The Office of General Counsel issued the following informal opinion on May 17, 2002, representing the position of the New York State Insurance Department.

Re: Service Contracts / Risk Retention Groups

Questions Presented:

1) Does it remain the Insurance Department’s position that a service contract provider may not use an insurance policy issued by a risk retention group not domiciled in New York for the purpose of satisfying the financial responsibility requirements established by N.Y. Insurance Law § 7903(c)(1) (McKinney 2001-2002)?

2) If the answer to question 1 above is yes, may the service contract provider, which has otherwise complied with the financial responsibility requirements established by N.Y. Insurance Law § 7903(c)(1) (McKinney 2001-2002), secure protection for itself under a separate insurance policy issued in another state by a RRG not domiciled in New York?

3) If the answer to question 2 above is yes, may the service contract itself state that the service contract provider has secured protection for itself under a separate insurance policy, even though the insurer may not be an authorized insurer in New York?

Conclusions:

1) Yes. It remains the Department’s position that a policy issued by a risk retention group not domiciled in New York will not satisfy the financial responsibility obligations established in Insurance Law Section 7903(c).

2) The service contract provider is not prohibited by New York law from securing separate insurance coverage for itself. Whether the RRG may issue the policy in the other state is a question for the appropriate regulatory body in that jurisdiction.

3) Yes. So long as no representation is made that the policy provides coverage to the purchaser of the service contract, either directly or by cut-through, in the event the service contract provider fails to fulfill its obligations under the service contract.

Facts:

A Risk Retention Group ("RRG") domiciled in South Carolina has been approached by an Illinois-based service contract provider ("SCP") that proposes to issue service contracts in New York State. The service contract provider wants to purchase a "Vehicle Service Contract Reimbursement Insurance Policy" (issued by the RRG outside of New York State) to provide coverage for the obligations it incurs under the New York service contracts.

Analysis:

Article 79 of the N.Y. Ins. Law governs the issuance of service contracts. No person or other entity may issue, sell or offer for sale a service contract in New York under which it is contractually obligated to provide service unless it first registers with the Superintendent of Insurance as a service contract provider, pursuant to N.Y. Insurance Law § 7907 (McKinney 2000). As a requirement of registration, a service contract provider must assure the faithful performance of the provider's obligations to its contract holders by complying with one of the three methods for demonstrating its financial responsibility as provided in N.Y. Insurance Law § 7903(c) (McKinney 2001-2002). Section 7903(c)(1) contains the insurance policy method for demonstrating financial responsibility. It provides, in pertinent part, as follows:

The foregoing statute constitutes a financial responsibility statute within the reservation of state authority specified in § 3905(d) of the federal Liability Risk Retention Act of 1986 ("LRRA")(15 U.S.C. § 3901, et seq.), as follows:

N.Y. Ins. Law § 5913 (McKinney 2000) provides as follows:

Accordingly, the Department has concluded that the New York service contract financial responsibility statute is excepted from federal preemption under the above-cited provisions of the LRRA and that a service contract provider may not use service contract reimbursement insurance issued by a risk retention group not domiciled in New York to meet the financial responsibility obligations established in Insurance Law Section 7903(c).

With respect to whether a service contract provider that has otherwise complied with the financial responsibility obligations established by N.Y. Insurance Law § 7903(c)(1) (McKinney 2001-2002) may secure additional protection by purchasing a policy to be issued in another state by a risk retention group domiciled outside of New York, nothing in the New York Insurance Law would prohibit a SCP from securing such protection for itself.

So long as the SCP had satisfied one of the statutory methods of establishing financial responsibility, it would be free to secure separate coverage for itself including a policy to be issued and delivered in another state by a risk retention group domiciled outside of New York. Such policy would not be subject to New York law. Whether the RRG may issue the policy in the other state is a question for the appropriate regulatory authority of that state.

As to whether a service contract may state that the SCP has secured protection for itself under a separate insurance policy even though the insurer may not be an authorized insurer in New York, one concern about such kind of contract is that the vehicle service contract holder (purchaser) is not misled into believing that the policy issued to the SCP would provide, under any circumstances, any direct benefits to the purchaser since, under the law, the service contract is required to state that it is backed by the full faith and credit of the provider. N.Y. Insurance Law § 7905(c) (McKinney 2000).

The Department concluded that the following provision was acceptable:

Any proposed modification of the contract language should be re-submitted to the Department for further review.

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