The Office of General Counsel issued the following informal opinion on December 19, 2005 representing the position of the New York State Insurance Department.
Re: Excess Line Placement
1) May an excess line broker place business with an unauthorized insurer when an authorized insurer has offered to issue the coverage when three or more other authorized insurers declined to issue the coverage?
2) May an excess line broker place business with an unauthorized insurer that provides a separate limit for defense costs when an authorized insurer offers the same coverage except that defense costs are covered within the policys limits of liability?
1) No, if an authorized insurer has offered to issue the coverage then an excess line broker may not place the business with an unauthorized insurer even if three or more other authorized insurers declined to issue the coverage.
2) No, an excess line broker may not place business with an unauthorized insurer that provides a separate limit for defense costs when an authorized insurer offers the same coverage except that defense costs are covered within the policys limits of liability.
A letter was sent to the Department that stated, in relevant part, the following:
I am trying to place school board legal liability coverage with a local school. I have been declined by 4 or 5 standard carriers and got a quote from one standard carrier. I also got a quote from an A+ non-admitted carrier that was superior in price and coverage. Specifically, the non-admitted carrier is offering defense as a separate limit while the admitted carrier offers defense costs within the limit of liability a huge coverage difference.
Although the school board has since accepted the coverage from an authorized insurer the inquirer would like the answer to the question in the event he faces a similar issue in the future. It was stated that the coverage would have been placed through a licensed excess line broker. The inquirer holds a number of insurance licenses including a license as a property/casualty insurance broker.
It is assumed that the policy in question would have included an indemnity obligation and defense obligation within the same contract, rather than being sold in separate policies, and that such obligations would arise from the same causes of loss.
If the defense obligation was not within the same contract as the indemnity obligation, or did not provide coverage for the same losses, then the defense coverage would be legal expense insurance, which may not be written in the excess line market.
Although the inquiry referred to "non-admitted" insurers, New York Insurance Law does not define "non-admitted", which is used interchangeably with, and generally intended to mean the same thing as the term "unauthorized," which is defined by New York Insurance Law1.
An excess line broker placing business with an unauthorized insurer must comply with the provisions of N.Y. Ins. Law § 2118 (McKinney Supp. 2005) and N.Y. Comp. R. & Regs. tit. 11 Part 27 (Regulation 41), which require, among other things, 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.
N.Y. Ins. Law § 2118(b)(3)(A) (McKinney Supp. 2005) provides, in relevant part, as follows:
The submission of insurance documents to the excess line association shall be accompanied by a statement subscribed to, and affirmed by, the licensee or sublicense 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 . . . (emphasis added)
N.Y. Ins. Law § 2118(b)(4) (McKinney Supp. 2005) provides, in relevant part, as follows:
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 . . .
The excess line market is intended to provide coverage when the coverage is not available from an authorized insurer and excess line insurance is permitted only to the extent it is in excess of any insurance available in the authorized market.
The requirement for three declinations is only relevant to whether a diligent effort has been made if no authorized insurer has offered to place the insurance. In other words, if an authorized insurer has offered to place the insurance, the excess line broker may not place the insurance with an unauthorized insurer even if three or more other authorized insurers have declined to place the coverage.
Under the facts provided, an authorized insurer agreed to place the insurance and, therefore, the coverage may not be placed with the excess line insurer. But it was stated that the coverage available in the excess line market was superior to that offered by the authorized insurer in price and coverage.
With respect to the price, the Department has previously opined that where sufficient coverage is available in the authorized market, the insurance may not be placed in the excess line market even if the premiums for the excess line market are lower. Opinion of General Counsel No. 03-04-27 (April 21, 2003). Therefore, price is not a sufficient reason to place insurance otherwise available in the authorized market in the excess line market.
With respect to the coverage differences, it was stated that the coverage offered by the authorized insurer is inferior because the defense costs are included within the policy limits while there is a separate limit for the defense costs in the excess line policy. However, it is the Departments view that policies that provide separate limits are less favorable to insureds than policies that include defense costs within the policy limits. With one exception in 11 NYCRR § 71.4 (Regulation 107) that was permitted to conform to Federal regulatory requirements, with respect to policies for pollution liability or environmental impairment issued to owners or operators of underground storage tanks, liability policies may not provide separate limits for defense costs. Although Regulation 107 does not apply to excess line policies and does not preclude the issuance of policies on such basis, the regulation reflects the Departments view that such coverage is in fact less favorable to insureds.
Thus, under the facts provided, since more favorable coverage is available in the authorized market, the Insurance Law would not have permitted placement in the excess line market.
For further information you may contact Assistant Counsel Brenda M. Gibbs at the Albany Office.
1 Pursuant to N.Y. Ins. Law § 107(a)(10) (McKinneys Supp. 2005):
[a]uthorized insurer means an insurer authorized as such to do an insurance business in this state in compliance with this chapter, by reason of a license so to do issued and in force pursuant to the laws of this state or of a corporate charter granted and in force pursuant to the laws of this state, but not including any insurer herein exempted from compliance with the requirement that it obtain a license to do business.