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 July 6, 2006, representing the position of the New York State Insurance Department.

RE: Circular Letter No. 6 (2005) and group aggregate limits

Questions Presented:

1) Does the Insurance Law specify the minimum limit of liability coverage for a registered representative to purchase under a liability policy?

2) May a liability policy issued to a purchasing group covering a broker/dealer and its registered representatives provide for a group aggregate limit covering the broker/dealer and its registered representatives and an individual aggregate limit for each registered representative as described below?

Conclusions:

1) No. The Insurance Law does not specify the minimum limit of liability coverage for a registered representative to purchase under a liability policy.

2) No. Pursuant to Section 153.4(c) of N.Y. Comp. Codes R. & Regs. tit. 11, Part 153 (Regulation 135), a policy that insures a securities broker/dealer and its registered representatives, may not provide coverage to its New York members subject to a group aggregate liability limit of any kind at any time.

Facts:

The inquirer asked whether a liability policy issued to a purchasing group covering a broker/dealer and its registered representatives may provide for a group aggregate limit of $1,000,000 covering the broker/dealer and its registered representatives and an individual aggregate limit of $100,000 for each registered representative. The group aggregate limit would apply to any claim that is made against both the broker/dealer and one or more registered representatives. The individual aggregate limit would apply to claims against a registered representative if the broker/dealer was not named in the claim. The individual aggregate limit would also apply in instances in which the group aggregate limit was applicable, but the limit had been exhausted. In no case could both limits be applied to a claim against a registered representative. In other words, the registered representative would be covered under either the group aggregate limit or the individual aggregate limit.

Analysis:

For the purposes of this analysis, it is presumed that the policy covering a broker/dealer and its registered representatives would be issued to a purchasing group formed pursuant to the requirements of N.Y. Ins. Law Article 59 (McKinney 2006), the Federal Liability Risk Retention Act 15 U.S.C. §§ 3901, et seq. ("LRRA") and N.Y. Comp. Codes R. & Regs. tit. 11, Part 310 (Regulation No. 134). Otherwise, the policy may not be issued on a group basis, as the inquirer has proposed. See Opinion of General Counsel No. 06-04-07 (April 5, 2006) which is available on the Department’s website at www.ins.state.ny.us.

With respect to the inquirer’s first question, it must be noted that the Insurance Law does not specify the minimum limit of liability coverage for a registered representative to purchase.

Next, with respect to group aggregate limits, Section 153.4(c) of N.Y. Comp. Codes R. & Regs. tit. 11, Part 153 (Regulation 135) provides as follows:

No group policy, master policy or certificate shall be subject to a group or sub-group aggregate liability limit of any kind at any time, and any liability limit applicable to a group member shall:

(1) be separate and apart from any liability limit to which any other group member insured under the group policy may be subject; and

(2) operate unaffected by the experience of any other group member or the overall experience of the group itself. (emphasis added)

Thus, if the insurer were to apply the $1,000,000 aggregate group limit to the New York group members, as the inquirer has proposed, the insurer would be in violation of Section 153.4(c) of Regulation 135. The fact that the policy also provides a separate limit for each registered representative that is available when the group aggregate limit is either exhausted or not applicable does not change this result since Section 153.4(c) of Regulation 135 prohibits the application of a group aggregate limit of any kind at any time to the New York members of a group policy. It should also be noted that the prohibition against the group aggregate also applies to the broker/dealer since it also has New York exposure and is thus subject to the regulation.

Finally, the inquirer suggested that the Department consider two alternatives to requiring that each group member have his or her own separate liability limit. The first would be for the Department to mandate a minimum group aggregate limit calculated based upon the number of members to be covered. The second would be for the Department to mandate that the group aggregate limit, if exhausted, would automatically reset to the full amount, but only for a specified number of times.

The Department has reviewed the inquirer’s suggestions and finds that they do not satisfy the Department’s concerns regarding group aggregate limits among which is that the insured’s coverage may wholly or partially be exhausted by other members of the group.

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