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

George E. Pataki
Governor

Gregory V. Serio
Superintendent

The Office of General Counsel issued the following opinion on April 21, 2003 representing the position of the New York State Insurance Department.

Re: Placing Business with Unauthorized Insurer

Question Presented:

May an excess lines broker place business with an unauthorized insurer when an authorized insurer offers the same coverage for a higher premium?

Conclusion:

No. If the same coverage is available by an authorized insurer, even though the premium is higher, the excess line broker must obtain the coverage from the authorized insurer, pursuant to the statutory requirements of N.Y. Ins. Law § 2118(b) (McKinney Supp. 2003) and N.Y. Comp. R. & Regs. tit. 11 Part 27 (1999) (Regulation 41).

Facts:

No specific facts were given.

Analysis:

When an excess line broker desires to place business with an unauthorized insurer, the broker must comply with the provisions of N.Y. Ins. Law § 2118(b) (McKinney Supp. 2003) and N.Y. Comp. R. & Regs. tit. 11 Part 27 (1999) (Regulation 41), which require that a diligent effort be made to procure insurance from an authorized insurer and permit placement with an unauthorized insurer only when coverage can not be procured from the authorized-insurer market. These provisions require that the broker first obtain three declinations from authorized insurers prior to placing the coverage with an unauthorized insurer.

The duties of an excess line broker regarding the placement of business with an unauthorized insurer are contained in Section 2118. Under subsection (b), within forty-five days after a policy is procured, the licensee is required to submit specified insurance documents to the excess line association. Specifically, N.Y. Ins. Law § 2118(b)(3)(A) states, in relevant part that:

The submission of insurance documents to the excess line association shall be accompanied by a statement subscribed to, and affirmed by, the licensee or sublicensee as true under the penalties of perjury that, after diligent effort, the full amount of insurance required could not be procured, from authorized insurers, each of which is authorized to write insurance of the kind requested and which the licensee has reason to believe might consider writing the type of coverage or class of insurance involved, and further showing that the amount of insurance procured from an unauthorized insurer is only the excess over the amount procurable from an authorized insurer . . . .

N.Y. Ins. Law § 2118(b)(4) states, in relevant part that:

The number of declinations constituting diligent effort in regard to placement of coverage with authorized insurers for purposes of paragraph three of this subsection shall be three . . .

In addition, Regulation 41, N.Y. Comp. Codes R. & Regs. tit. 11 § 27.3 (1999), states, in relevant part that:

(a) No excess line broker shall place coverage for a risk with any unauthorized insurer, unless the risk has been declined by at least three authorized insurers, each of which is authorized in this State to write insurance of the kind requested and is an insurer that the excess line broker has reason to believe might consider writing the type of coverage or class of insurance involved . . . .

(b) Every licensee or affirming broker, in connection with the placement of each risk pursuant to this Part, shall record on the affidavit required pursuant to section 27.5 of this Part, the information relied upon that formed the basis of such licensee’s or affirming broker’s reason to believe that the authorized insurer might consider writing the type of coverage or class of insurance involved.

However, Section 2118(b)(3)(E) permits the Superintendent to exempt specified coverages from the requirements of Section 2118(b)(3)(A), by regulation. Accordingly, N.Y. Comp. Codes R. & Regs. tit. 11 § 27.3(g)(1) exempts a number of types of coverage for this purpose.

Section 2118 of the Insurance Law provides an exception from the general rule that an unauthorized insurer may not do an insurance business in this State, and recognizes that in certain prescribed situations, an excess line broker may procure insurance from an unauthorized insurer. However, the excess line market was intended to provide coverage when no coverage is available from an authorized insurer. Therefore, if coverage is available from an authorized insurer, the excess line broker is not exercising due care if it procures from an unauthorized insurer the policy with a lower premium. The broker would be violating the statutory requirement that coverage from the unauthorized insurer shall only be in excess of the amount obtainable in the authorized market.

Thus, if the same coverage is available from an authorized insurer, even though the premium is higher, the excess line broker must obtain the coverage from the authorized insurer, pursuant to the statutory requirements of N.Y. Ins. Law § 2118(b) (McKinney Supp. 2003) and N.Y. Comp. R. & Regs. tit. 11 Part 27 (1999) (Regulation 41).

For further information, you may contact Associate Attorney Meredith S. Kaufer at the New York City Office.