New York Issues First-in-Nation Regulation on Commercial Crime Insurance

New York State’s Department of Financial Services (DFS) in December issued a new regulation that prohibits insurance companies from denying commercial crime insurance coverage to New York businesses employing people with criminal convictions.

The regulation, called Insurance Regulation 209, serves as the first of its kind in the U.S. and is set to take effect on July 1, 2017, with respect to all insurance policies issued, renewed or delivered in New York state on or after that date.

Its aim is to make it easier for businesses across New York state to hire formerly incarcerated employees, as well as help those businesses obtain coverage for any loss caused by an employee with a criminal record.

Some in the industry have applauded these efforts as a step forward.

“We support Governor Cuomo’s efforts to provide employers with commercial crime insurance that does not exclude coverage for individuals on the basis of their past criminal records,” Andrew Potash, chairman of Distinguished and a board member of The Osborne Association, said in a press release issued by the New York State DFS.

John S. Kiernan, president of the New York City Bar Association, added in the release that the new regulation is also consistent with the state’s public policy and efforts to support its communities.

“It will eliminate the catch-22 currently faced by employers trying to comply with state law but also to obtain the insurance they need to protect their businesses,” he said.

Paul King, senior vice president, national MPS director and cyber practice leader at USI Insurance Services added that increased premium levels in a historically depressed crime market could be one benefit seen from the new regulation.

Other potential benefits include justification for increased deductibles and self-insured retentions due to increased risk, as well as New York insureds having to implement better processes and controls due to increased risk of loss, he added.

Challenges for Insurers

That said, others in the insurance industry are not as optimistic, expressing concerns about increased losses for insurers and difficulty for underwriters due to the new regulation.

“I don’t see much in the way of benefits,” said Tim Dodge, assistant vice-president of research at the Independent Insurance Agents & Brokers of New York Inc. “It’s pretty clear from the comments that [the industry has] misgivings about this.”

One big challenge insurers see with the new rule is that they will now have to provide coverage in situations where an employee with a past felony record steals from his employer, Dodge explained. Underwriters will have to evaluate these employees when deciding whether or not to offer crime insurance to a given employer.

“They will have to weigh factors such as the seriousness of the prior offense, how long ago it happened, signs of rehabilitation or recidivism and job duties,” he said. “These are evaluations they don’t currently have to make. So the challenge for insurers will be complying with the regulation while still underwriting the risks in ways that will be profitable.”

Increased losses on crime policies in aggregate dollars, percentage of book or both are an anticipated challenge at the top of many insurers’ minds, King said.

“Insureds are likely correct in thinking it could give rise to increases in premium or deductibles,” he said. “For brokers and insurers alike, making sure clients/insureds do not run afoul of regulatory issues will increase workload, etc. There are other lines of cover that must be considered beyond just crime coverage – EPL insurance, contractual/MSA impact, etc. These will all need to be considered in light of this new law.”

Insurers have until next summer to file new policy forms that comply with the regulation, Dodge said. They will then phase in the new forms as individual accounts are newly written or renew through the second half of the year.

“While it’s possible that underwriters may become more cautious about offering crime insurance, and they may start charging higher premiums, I do not foresee this change causing them to make the coverage less available,” he added.

Background on the Regulation

According to the press release issued by the New York State DFS, 2.3 million people in New York have a criminal conviction on their record.

This new regulation will ensure employers can obtain this coverage after considering a set of eight factors outlined in New York State’s Correction Law that oversee the hiring of employees with criminal convictions.

“This first-in-the-nation action will further break down artificial barriers that prevent previously incarcerated New Yorkers from obtaining work and turning their lives around,” New York Gov. Andrew Cuomo said in the release.

This move comes as commercial crime insurance policies in New York are often found to have provisions excluding 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, according to the regulation.

“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,” the regulation states.

What Happens Next?

Going forward, insurance application forms will need to be changed to address this new regulation, most likely via endorsement for New York insureds until the carveback becomes standardized, King said.

Because the New York State DFS adopted this regulation due to obligations employers have under New York State’s Correction Law, if other states have similar requirements in their laws, they could be seen adopting this regulation as well, Dodge said.

“New York, like California, Illinois, Delaware and a few other states often sets the tone for development of regulation and law,” said King.

Topics Carriers New York Fraud Legislation Commercial Lines