The office of General Counsel issued the following informal opinion on November 18, 2002, representing the position of the New York State Insurance Department.
Re: Extra-contractual obligations and reinsurance contracts
This responds to your request that the Department reconsider its position regarding the inclusion of a savings clause in a reinsurance agreement that provides coverage for extra contractual obligations insurance, as expressed in a February 26, 2002 opinion of this office as well as in earlier opinions.
Must a New York domestic insurer, which enters into a reinsurance agreement that covers risks located wholly outside New York and who provides coverage to the ceding insurer for its extra contractual obligations (ECO) in connection with such risks, include the following savings clause in the agreement: "In no event shall coverage be provided to the extent that such coverage is not permitted under New York law."
No, if the coverage comes within a kind of insurance that is authorized under N.Y. Ins. Law § 1113 (McKinney 2000 & Supp.), or otherwise under New York law, a domestic insurer is not precluded from providing coverage outside New York that is permissible in the other jurisdiction although the coverage may not be written in New York.
Reinsurers often provide insurance coverage to ceding insurers for their liabilities arising from the handling of any claim by the insurer on the underlying policy, including, but not limited to, liabilities arising from the failure of the insurer to settle claims within the policy limits, and alleged or actual negligence, fraud, or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action. These provisions are known as "extra-contractual obligations" (ECO) coverage.
Pursuant to N.Y. Ins. Law § 1102(b) (McKinney 2000), a New York domestic insurer (including a reinsurer) is prohibited from doing an insurance business outside New York that it is not permitted to do in New York. Accordingly, our prior opinions stated that a domestic reinsurer could not provide coverage for fraud, bad faith and punitive damages, for any risks (whether in New York or outside of New York) as such coverage is against public policy in this State Therefore, domestic reinsurers were required to include the following savings clause in their policies: "In no event shall coverage be provided to the extent that such coverage is not permitted under New York law."
However, foreign insurers authorized in New York are not subject to the prohibitions of § 1102(b). Rather, they are subject to the so-called Appleton Rule, N.Y. Ins. Law § 1106(f) (McKinney 2000), which states that an authorized foreign insurer may not do outside of New York any kind or combination of business that is not permitted to be done in this state by similar domestic insurers hereafter organized, unless, in the judgment of the Superintendent, the doing of such kind or combination of kinds of insurance business would not be prejudicial to the best interests of the people of this State. Therefore, the Department had stated in prior opinions that foreign insurers could enter into reinsurance agreements outside New York that provide ECO coverage if the agreement included the following savings clause:
If any provision of this contract shall be rendered illegal or unenforceable by the laws, regulations or public policy of any state, such provision shall be considered void in such state, but this shall not affect the validity or enforceability of any other provision of this contract or the enforceability of such provision in any other jurisdiction.
You asked the Department to reconsider the Departments opinion regarding domestic reinsurers.
Pursuant to Ins. Law § 1102(d), the Superintendent may issue a license to any insurer to do in this state only the kinds of insurance business for which such insurer is qualified under the provisions of the Insurance Law and its charter. For the most part, the kinds of insurance are specified in § 1113(a). In particular relevance for our inquiry, paragraphs (13) and (29) of § 1113(a) provide:
(13) "Personal injury liability insurance," means insurance against legal liability of the insured, and against loss, damage or expense incident to a claim of such liability (including the insurer's obligation to pay medical, hospital, surgical and disability benefits to injured persons, and funeral and death benefits to dependents, beneficiaries or personal representatives of persons who are killed, irrespective of legal liability of the insured), arising out of death or injury of any person, or arising out of injury to the economic interests of any person, as the result of negligence in rendering expert, fiduciary or professional service, but excluding any kind of insurance specified in paragraph fifteen except insurance to protect an insured against liability for indemnification or contribution to a third party held responsible for injury to the insured's employee arising out of and in the course of employment when such insurance is written pursuant to this paragraph and not written pursuant to paragraph fifteen of this subsection.
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(29) "Legal services insurance" means insurance providing legal services or reimbursement of the cost of legal services.
Section 1102(b) states:
No corporation organized under any law of this state shall do an insurance business outside this state unless so authorized pursuant to the provisions of this chapter or exempted by the provisions of this chapter from such requirement.
In regard to the predecessor to § 1106(f) (§ 42(5) of the 1939 Insurance Law), the Law Revision Committee noted that the provision "was proposed in order to protect the insuring public in this state by providing that foreign insurers shall not expose their assets to ruin by the doing of kinds, or combinations of kinds, of business which are deemed too hazardous for New York companies." (Tentative Draft of the Insurance Law Revision p. 25 as cited in Commentaries on the Revised Insurance law of New York, Kaplan & Gross, 1940 p. 69). The purpose of § 1102(b) (originally § 40(2)) is similar and serves to restrict domestic insurers to the kinds of insurance business that New York deemed acceptable.
The prohibition in Section 1102(b) applies to the kinds of insurance (as defined in § 1113) done by a domestic insurer and not to limitations of coverage within a kind of insurance that may be imposed upon the insurer by statute, regulation or court interpretation. Numerous examples could be cited of such limitations, including the Departments regulations regarding legal defense costs in liability policies and claims-made liability insurance. N.Y. Comp. Codes R. & Regs. tit. 11 Part 71 (1997, 2000) (Regulation 107) and N.Y. Comp. Codes R. & Regs. tit. 11 Part 73 (1997, 2000) (Regulation 121). These regulations establish prohibitions or limitations regarding the issuance of liability policies with defense within limits or on a claims-made basis but do not redefine what is meant by liability insurance under § 1113. Consequently, these limitations or prohibitions in the regulation do not implicate § 1102(b) (or § 1106(h), for that matter) and they do not apply to policies issued outside New York where the policies do not cover New York risks. Rather, the laws of the jurisdiction where the policy is issued or the risk is located govern such policies. This reading of § 1102(b) is consonant with the legislative intent of the section.
Similarly, even though New York may prohibit an insurer from paying an extra-contractual claim under certain circumstances, ECO coverage is permitted to the extent it constitutes personal injury liability insurance or legal services insurance, and to such extent, an authorized insurer (either domestic or foreign) is not precluded by New York law from providing the coverage outside New York to non-New York risks. In regard to policies that cover New York risks or exposures, either wholly or partially, the policy may not provide coverage to the extent that it is against public policy in this state.
To the extent that this opinion is inconsistent with the earlier opinions, those opinions are overruled.
For further information you may contact the Deputy Superintendent and General Counsel, Audrey Samers, at the New York City Office.