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 February 5, 2004, representing the position of the New York State Insurance Department.

Re: Excess Line Placements and the Property/Casualty Insurance Security Fund (PCISF) Payment Limits

QUESTIONS PRESENTED:

1. With regard to authorized insurers that become insolvent, does the Insurance Law impose any limits on the Property/Casualty Insurance Security Fund ("PCISF"), in regard to paying the "allowed claims" of such insurer?

2. Does the term "policy forms," as mentioned in the "Notice of Excess Line Placement," refer to the terms that are required to be in a given type of insurance policy?

3. What are the disadvantages of obtaining insurance coverage on an excess line basis?

CONCLUSIONS:

1. The Property/Casualty Insurance Security Fund ("PCISF") has limits on the amount it will pay out for allowed claims, as described below.

2. The terms "policy form" and "policy" are often interchangeable. A "policy" is defined as a "written agreement that puts insurance coverage into effect." See, Barron’s Dictionary of Insurance Terms 385 (4th ed. 2000). The inquirer’s understanding of the term "policy form", as used in the "Notice of Excess Line Placement", appears to be correct.

3. Unauthorized insurers are not subject to certain provisions of New York Insurance Law and regulations. Thus, insureds enrolled with such insurers do not have the same level of protection as insureds that are enrolled with authorized insurers. In addition, the Department does not perform regular examinations on or oversee the activities of unauthorized insurers. Excess line policy forms and rates are also not subject to the rate and form filing requirements in the Insurance Law.

FACTS:

The inquirer states that the broker for the corporation that he represents has asked the corporation to sign a document entitled "Notice of Excess Line Placement" that reads as follows:

"Consistent with the requirements of New York Insurance Law and Regulation, [Company] is hereby advised that after a diligent effort to place the required insurance with companies authorized in New York to write coverages of the kind requested, all or a portion of the required coverages have been placed by [Broker] with insurers not authorized to do an insurance business in New York and which are not subject to supervision by this State. Policies issued by such unauthorized insurers may not be subject to all of the regulations of the Superintendent of Insurance pertaining to policy forms. In the event of insolvency of the unauthorized insurers, losses will not be covered by any New York State Insolvency Fund."

The inquirer seeks clarification regarding the disadvantages of excess line placements as well as the maximum limits on the amount that the Property/Casualty Insurance Security Fund will pay out when an authorized insurer becomes insolvent.

ANALYSIS:

This inquiry is prompted by a "Notice of Excess Line Placement" that an excess line broker asked the inquirer’s client to sign. N.Y. Comp. Codes R. & Regs. tit. 11, § 27.3 (1999) (Regulation 41) and N.Y. Ins. Law § 2118(b)(3)(A)(McKinney Supp. 2002) permit a licensed excess line broker to place certain risks with unauthorized insurers provided the excess line broker complies with the requirements therein. Specifically, N.Y. Ins. Law § 2118(b)(3)(A) (McKinney Supp. 2002) provides, in pertinent part, that:

(3)(A) 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. The licensee, however, shall be excused from affirming that a diligent effort …was made to procure the coverage from authorized insurers if the licensee’s affidavit is accompanied by the affidavit of another broker involved in the placement affirming as true under the penalties of perjury that, after diligent effort by the affirming broker, the required insurance could not be procured from an authorized insurer which the affirming broker had reason to believe might consider writing the type of coverage or class of coverage involved. The licensee and the affirming broker shall be excused from affirming that a diligent effort was made if the superintendent determines pursuant to paragraph four of this subsection, that no declinations are required.

Please note that generally, an excess line broker may obtain insurance from unauthorized insurers only where a broker or excess line broker has made a diligent effort to obtain the particular coverage from authorized insurers. In addition, such placement must be made in conformance with, among other things, the requirements above.

In addition to those provided in the "Notice of Excess Line Placement" above, the inquirer asks what other adverse consequences may result from the placement of coverage with unauthorized insurers on an excess line basis. We are unable to provide an exhaustive list of all of the provisions of the Insurance Law or regulations that would not apply when insurance coverage is acquired from unauthorized insurers. However, as the "Notice of Excess Line Placement" states, unauthorized insurers are not subject to certain provisions of New York Insurance Law and regulations, including N. Y. Comp. Codes R. & Regs. tit. 11, Part 71 (Regulation 107), which addresses legal defense costs in liability policies, and N. Y. Comp. Codes R. & Regs. tit. 11, Part 71 (Regulation 121), which addresses claims made policies. Thus, insureds that are covered under policies written by unauthorized insurers do not have the same level of protection as insureds that are covered by authorized insurers. Further, the Department does not perform regular examinations on, or oversee the activities of, such insurers. Excess line policy forms and rates are also not subject to the rate and form filing requirements in the Insurance Law.

Further, the inquirer asks whether there is a limit on the amount the New York insolvency funds1 may pay out in circumstances where an authorized insurer becomes insolvent. Although the inquirer has not specified which insolvency fund he is asking about, we have assumed2 that he is referring to the Property/Casualty Insurance Security Fund ("PCISF") as governed by Article 76 of the Insurance Law. Specifically, N.Y. Ins. Law § 7603(a)(1) (McKinney Supp. 2004) states in relevant part, as follows:

(a)(1) The property/casualty insurance security fund shall be used in the payment of allowed claims remaining unpaid, in whole or in part, by reason of the inability due to insolvency of an authorized insurer to meet its insurance obligations under policies[.]

N.Y. Ins. Law § 7603(a)(2) (McKinney Supp. 2004) provides as follows:

(2) No payment from the property/casualty insurance security fund shall be made to any person who owns or controls ten percent or more of the voting securities of the insolvent insurer and no payment on any one claim shall exceed one million dollars, provided that the amount of payment on a claim and the aggregate for all claims shall be further limited by the provisions of paragraph two of subsection (g) of section seven thousand six hundred two of this article.

N.Y. Ins. Law § 7602(g) (McKinney 2000) further limits allowed claims and provides as follows:

(g) "Allowed claim" means a claim which has been allowed by the court in a proceeding under article seventy-four of this chapter and which is based upon:

(1) a policy insuring property or risks located or resident in

this state, or

(2) a policy issued in this state to a resident of this state insuring property or risks, located or resident outside this state but within the United States, its possessions and territories, and Canada, provided that, with respect to policies covered under this paragraph:

(A) irrespective of the amount of claim which has been allowed, no person shall recover any amount from this fund until such person has exhausted all rights of recovery from any security fund, guaranty association, or the equivalent in the jurisdiction where such property or risks are located or resident; and, thereafter, such person’s recovery from this fund, when combined with amounts recovered or recoverable from any other security fund, guaranty association, or the equivalent in such jurisdiction, shall not exceed the maximum limit available to a qualified claimant for a recovery solely from such other security fund, guaranty association, or the equivalent; and

(B) the aggregate limit for all claims arising out of any one policy, excluding claims with respect to property or risks located or resident in this state, shall not exceed the lesser of the aggregate limit of the policy or five million dollars.

N.Y. Ins. Law § 7608(c) (McKinney 2000) also provides that "[n]o payment from the funds shall exceed the limit of liability provided for in the insurance policy or surety bond."

The inquirer also asks for a definition of the term "policy form" as referred to in the "Notice of Excess Line Placement." The terms "policy form" and "policy" are often interchangeable. A "policy" is defined as "written agreement that puts insurance coverage into effect." See, Barron’s Dictionary of Insurance Terms 385 (4th ed. 2000). The inquirer’s understanding of the term "policy form", as used in the "Notice of Excess Line Placement", appears to be correct.

For further information you may contact Associate Attorney D. Monica Marsh at the New York City Office.


1 There are three major New York State insolvency funds authorized by Articles 76 and 77 of the Insurance Law. Article 76 authorizes:

(1) Property/Casualty Insurance Security Fund, which applies to, among other things, claims from motor vehicle accidents, disability benefits pursuant to workers’ compensation law and medical malpractice insurance.

(2) Public Motor Vehicle Liability Security Fund, which covers claims arising out of losses under policies providing coverage, pursuant to Section 370 of the Vehicle and Traffic Law, for vehicles that transport passengers for hire.

Article 77 authorizes:

(1) The Life Insurance Company Guaranty Corporation of New York, which covers certain claims where life insurers become insolvent.

2  Please note that the risks (vehicles for hire) that are covered by the Public Motor Vehicle Liability Security Fund may not be purchased on an excess line basis because Section 370 of the Vehicle and Traffic Law requires that such insurance be obtained from authorized insurers. In addition, procuring life insurance on an excess line basis is disallowed.