer from issuing a check or draft in payment of any settlement where the check or draft contains language that acceptance constitutes a final settlement or release, is too restrictive and will result in fewer settlements. Another trade association remarked that requiring a separate release to be signed would add administrative costs. The Department met with stakeholders of a trade association to discuss their concerns. The Department offered an alternative whereby the insurer could issue a check or draft that contains such language, but the insurer would need to send along with the check a document that complies with section 216.6(g). The Department was advised that the alternative was not feasible. Therefore, the Department did not make any changes.

In April 2010, the Department posted a revised version of the rule on its website and received comments from three insurance trade associations and four insurers. A trade association and an insurer expressed concern about the prohibition against requiring the releasor to keep the terms and conditions of the settlement confidential. The proposed rule has been revised to allow an insurer to require the execution of a release provided that it does not unreasonably restrict the ability of the releasor to discuss the terms and conditions of the settlement. Moreover, the insurer may not prohibit the releasor from discussing the terms and conditions of the settlement with certain persons, such as the releasor's attorney, accountant, or financial advisor or planner.

A trade association also expressed concern with the prohibition against the execution of a release that prohibits the releasor from making disparaging, negative, denigrating, or derogatory statements about the releasee, asserting that an insurer should not be put in a position of offering a fair settlement to a complainant, only to face disparaging remarks or have complainant's counsel recruit other policyholders to pursue similar complaints. The Department revised this section to state that an insurer shall not require execution of a release that unreasonably restricts the ability of the releasor to make statements about the insurer, provided that nothing therein would prevent the insurer from requiring the execution of a release that prohibits the releaser from making false statements about the insurer.

9. Federal standards: There are no minimum standards of the federal government for the same or similar subject areas.

10. Compliance schedule: Insurers will be required to comply with the new requirements no later than 90 days after publication of the Notice of Adoption in the State Register.

¹ With regard to first-party claims, an insurer typically requires an insured to fill out a proof-of-loss, rather than requiring the insured to execute a release.

Regulatory Flexibility Analysis

1. Small businesses: The Department of Financial Services finds that this amendment will not impose any adverse economic impact on small businesses and will not impose any reporting, recordkeeping or other compliance requirements on small businesses. The basis for this finding is that this amendment is directed at insurers licensed to do business in this State, none of which falls within the definition of "small business" as found in section 102(8) of the State Administrative Procedure Act. The Department bases this conclusion on its review of Reports on Examination and Annual Statements filed by authorized insurers, which shows that none of them constitutes a "small business", because none are both independently owned and have under one hundred employees.

2. Local governments: The amendment does not impose reporting, recordkeeping, or other compliance requirements on local governments.

Rural Area Flexibility Analysis

1. Types and Estimated Number of Rural Areas: Authorized insurers do business in every county in the State, including rural areas as defined under State Administrative Procedure Act § 102(13). Some of the home offices of these insurers lie within these rural areas.

2. Reporting, Recordkeeping, and Other Compliance Requirements and Professional Services: Authorized insurers already require the execution of releases for the settlement of third-party claims in many instances. However, for settlements that involve both property damage and bodily injury liability claims, the proposed amendment requires an insurer to use a separate release for both the property damage claim and the bodily injury liability claim. As a result, there may be more paperwork in such situations, because an insurer must draft two releases instead of one.

3. Costs: The costs to authorized insurers should be negligible. Insurers already have release templates, which an insurer will only need to alter to comport with the proposed amendment. Further, with regard to third-party motor vehicle property damage claims, Office of General Counsel ("OGC") Opinion 08-07-01 (July 1, 2008) and OGC Opinion 07-10-02 (October 10, 2007) interpreted the current language set forth in 11 NYCRR § 216.6(g) to prohibit a release from releasing an insurer from all unexpected, unknown, and/or unanticipated property damage claims. Therefore, insurers already should be complying in part with the proposed amendment.

In addition, while an insurer may need to draft two separate releases when a settlement involves both property damage and bodily injury liability claims, the cost to do so should be negligible.

4. Minimizing Adverse Impact: This amendment applies to authorized insurers that issue certain types of policies or contracts. The same requirements that will apply to non-rural entities will apply to rural area entities. Therefore, the amendment does not impose any adverse impact on rural areas.

5. Rural Area Participation: This notice is intended to provide small businesses, local governments and public and private entities in rural and non-rural areas with the opportunity to participate in the rule making process. Interested parties will have the opportunity to comment once the proposal is published in the State Register.

Job Impact Statement

This proposed amendment should not adversely impact jobs or employment opportunities in New York State. It is likely to have no impact whatsoever, since the proposed change merely clarifies the Department's current interpretation of the existing regulation.