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

George E. Pataki
Governor

Howard Mills
Superintendent

The Office of General Counsel issued the following opinion on August 16, 2006, representing the position of the New York State Insurance Department.

Applicability of N.Y. Ins. Law § 1213(e) to Formerly Listed Excess Line Insurers

Question Presented:

Does N.Y. Ins. Law § 1213(e) (McKinney 2006) apply to a formerly listed excess line insurer where the policy that is the subject of the lawsuit was placed on an excess lines basis pursuant to N.Y. Ins. Law § 2105; the excess line insurer was on the Excess Lines Association of New York’s ("ELANY") list of eligible excess lines insurers at the time the policy was written; and where the insurer continues to maintain the excess line trust fund pursuant to N.Y. Comp. Codes R. & Regs. tit. 11, Part 27 (2003) (Regulation 41)?

Conclusion:

N.Y. Ins. Law § 1213(e) (McKinney 2006) would apply under such circumstances, provided the excess line insurer has complied with all the applicable provisions of the Insurance Law and Regulations and its contract designates the Superintendent as its attorney upon whom lawful process in any proceeding instituted by or on behalf of an insured may be served, and provided the insurer has sufficient funds in its excess line trust fund that is available to satisfy any final judgment.

Facts:

You seek clarification of our December 17, 2004 opinion, which addressed the issue of the posting of a bond by an excess line insurer with the court in which legal proceedings are pending, pursuant to N.Y. Ins. Law § 1213(c) (1)(A) (McKinney 2006). In particular, you state that two of your clients that appear on the list of eligible excess lines insurers, maintained by the Excess Lines Association of New York ("ELANY"), are now in run-off status, at least with respect to their U.S. excess and surplus lines business. You state that while the run-off companies continue to service old policies and continue to handle and pay claims on these old policies, no new U.S. excess and surplus lines business is being written. However, you state that there may be infrequent situations in which a run-off company may renew or extend coverage for a limited period. You state that each run-off company meets and plans to continue to meet capital, surplus and U.S. excess lines trust fund requirements, pursuant to Regulation 41. However, you state that the run-off companies are being encouraged by ELANY and the Department to voluntarily surrender their New York excess lines eligibility due to their run-off status.

Analysis:

N.Y. Ins. Law § 1213 (McKinney 2006) governs service of process on insurers not licensed to do business in New York. Specifically, N.Y. Ins. Law § 1213(c)(1)(A)(McKinney 2006) provides as follows:

(c)(1) Before any unauthorized foreign or alien insurer files any pleading in any proceeding against it, it shall either:

(A) deposit with the clerk of the court in which the proceeding is pending, cash or securities or file with such clerk a bond with good and sufficient sureties, to be approved by the court, in an amount to be fixed by the court sufficient to secure payment of any final judgment which may be rendered in the proceeding, but the court may in its discretion make an order dispensing with such deposit or bond if the superintendent certifies to it that such insurer maintains within this state funds or securities in trust or otherwise sufficient and available to satisfy any final judgment which may be entered in the proceeding….

N.Y. Ins. Law § 1213(e)(McKinney 2006) states:

(e) This section shall not apply to any proceeding against any unauthorized foreign or alien insurer arising out of any contract of insurance effectuated in accordance with subsection (b) or (c) of section two thousand one hundred seventeen of this chapter or in accordance with section two thousand one hundred five of this chapter where such contract designates the superintendent or his successors in office the insurer’s true and lawful attorney upon whom may be served all lawful process in any proceeding instituted by or on behalf of an insured or beneficiary arising out of such contract.

The purpose of Section 1213(c)(1)(A) is to protect New York residents or other non-residents authorized to do business in New York and to be able to recover any judgment that is obtained against any unauthorized insurer.1 Therefore, for public policy purposes, an unauthorized insurer that is being sued in New York would have to have funds on deposit to satisfy any judgment that might be rendered against it. Section 1213(e) exempts any unauthorized insurer whose insurance contract was effectuated pursuant to Section 2117(b) or (c) or Section 2105 of the Insurance Law (excess line contracts) from this bond posting requirement if such insurer’s contract designates the Superintendent as its attorney upon whom may be served all lawful process in any proceeding instituted by or for any insured or beneficiary, as a result of such contract.

You ask whether Section 1213(e) would apply to a formerly listed excess line insurer if the insurance policy underlying the lawsuit was placed pursuant to Section 2105 of the Insurance Law,2 the insurer was on the list of eligible excess line insurers at the time the policy, which is the subject of the lawsuit, was written and the insurer continues to maintain the excess lines trust fund pursuant to N.Y. Comp. Codes R. & Regs. tit. 11, Part 27 (2003) (Regulation 41). Specifically, Section 27.14(a) of Regulation 41 provides as follows:

(a) No excess line broker shall place coverage with an unauthorized insurer unless such insurer has established and maintains a trust fund in compliance with the requirements set forth in this section and section 27.15 of this Part.

Section 27.15(j) provides, in pertinent part, as follows:

(j) The trust fund shall be established pursuant to a trust agreement consistent with section 27.15 of this Part and containing the following minimum provisions in a form satisfactory to the superintendent:

(1) the trust fund is for the exclusive protection of all direct policyholders and beneficiaries of direct policies covering property or risks located within the United States (exclusive of any marine insurance business, excluded from excess line business pursuant to section 2117(b)(3) of the Insurance Law) where the insurer does business on an unauthorized basis;

(5) the superintendent and excess line association shall be notified by the trustee, within 30 days of its receipt of notice from the insurer, that a trust has been amended or will not be renewed or replaced;

(6) in the event of termination of a trust, an independent certified public accountant shall be appointed by the trustee as auditor, and an audit shall be made of the trust fund as of the date of such termination;

(7) the audit shall estimate any outstanding liability of the insurer for unpaid losses (both reported and unreported) and unearned premiums on policies issued by the insurer to United States policyholders during the term of the trust, up to the date of termination;

(8) the auditor shall, upon completion of the audit, and from time to time thereafter at the request of the trustee, issue a certificate to the trustee certifying the amount of any outstanding liability at the date of the termination or at a later date specified in the certificate; and

(9) the trustee shall retain in trust, following the date of termination by the insurer, such funds as may be necessary to pay losses and unearned premiums consistent with the audit.

If the excess line insurers in question have complied with all of the above provisions and have designated the Superintendent as their lawful attorney upon whom legal process in any proceeding must be served, and such insurers have sufficient funds in their Regulation 41 trust fund available to satisfy any final judgment against such insurers, Section 1213(e) would apply.

As a final matter, you mentioned that there may be infrequent situations in which a company in run-off status will renew or extend coverage for a limited period. Please be advised that, pursuant to N.Y. Ins. Law § 2118, Section 27.13(a), (b) & (g) of Regulation 41 and other applicable sections of the Insurance Law and Regulation, a company must be in compliance with, among other things, the solvency requirements of New York and be on the list of eligible insurers to renew policies, even if the renewal is only for a limited period.

For further information you may contact Associate Attorney D. Monica Marsh at the New York City Office.


1 See Allstate Ins. Co. v Administratia Asigurarilor De Stat, 948 F.Supp. 285 (1996).

2 Section 2105 addresses excess line insurance and licensing of brokers.