New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

The Office of General Counsel issued the following informal opinion on August 17, 2001, representing the position of the New York State Insurance Department.

RE: Business Insurance Plan Insurance Dept. Reg. No. 135 (11 NYCRR 153)

Questions Presented:

1) Can members of a voluntary membership association of consulting engineers ("the Association") be offered specific programs of commercial property/casualty insurance coverage(s) including professional liability, workers' compensation, motor vehicle physical damage and commercial property coverage? May any or all of such coverages be offered on a group or other discounted premium basis to Association members?

2) If a member purchases insurance through the Association and subsequently fails to renew its membership, may the member's insurance coverage be cancelled or non-renewed?

Conclusions:

1) Yes, the Association members may be offered the specified insurance coverages, so long as the Association itself does not provide any services that would require licensing by this Department (such as solicitation of insurance, adjusting of claims, etc.) The Association members may purchase insurance under a "safety group" or "mass merchandising" program that may result in a reduction of the premiums they would pay for similar coverages obtained individually. The insurance may not be written on a group basis except with regard to liability coverage, for which the members of the Association may form a "purchasing group" to purchase coverage on a group basis.

2) Under certain circumstances. Cancellation and non-renewal of commercial insurance is governed by the provisions of N.Y. Ins. Law § 3426 (McKinney Supp. 2000). Failure of a group member to renew its membership in the Association would not be a valid basis for midterm cancellation under the statute. An insurer may non-renew a policy at the end of the required policy period in accordance with its underwriting guidelines, so long as it specifies the reason and such reason is not otherwise violative of the law.

Facts:

The Department received an inquiry from a voluntary membership association of consulting engineers ("Association"). Membership is open to all firms that meet the licensing requirements established by New York State. Membership fees vary based upon the characteristics of the member, with larger entities generally paying a higher annual membership fee then smaller ones. Most, if not all, members are for-profit enterprises.

The Association has entered discussions with a licensed insurance broker concerning the possibility of offering Association members specific programs of commercial property/casualty insurance coverage(s) including professional liability, workers' compensation, motor vehicle physical damage and commercial property coverage. The insurance program is to be written and administered through the licensed broker.

Two primary objectives of the Association are (1) to make the premium rates attractive to members, since each member has the option to secure such coverages individually and (2) to make the availability of such coverages a motivation for members to maintain membership in the Association by making continued membership a requirement for continuation of insurance coverage.

Analysis:

Prior to 1986, property/casualty insurance could not permissibly be written in New York on a group basis. New York, responding to a property/casualty insurance availability crisis, passed omnibus legislation (Chapters 220 and 221 of the Laws of 1986.) One of the new sections added to the Insurance Law as part of the omnibus legislation was N.Y. Ins. Law § 3435 (McKinney 2000), which was New York’s first property/casualty group insurance law. However, § 3435 permits group insurance only where the members of the group are public entities or nonprofit organizations. Since most, if not all, of the Association members are for-profit entities, they may not secure coverage under a group insurance policy written pursuant to § 3435.

In response to the liability insurance availability crisis during the 1980s, the federal government enacted the Federal Liability Risk Retention Act of 1986 (LRRA), 15 U.S.C. § 3901-3906 (2001). One of the principal provisions of the LRRA was to permit the purchase of group liability insurance, notwithstanding state laws to the contrary, using a purchasing group as the means. New York recognized purchasing groups when it enacted Article 59 of the New York Insurance Law in 1988 (N.Y. Ins. Law § 5901-5913 (McKinney 2000)), conforming New York law to the LRRA.

In 1989, the New York State Insurance Department promulgated a new Regulation No. 135, N.Y. Comp. Codes R. & Regs. tit.11, § 153 (1989), establishing standards and procedures for property/casualty insurance policies issued in New York on a group basis (pursuant to Ins. Law § 3435 or the LRRA and Ins. Law Art. 59) or on a "quasi group" basis. The regulation states that "'Quasi-group' means any method of marketing individually underwritten and issued property/casualty or liability insurance policies in a group context to participants engaged in similar activities or organized in a common network, through a mass merchandising, safety group or similar program, in connection with state law or a federal purchasing group." N.Y. Comp. Codes R. & Regs. tit. 11, § 153.1(q)(1989).

Accordingly, the three alternatives that may be utilized by members of the Association are: (1) formation of a purchasing group made up of the members of the association that wish to purchase liability insurance; (2) development of a mass merchandising program offering insurance to association members; or (3) formation of a safety group consisting of members of the association. Each option must be considered separately.

Purchasing Groups

N.Y. Ins. Law § 5902(m) (McKinney 2000), defines a purchasing group as follows:

(m) "Purchasing group" means any group formed pursuant to the federal liability risk retention act of 1986 which:

(1) has as one of its purposes the purchase of liability insurance on a group basis;

(2) purchases such insurance only for its group members and only to cover their similar or related liability exposure, as described in paragraph three of this subsection;

(3) is composed of members whose businesses or activities are similar or related with respect to the liability to which members are exposed by virtue of any related, similar, or common business, trade, product, services, premises, or operations; and

(4) is domiciled in any state.

The LRRA applies only to insurance for liability, as that term is defined in 15 U.S.C. § 3901. Section 3901(a)(2)(B) specifically provides that liability "does not include personal risk liability and an employer's liability with respect to its employees other than legal liability under the Federal Employers' Liability Act (45 U.S.C. 51 et seq.)". The identical provision is contained in New York Insurance Law, which further states, in relevant part, that "'Liability' means legal liability for damages (including costs of defense, legal costs and fees, and other claims expenses) because of injuries to other persons, damage to their property, or other damage or loss to such other persons resulting from or arising out of: (1)(A) any business (whether profit or nonprofit), trade, product, services (including professional services), premises, or operations;. . . ." N.Y. Ins. Law § 5902(h)(2) (McKinney 2000).

Therefore, a purchasing group may purchase professional or other liability coverage. It may not purchase workers' compensation insurance on a group basis, since that is a form of "...employer's liability with respect to its employees. . . ." pursuant to N.Y. Ins. Law § 1113(a)(15) (McKinney 2000), and is specifically excluded from the coverages that may be written for a New York purchasing group pursuant to N.Y. Ins. Law § 5902(h)(2) (McKinney 2000). Nor may it secure "personal risk liability" insurance (which includes motor vehicle physical damage coverage and first party property insurance coverage) for its members since such coverage may not be written for purchasing groups in New York. See N.Y. Ins. Law § 5902(h)(2) and (j)(McKinney 2000).

A purchasing group must file, with the insurance regulator of the state where it intends to do business, a notice of the group's intention to do business in that state. This notice must contain certain information about the purchasing group, including the name and domicile of the insurance company that will provide the insurance coverage. In addition, the purchasing group must register with and designate the state insurance regulator as its agent for the purpose of receiving service of legal documents or process. N.Y. Ins. Law § 5908 (McKinney 2000).

The Insurance Law specifies the range of activities that a purchasing group may lawfully engage in. One authorized purpose is to purchase liability insurance "...only for its group members. . . ." N.Y. Ins. Law § 5902(m)(2) (McKinney 2000). Based upon that provision, a member failing to maintain its membership in the purchasing group would also lose its right to obtain insurance coverage. This result is supported by the fact that the coverage is a form of group insurance rather than individual coverage written for each group member. However, the failure to maintain membership would not constitute a basis for midterm cancellation of coverage. See N.Y. Ins. Law § 3426(c) (McKinney 2000). At the end of the required policy period or policy term (whichever is longer) the policy could be non-renewed by the insurer and the ex-member would not be eligible for continued coverage as part of the group. However, the insurer could offer to provide coverage to the insured outside of the group applying its non-group rating plan.

Mass Merchandising Programs

N.Y. Comp. Codes R. & Regs., tit. 11, § 153.1(j)(1989)(Insurance Department Regulation No. 135) states as follows:

"Mass merchandising" means a method of marketing individually underwritten and issued property/casualty or liability insurance policies to participants that are employees of an employer, or members of an association or organization, that has agreed to promote or otherwise facilitate such coverage from an insurer to such participants, with reasonably anticipated economies of acquisition or administration.

Members of the Association could secure insurance coverage for professional liability, workers' compensation, motor vehicle physical damage and commercial property coverage through an approved mass merchandising program, since all are forms of property/casualty insurance. The insurer agreeing to underwrite such a program would need to submit a filing to the Department justifying the rate structure for each coverage, including the economies of acquisition or administration.

The failure to maintain membership in the Association would not constitute a ground for midterm cancellation of coverage. See N.Y. Ins. Law § 3426(c) (McKinney 2000). At the end of the policy term the insurer could, but would not be required to, offer continued coverage. However, since the ex-Association member would lose the benefit of any economies of acquisition or administration, the insurer would have to apply the rating plan applicable to its non mass merchandising customers.

Safety Group Programs

N.Y. Comp. Codes R. & Regs., tit. 11, § 153.1(r)(1989) (Insurance Department Regulation No. 135) states as follows:

"Safety group" means a method of marketing individually underwritten and issued property/casualty or liability insurance policies to participants engaged in similar activities giving rise to similar risks, placing special emphasis on common safety controls and risk management measures among such participants to reduce such risks.

Members of the Association could secure insurance coverage for professional liability, workers' compensation, motor vehicle physical damage and commercial property coverage through an approved safety group program, since all are forms of property/casualty insurance. The insurer agreeing to underwrite such a program would have to submit a filing to the Department justifying the rate structure, including the common safety controls and risk management measures among such participants that are intended to reduce risk exposure.

The failure to maintain membership in the Association would not constitute a ground for midterm cancellation of coverage. See N.Y. Ins. Law § 3426(c) (McKinney 2000). At the end of the policy term the insurer could, but would not be required to, offer continued coverage. If it were established that membership in the Association was essential to maintaining the benefit of the safety controls and risk management measures intended to reduce risk exposure then the insurer would have to apply the rating plan applicable to its non safety group customers.

For further information you may contact Associate Attorney Sam Wachtel at the New York City Office.