The Office of General Counsel issued the following opinion on December 1, 2003, representing the position of the New York State Insurance Department.
RE: Non-admitted Insurers Premium Quotes and Broker of Record Letters
1) Must a licensed excess line broker who is replaced by its insured with a different, licensed excess line broker be notified that a broker of record letter was filed?
2) Must a former excess line broker be notified that the unauthorized insurer, which had quoted the account for this broker, had thereafter provided a different quote on the same account to a different excess line broker?
3) May the effective date of a commercial general liability insurance policy be "backdated" (inserting a policy term effective date that is prior to the date that coverage was bound) where coverage was placed with an unauthorized insurer?
1) There are no statutes or regulations in New York that address the filing of broker of record letters, nor are there any notification requirements relating thereto.
2) There are no statutes or regulations in New York that address the provision of quotes to more than one broker, nor are there any notification requirements relating thereto.
3) The effective date of coverage on a commercial general liability insurance policy may not be "backdated" regardless that an unauthorized insurer wrote the policy.
A licensed excess line broker ("broker A") in New York provided to his insured quotes from two unauthorized insurers for a commercial general liability insurance policy. The premiums quoted were $90,000 and $70,000. On or about August 13, 2003, the insured gave broker A an order to bind coverage with the insurer that provided the $70,000 quote. Thereafter, the insured contacted another excess line broker ("broker B"), who obtained a premium quote of $45,000 from the insurer who had provided the $90,000 premium quote to broker A. The insurer advised broker B that it would not bind coverage without a broker of record letter. A broker of record letter was submitted and an order to bind coverage effective August 20, 2003 was placed. Thereafter, the policys effective date was backdated to August 11, 2003.
A broker of record letter is a written statement signed by an insured advising an insurer that a particular broker or agent shall act as the insureds representative. A broker of record letter is not a creation of statute or regulation; it was developed by the insurance industry as a means of conducting business transactions.
There are no laws or regulations relating to procedures concerning broker of record letters. Thus, there are no statutes or regulations in New York that address the filing of broker of record letters, nor are there any notification requirements relating thereto. Whether notification must be given to the former broker that a broker of record letter was filed naming a new broker is dependent upon the terms of the broker-insured, and broker-insurer, agreements. Such contractual matters do not involve the administration of the Insurance Law, and thus, are not regulated by the Department.
There are also no statutes or regulations in New York that specifically address whether an insurer may provide quotes on one account to more than one broker, nor are there any notification requirements relating thereto. Such procedures were developed by the insurance industry as a means of transacting business. A broker would need to refer to the contract it made with the insurer to determine if any of the terms were breached. As stated above, contractual matters do not generally involve the administration of the Insurance Law, and thus, are not regulated by the Department.
With respect to the different premiums quoted on the same account by the same insurer, it was not stated whether both quotes provided the same level of benefits to the insured. Moreover, while N.Y. Ins. Law § 2303 (McKinney 2000), which applies to property/casualty insurance, states, in pertinent part, that "[r]ates shall not be excessive, inadequate, unfairly discriminatory, destructive of competition or detrimental to the solvency of insurers," this statute does not apply to unauthorized insurers. N.Y. Ins. Law § 2302(a) (McKinney 2000) states in relevant part: "This article shall apply to all kinds of insurance written on risks or operations in this state by an insurer authorized to do business in this state ." Thus, unauthorized insurers are not subject to Article 23 of the New York Insurance Law. Hence, the Department offers no opinion regarding the widely differing premiums quoted by the unauthorized insurer.
The Department was advised that the insurer backdated the policy with an effective date of August 11, 2003, although coverage was bound on August 20, 2003. N.Y. Ins. Law § 1101(a)(1) (McKinney 2003 Supp.) defines a contract of insurance as follows:
"Insurance contract" means any agreement or other transaction whereby one party, the "insurer", is obligated to confer benefit of pecuniary value upon another party, the "insured" or "beneficiary", dependent upon the happening of a fortuitous event in which the insured or beneficiary has, or is expected to have at the time of such happening, a material interest which will be adversely affected by the happening of such event.
A "fortuitous event" is defined in N.Y. Ins. Law § 1101(a)(2) as "any occurrence or failure to occur which is, or is assumed by the parties to be, to a substantial extent beyond the control of either party."
Case law holds that "insurance is a guaranty against the damage or loss to result from a future event, the contract of insurance being executed as to the insured by the payment of the annual premium, while it is wholly executory on the part of the insurer, whose undertaking depends upon a future event." People of the State of New York v. May, 162 A.D. 215, 147 N.Y.S. 487 (1914).
The Department thus interprets an insurance contract, as defined by N.Y. Ins. Law §1101, as one that is dependent upon a future event. 1 Therefore, backdating a policy (inserting a policy term effective date that is prior to the date that coverage was bound) is impermissible under N.Y. Ins. Law § 1101.
Although policy forms issued by unauthorized insurers are not subject to approval by the Superintendent, this does not mean that excess line policies may provide any kind of terms and conditions. N.Y. Comp. Codes R. & Regs. tit. 11, Part 27 (Regulation 41) provides the governing standards for excess line placements. Section 27.11 (a)(1), (4), and (5) therein states:
a) No excess line broker shall procure coverage from an unauthorized insurer if such coverage is prohibited by law, including if such coverage:
1) does not constitute insurance within the meaning of section 1101 or other sections of the Insurance Law;
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4) is determined by any Appellate Division of the New York State Supreme Court or the New York State Court of Appeals to be against public policy in this State; or
5) has been otherwise proscribed by law.
Hence, the effective date of coverage on a commercial general liability insurance policy may not be backdated regardless that an unauthorized insurer wrote the policy.
For further information you may contact Associate Attorney Sally Geisel at the New York City Office.
1There are exceptions to this general rule: for example, an ocean marine insurance policy that covers the risk of the voyage may be written while the ship is at sea, where damage or loss may have already occurred at the time the policy was written, but where such damage or loss was unknown to either party. Also, for example, the use of a retroactive date on a claims-made insurance policy pursuant to N.Y. Comp. Codes R. & Regs. tit. 11, Part 73 (Regulation 121). There are a few other instances where the Department has recognized an exception to the general rule, but in no event do such instances include inserting a policy term effective date that is prior to the date that coverage was bound.