The Office of General Counsel issued the following opinion on February 21, 2006, representing the position of the New York State Insurance Department.
Re: Definition of "Any One Risk"
Does the below-outlined interpretation of what constitutes "any one risk" conform to N.Y. Ins. Law § 1115 (McKinney 2000)?
Yes, the below-outlined interpretation of what constitutes "any one risk" conforms to N.Y. Ins. Law § 1115 (McKinney 2000).
The inquirer seeks clarification on behalf of a client, a large property/casualty insurer (the "Company"), of the issue of the proper interpretation of the term "any one risk". This issue has arisen in connection with the preparation of the Companys Annual Statement, specifically, its response to Question 13.1 of General Interrogatory, Part 2 (the "Interrogatory"), which requires insurers to disclose their largest net aggregate amount insured in any one risk.
The Company provides property insurance to colleges and universities and believes that a prior Opinion addressing the definition of the term does not realistically reflect its risk exposure to that type of business. The inquirer has thus submitted to the Department a detailed interpretation of the Companys view of the term "any one risk" and would like this Offices opinion as to whether the Companys view is valid.
N.Y. Ins. Law § 1115 (McKinney 2000) provides, in pertinent part, as follows:
(a) Except as otherwise provided in this chapter, no insurer doing business in this state shall expose itself to any loss on any one risk in an amount exceeding ten percent of its surplus to policyholders. In determining the amount of risk, any portion reinsured in an assuming insurer authorized to do such business in this state or in an accredited reinsurer, as defined in subsection (a) of section one hundred seven of this chapter, shall be deducted. In determining the limitation of risk under any provision of this chapter, "surplus to policyholders" shall include voluntary reserves, or any part thereof, not required by law, and be determined from the insurer's last sworn statement on file with the superintendent, or the last report on examination filed by the superintendent, whichever is more recent at the time the risk is assumed. In applying the limitation under any provision of this chapter to alien insurers, such provision shall be deemed to refer to the exposure to risk and to the surplus to policyholders of the United States branch of such alien insurer.
N.Y. Ins. Law § 1115(a)(McKinney 2000) (emphasis supplied).
This provision is of long standing in the Insurance Law. It is aimed at ensuring that an insurers solvency is not threatened by an overexposure to a single risk. Despite the long history, the provision has not been the subject of extensive commentary or analysis by the Department or outside authorities.
In certain contexts, the concept of a single risk can be fairly simply delineated for example, life insurance (a single individuals life) and financial guaranty insurance (the risk of default by the issuer of an obligation). The insuring of properties such as buildings, however, introduces an element of complexity, especially where an insurer, as in the instant case, provides insurance to single entities that own multiple structures in varying degrees of proximity to one another. This is the situation underlying the present inquiry. In Office of General Counsel Opinion No. 03-01-07 (January 3, 2003) the following language was used to describe the term "any one risk" in such a context:
Property Insurance covering more than one property: each of the properties are regarded as separate risks, unless the properties may be exposed to loss as the result of a single catastrophic event occurring at a specific location (e.g., a fire that causes damage to the buildings located on a college campus).
As stated above, the Company feels that the formulation expressed in that Opinion does not necessarily accurately reflect the risk to which it is exposed in the course of its operations. Acknowledging that fire is the primary peril considered when underwriting property coverage, it has proposed an alternative interpretation providing as follows:
1. Where a policy covers a property risk (building) at a single location, then such policys limits of liability should be used to determine the maximum amount of exposure on any one risk.
2. Where one policy covers property risks at more than one specified location (e.g. two buildings at two distinct geographic locations), then the amount of the policys limits of liability subject to loss at each specific location should be used to determine the maximum amount of exposure on any one risk.
3. Where one policy covers a specific location with numerous property risks (e.g. a college campus with numerous buildings spread over a sizeable campus), then for purposes of determining what constitutes the amount insured in any one risk, the company may be guided by written procedures that determine the insurers maximum exposure to a single covered event to be the greatest of (a) the single building with the highest insured value; (b) the insured value of buildings that are physically connected; or (c) in the case of buildings or structures constructed of combustible materials that are situated in a location that poses a risk of a multi-building conflagration, the highest combined insured value of such buildings or structures.
4. Where the insurer has issued more than one property insurance policy to the named insured, and the policies insure the same properties (e.g., a primary and an excess policy), the single largest risk shall be determined as described in paragraphs 1 through 3 above; however, the total amount of the insurers exposure to any one risk shall be determined by adding the amount of each policys limit of liability that is subject to loss in the particular risk scenario described above that is applicable to that policy.
As stated in the Facts herein, the Company is concerned with preparing an accurate and proper response to the Interrogatory. The instructions for that Interrogatory provide that it is intended to "...identify the companys net total exposure over all lines of coverage that would be impacted by a loss occurring at a specific location." This proposed interpretation appears to present reasonable and realistic guidelines for determining the largest amount at risk in the scenarios described. Accordingly, it is consistent with N.Y. Ins. Law § 1115.
This Opinion is based on the specific circumstances presented and should not be viewed as concluding that the Companys method for interpreting the meaning of the term "any one risk" constitutes the definitive or exclusive interpretation of that term. Different formulations, if consistent with economic reality and based on sound underwriting principles, may also be used by insurers in interpreting the term and in preparing a response to the Interrogatory in question.
For further information please contact Supervising Attorney Michael Campanelli at the New York City office.