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

George E. Pataki
Governor

Howard Mills
Acting Superintendent

The Office of General Counsel issued the following informal opinion on April 20, 2005 representing the position of the New York State Insurance Department.

RE: Investments by Insurers in Limited Liability Companies

Question Presented:

How are limited liability companies (LLCs) treated with respect to the types of investments that insurers may invest in pursuant to Article 14?

Conclusion:

The term "institution" as applied in Article 14 of the N.Y. Ins. Law includes limited liability companies. Ownership interests in an LLC are similar to "partnership interests" as defined by N.Y. Ins. Law §1401(a)(3) (McKinney Supp. 2005) and, thus, where the Insurance Law permits or prohibits a particular partnership interest, an ownership interest in an LLC is permitted or prohibited, respectively. In addition, since LLCs are also similar to corporations, where Article 14 permits or prohibits certain investments in shares, investments in LLCs are permitted or prohibited, respectively, except where the Insurance Law refers to a specific type of shares, such as preferred shares, or an interest in an LLC, which fails to satisfy any other requirements for the particular type of investment or the context requires otherwise.

Facts:

The inquiry is of a general nature.

Analysis:

N.Y. Ltd. Liab. Co. Law § 102(m) (LEXIS 2005) provides as follows:

(m) "Limited liability company" and "domestic limited liability company" mean, unless the context otherwise requires, an unincorporated organization of one or more persons having limited liability for the contractual obligations and other liabilities of the business (except as authorized in section six hundred nine of this chapter), other than a partnership or trust, formed and existing under this chapter and the laws of this state.

The Insurance Law was recodified before the authorization of LLCs under New York State law and has not been amended to incorporate LLCs. Although the LLC is a separate and distinct type of entity, it is considered a hybrid of the corporation and the partnership because LLCs have the limited liability feature of corporations and the flexibility and tax advantages of partnerships. See 16 N.Y. Jur. 2d, Bus. Rel. § 1995 (1996); H. Leftkowitz & I. Akselrad, New York Limited Liability Company Forms and Practice Manual §1.2 (Dec. 1995). As a result, the Insurance Law must be analyzed in context to determine how it applies to LLCs.

Two terms, "institution" and "partnership interests" are used throughout Article 14 with respect to permissible investments by insurance companies. An analysis of the definitions of these two terms is, therefore, relevant to this inquiry.

N.Y. Ins. Law § 107(a)(24) (McKinney Supp. 2005) defines an "institution" as ". . . a corporation, a joint-stock company, an association, a trust, a business partnership, a business joint venture or any similar entity." Because LLCs are similar to both corporations and partnerships, the definition of "institution" contained in N.Y. Ins. Law § 107(a)(24) (McKinney Supp. 2005) includes LLCs as a "similar entity".

N.Y. Ins. Law § 1401(a)(3) (McKinney Supp. 2005) provides that:

‘[p]artnership interests’ when used in connection with the permissible types of investments made by any domestic insurer, other than a domestic life insurer, means, an interest as a limited partner in a limited partnership. A ‘limited partnership’ means a partnership formed by two or more persons pursuant to the provisions of the applicable law, having as members one or more general partners and one or more limited partners. The limited partners as such shall not be bound by the obligations of the partnership.

A critical reason for regulating the investments of insurers is to protect the financial soundness of insurers and, thus, the ability of insurers to pay claims. The limitation on partnership interests contained in N.Y. Ins. Law § 1401(a)(3) (McKinney Supp. 2005) to an interest as a limited partner in a limited liability partnership rather than other types of interests in a partnership is directly related to such purpose.

Limited partners in a limited partnership have only limited liability rather than unlimited personal liability for the debts and other obligations of the partnership. A limited partner, thus, risks no more than the investment made in the limited partnership. A member of an LLC also has limited liability. Therefore, ownership interests in LLCs are similar to "partnership interests" as defined by N.Y. Ins. Law §1401(a)(3) (McKinney Supp. 2005) and therefore, where the Insurance Law permits or prohibits a partnership interest, an ownership interest in an LLC is also permitted provided any other requirements are also met or prohibited, respectively.

In addition, since LLCs are also similar to corporations, where Article 14 permits or prohibits certain investments in shares, investments in LLCs are permitted or prohibited, respectively. Exceptions apply, however, where the Insurance Law refers to a specific type of shares, such as preferred shares pursuant to N.Y. Ins. Law §§ 1404(a)(3) (McKinney 2000) and 1405(a)(2) (McKinney Supp. 2005), or an interest in an LLC can not satisfy other requirements for the particular type of investment or the context requires otherwise.

Finally, we also note several provisions of the Insurance Law which should be specifically clarified with respect to LLCs.

N.Y. Ins. Law § 1407(a)(6) (McKinney Supp. 2005) provides as follows:

§ 1407.  Non-reserve and prohibited investments for property/casualty and certain other insurers

(a) Any insurer that makes investments under the authority of subsection (c) of section one thousand four hundred three of this article and meets the requirements of such subsection (c) and section one thousand four hundred two of this article may invest in, or otherwise acquire or loan upon, directly or indirectly, any of the types of investments described in section one thousand four hundred four of this article, but without having to meet the applicable qualitative standards or quantitative limitations which are set forth in subsection (a) of section one thousand four hundred four of this article, except the following prohibited investments:

* * *

(6) Obligations, shares or other securities issued by a corporation, if a majority of the shares having voting powers of such issuing corporation is owned directly or indirectly by or for the benefit of one or more officers or directors of the insurer. (emphasis added)

N.Y. Ins. Law § 1407(a)(6) (McKinney Supp. 2005) specifically prohibits certain insurers from investing in corporations in which the insurer’s officers or directors directly or indirectly own a majority of the voting rights. An LLC is more similar in this case to a corporation than a limited partnership since members of an LLC can have voting or nonvoting membership interests while limited partners of a limited partnership have no vote or say in the management of the partnership. Thus, LLCs should be included within the term "corporation" as applied in N.Y. Ins. Law §1407(a)(6) (McKinney Supp. 2005).

N.Y. Ins. Law § 1407(a)(9) (McKinney Supp. 2005) prohibits certain insurers from "[a]cquiring any interest in an investment through a partnership, other than an interest acquired by a limited partner in a limited partnership." This exclusion does not prohibit investment in an LLC because it provides an exception for partnership interests for which, as previously discussed, investment in an LLC is similar.

For further information you may contact Assistant Counsel Brenda M. Gibbs at the Albany Office.