New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT

25 BEAVER STREET
NEW YORK, NEW YORK 10004

Eliot Spitzer
Governor
Eric R. Dinallo
Acting Superintendent

The Office of General Counsel issued the following opinion on February 1, 2007 representing the position of the New York State Insurance Department.

Re: Debt Incurred by an HMO or an Article 43 Corporation.

QUESTIONS PRESENTED:

1) In what circumstances is Department approval required for a corporation licensed under Article 43 of the New York Insurance Law to incur a debt with a bank?

2) In what circumstances is Department approval required for a health maintenance organization ("HMO") to incur a debt with a bank?

CONCLUSIONS:

1) Where the debt is incurred as a result of a loan pursuant to New York Insurance Law § 1307 (McKinney 2006), or as a result of an intercompany transaction between a domestic controlled insurer and any person in its holding company system pursuant to Insurance Law § 1505 (McKinney 2006), the Department's approval is required.

2) Where the debt is incurred as a result of a loan pursuant to Insurance Law § 1307, or as a result of an intercompany transaction between a controlled HMO and any person in its holding company system pursuant to N.Y. Comp. Codes R. & Regs. tit.10, § 98-1.10 (2007), the Department's approval is required.

Facts:

The inquiry is of a general nature, without reference to any facts.

Analysis:

The Insurance Law and the regulations promulgated thereunder do not contain a general requirement that an Article 43 corporation or an HMO obtain approval from the Department prior to incurring debt with a bank. But as discussed below, in certain circumstances, prior approval is required.

Article 43 Corporations

Pursuant to Insurance Law § 4302 (McKinney 2000), Article 43 corporations are licensed by this Department and subject to its oversight. With respect to borrowing funds, Insurance Law § 1307 provides:

(a) Any domestic stock, mutual or co-operative insurance company or reciprocal insurer may, without pledging any of its assets, receive advances or borrow funds to:

(1) conduct its business,

(2) enable it to comply with any surplus requirement or make good any impairment or deficiency or other requirement of this chapter,

(3) defray the reasonable expenses of its organization,

(4) provide any fund to be voluntarily contributed to surplus, or

(5) organize, acquire or invest in any subsidiaries authorized by this chapter.

(b) Such borrowing may only be made upon an agreement that such moneys and such interest thereon as may be agreed upon, at a rate not exceeding the maximum rate provided in section 5-501 of the general obligations law, in effect at the time the agreement is executed, shall be repaid only out of free and divisible surplus of such insurer with the approval of the superintendent whenever, in his judgment, the financial condition of such insurer warrants. In the event of insolvency of a mutual or co-operative insurance company unearned premiums shall be deemed to be part of its free and divisible surplus.

(c) Any sum so advanced or borrowed shall not be part of the legal liabilities off such insurer and shall not be a basis of any set-off but until repaid all statements published by such insurer or filed with the superintendent shall show, as a footnote, the amount then remaining unpaid.

(d) No such insurance company or reciprocal insurer shall directly or indirectly make any agreement for any advance or borrowing pursuant to this section unless such agreement is in writing and shall have been approved by the superintendent as not unfair, misleading or contrary to law.

Insurance Law § 1505 also is relevant to your inquiry. It provides, in pertinent part, as follows:

(c) The superintendent's prior approval shall be required for the following transactions between a domestic controlled insurer and any person in its holding company system: sales, purchases, exchanges, loans or extensions of credit, or investments, involving five percent or more of the insurer's admitted assets at last year-end.

(d) The following transactions between a domestic controlled insurer and any person in its holding company system may not be entered into unless the insurer has notified the superintendent in writing of its intention to enter into any such transaction at least thirty days prior thereto, or such shorter period as he may permit, and he has not disapproved it within such period:

(1) sales, purchases, exchanges, loans or extensions of credit, or investments, involving more than one-half of one percent but less than five percent of the insurer's admitted assets at last year-end;

(2) reinsurance treaties or agreements;

(3) rendering of services on a regular or systematic basis; or

(4) any material transaction, specified by regulation, which the superintendent determines may adversely affect the interests of the insurer's policyholders or shareholders.

Nothing herein contained shall be deemed to authorize or permit any transaction which, in the case of a non-controlled insurer, would be otherwise contrary to law.

Thus, under Insurance Law § 1307(d), an Article 43 corporation must receive the approval of the Superintendent prior to incurring a debt of the sort set forth in Insurance Law § 1307(a).1 Likewise, under Insurance Law § 1505(d), prior approval is required where the debt is incurred as a result of an intercompany transaction between a domestic controlled insurer and any person in its holding company system.2

Health Maintenance Organizations

Although Insurance Law § 1109 (McKinney 2006) exempts HMOs from the licensing requirements of the Insurance Law, HMOs must nonetheless adhere to Insurance Law § 1307 (cited above). Thus, HMOs are required to seek the approval of the Department prior to incurring a debt pursuant to Insurance Law § 1307(a).

Furthermore, pursuant to the regulations promulgated under the New York Public Health Law, HMOs are Managed Care Organizations (MCOs). 10 NYCRR 98-1.1 reads as follows:

This Subpart shall be applicable to all persons who propose to establish and/or operate a health maintenance organization (HMO), special purpose health maintenance organization, also known as a prepaid health services plan (PHSP), comprehensive HIV special needs plan (HIV SNP) or, as specified, a primary care partial capitation provider (PCPCP) or managed long term care plan (MLTCP) or who currently operate an HMO, PHSP, HIV SNP or, as specified, a PCPCP or MLTCP certified under article 44 of the Public Health Law within the State of New York, which may hereinafter be referred to individually or collectively as managed care organizations (MCOs). [emphasis supplied].

In turn, 10 NYCRR 98-1.10 provides in relevant part:

(c) The commissioner's and, except in the case of PHSP, HIV SNP or PCPCP, the superintendent's prior approval shall be required for the following transactions between a controlled MCO and any person in its holding company system: sales, purchases, exchanges, loans, extensions of credit or investments the aggregate of which involves five percent or more of the MCO's admitted assets at last year-end. Thirty days prior notice to the commissioner and, except in the case of a PHSP, HIV SNP or PCPCP, the superintendent, is required before entering into the following transactions between a controlled MCO and any person in its holding company system: a reinsurance agreement or an agreement for rendering services on a regular or systematic basis, other than medical or management services that require prior approval under this Subpart. Such transactions may become effective unless the commissioner or the superintendent has disapproved the transaction within such period. [emphasis supplied].

Thus, regulations promulgated to implement the Public Health Law require HMOs to seek the approval of the Superintendent where the debt is incurred as a result of transactions between a "controlled" HMO and any person in its holding company system, the aggregate of which involves five percent or more of the HMOs admitted assets at last year end.

For further information, you may contact Assistant Attorney Sapna Maloor at the New York City office.

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1 See General Counsel Opinion 03-01-46 dated January 28, 2003 (holding that where an insurer borrows monies that it shows as a liability, it does not need the approval of the Superintendent).

2 See General Counsel Opinion 05-11-22 dated November 18, 2005 (holding that a capital contribution from a corporate parent to its licensed subsidiary constitutes a transaction to which the notification requirements of Insurance Law § 1505(d) applies).