New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
ONE COMMERCE PLAZA
ALBANY, NEW YORK 12257

George E. Pataki
Governor

Howard Mills
Superintendent

The Office of General Counsel issued the following opinion on March 13, 2006 representing the position of the New York State Insurance Department.

RE: Excess Line Placement.

Question Presented:

If an excess line broker has obtained a quote from a authorized insurer for a liability policy that contains a defense within limits offset provision and a quote from an eligible excess line insurer for a liability policy with unlimited defense outside the liability limit, may the excess line broker place the policy with the excess line insurer if the excess line broker has also received three declinations from other authorized insurers?

Conclusion:

Yes, an excess line broker that has obtained a quote from a authorized insurer for a liability policy that contains a defense within limits offset provision and a quote from an eligible excess line insurer for a liability policy with unlimited defense outside the liability limit, may place the policy with the excess line insurer where the excess line broker has also received three declinations from other authorized insurers.

Facts:

No facts were provided. The inquirer requested further clarification of Opinion of General Counsel No. 05-12-14 (December 19, 2005) and has asked a question that is different from the question analyzed in that opinion.

Analysis:

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, inter alia, 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 and only to the extent it is in excess of any insurance available in the authorized 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 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 . . . (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  . .

In Opinion of General Counsel No. 91-25 (NILS March 7, 1991), the Department stated, in relevant part, as follows:

Where the policy provides a broad range of coverages, such as a special multi-peril policy, the package policy may be placed with an unauthorized insurer if the coverages cannot be placed separately or as a package with an authorized insurer . . . or if the coverages not available from an authorized insurer . . . cannot be placed separately in the unauthorized market.

There are three caveats. First, the components must have some appropriate relationship to each other. One cannot tie some exotic risk to an unrelated commonplace exposure to obtain coverage in the unauthorized market. Second, the additional coverage must be material, covering a substantial, and not illusory exposure. Third, the coverages offered by the unauthorized insurer must not be illegal and must comply with appropriate statutory and regulatory requirements.

The exception described in Opinion of General Counsel No. 91-25 (NILS March 7, 1991) is clearly applicable to the circumstances that the inquirer described in his question where the broker was unable to procure a liability policy with unlimited defense costs coverage since the defense cost coverage is not permitted as a separate policy in either the authorized or excess line markets. All other things being equal, the coverage available in the unauthorized market providing for unlimited defense costs outside the liability limit of the policy would provide the insured with more coverage than the policy available in the authorized market that contains a defense within limits offset provision and is, therefore, superior coverage.

Thus, an excess line broker that has obtained a quote from a authorized insurer for a liability policy that contains a defense within limits offset provision and a quote from an eligible excess line insurer for a liability policy with unlimited defense outside the liability limit, may place the policy with the excess line insurer where the excess line broker has also received three declinations from other authorized insurers.

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