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. New York is among a select group of states that often set the tone for a broader development of regulation and law.

The regulation defines commercial crime coverage as coverage under a policy of commercial risk insurance that provides burglary and theft insurance or fidelity insurance.

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 or damage caused by an employee with a criminal record.

Some in the industry have applauded these efforts as a step forward in ending discrimination and enabling Americans with criminal records to find jobs and integrate back into society.

“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 will not only help to increase employment opportunities for individuals with criminal records, but it 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 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, stating that while there is a lack of enthusiasm from the industry regarding the new regulation, he anticipates it will have minimal impact on the market as crime insurance produces relatively low premium volume compared to other lines of coverage such as liability, property and workers’ compensation.

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. These factors include whether the offense is related to the duties the employee will perform, the time that has passed since the conviction and evidence of good conduct by the applicant.

“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 Governor Andrew Cuomo said in the release. “We are taking one more step to restore fairness and dignity to our society while also increasing public safety by providing opportunity and reducing recidivism.”

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.

Because of this, New York Department of Financial Services Superintendent Maria T. Vullo determined that it would be an unfair method of competition or an unfair or deceptive practice in the insurance industry in New York for an insurer that writes commercial crime insurance policies to exclude coverage where the employer has weighed the factors set out in New York law and decided to hire the employee, according to the regulation.

“It is simply inexcusable for an insurer in New York to exclude a potentially valuable employee from insurance coverage just because he or she has a criminal conviction,” Superintendent Vullo said in the release. “So long as every business owner follows the letter of the law, we should encourage more companies to hire prospective employees rather than punish someone for a mistake in the past.”

How Crime Insurance Works

Crime insurance is often written as part of a package policy that includes liability and property coverages, but it is seldom written by itself, Dodge said.

“Probably the single biggest factor underwriters consider is the controls the employer has in place to prevent or detect crime losses,” Dodge said. “For example, they want to see multiple people involved with bookkeeping, so the person reconciling the books is not the same person who writes the checks. They’re interested in supervision of employees who may have the opportunity to steal money or property. If an employer has a history of past employee dishonesty losses, the underwriter will want to know what the employer is doing differently now to prevent future losses, and a higher deductible than the one the employer requested may be a condition of offering coverage.”

There is typically a standard crime insurance application process that asks questions about background check practices, any known losses caused by employees at current or previous places of employment, what control procedures are in place to ensure dual controls and checks/balances around money. A history of frequent losses and/or inadequate controls in place to prevent losses would most likely cause an underwriter to decline to offer coverage.

“It is not arduous, but it is a standardized process that either results in a quote or request for additional or supplemental information,” King said.

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. For forms that do not exclude insureds who hire employees with past convictions, the changes should be minimal, he added, stating that most crime policies have a prior dishonesty clause stating crime coverage terminates for any employee as soon as the employer becomes aware of any prior dishonest or fraudulent act.

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. “There is no reason other states won’t follow suit, especially in light of New York’s decision and the ability of the plaintiff’s bar to point to that development, specifically in bringing actions against employers in other states.”

The new regulation is the latest recommendation offered by Governor Cuomo’s Council on Community Reentry and Reintegration in support of criminal justice reform.

Beginning last spring, the Governor’s Council engaged in a series of conversations with employers across the state about the challenges and rewards they experienced in hiring people with criminal convictions. The Council heard from business owners repeatedly about not having access to loss or damage insurance coverage for this group of employees.