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

Eliot Spitzer
Governor

Eric Dinallo
Superintendent

The Office of General Counsel issued the following opinion on May 29, 2007, representing the position of the New York State Insurance Department.

RE: Doing an Insurance Business/Franchise Taxes

Questions Presented:

1) Does the New York Insurance Law require an insurer that principally solicits, negotiates and delivers a property/casualty insurance policy outside New York be authorized to do an insurance business in New York if the policy covers risks located in New York?

2) Under the facts provided, would the insurer be liable for franchise taxes pursuant to Tax Law Article 33 (N.Y. Tax Law §§ 1500 et seq.)?

Conclusions:

1) No.  Given that the policy at issue will be principally negotiated, issued and delivered in Italy, where the insurer is authorized to do an insurance business, the Italian insurer would not be doing an insurance business in New York within the meaning of N.Y. Ins. Law § 1101 (McKinney 2006) so long as, if the insurer engages in any communications or other transactions with any insured in New York (including any New York subsidiary), those communications or transactions are conducted through mail or email, pursuant to the “mail order” exception set forth in Insurance Law § 1101(b)(2)(E).

2) According to a recent opinion by the New York State Department of Taxation and Finance (“Tax & Finance”), it appears that the Italian insurer would not be subject to the Article 33 franchise tax on the facts presented. However, the question is one that is ultimately within the jurisdiction of Tax & Finance, not the Insurance Department.

Facts:

The inquirer submitted this inquiry on behalf of an insurer that is duly licensed to do an insurance business in Italy, but not authorized in New York.  The insurer wishes to sell a D&O liability policy to cover an Italian parent corporation and its subsidiaries. All of the companies are located outside New York, except for one subsidiary that has corporate offices in New York. According to the inquirer, the policy will be negotiated, delivered and issued in Italy, and no solicitation or negotiation of insurance will take place in New York.

Analysis:

Doing an Insurance Business

Generally speaking, Insurance Law § 1102 prohibits any person from doing an insurance business in New York without either being authorized by a license in force pursuant to the Insurance Law, or exempted by the provisions of the Insurance Law. Insurance Law § 1101, which defines the “doing of an insurance business” very broadly, reads as follows:

(b) (1) Except as provided in paragraph two, three or three-a of this subsection, any of the following acts in this state, effected by mail from outside this state or otherwise, by any person, firm, association, corporation or joint-stock company shall constitute doing an insurance business in this state and shall constitute doing business in the state within the meaning of section three hundred two of the civil practice law and rules:

(A) making, or proposing to make, as insurer, any insurance contract, including either issuance or delivery of a policy or contract of insurance to a resident of this state or to any firm, association, or corporation authorized to do business herein, or solicitation of applications for any such policies or contracts;

(B) making, or proposing to make, as warrantor, guarantor or surety, any contract of warranty, guaranty or suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the warrantor, guarantor or surety;

(C) collecting any premium, membership fee, assessment or other consideration for any policy or contract of insurance;

(D) doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an insurance business within the meaning of this chapter;

(E) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this chapter.

However, N.Y. Ins. Law § 1101(b)(2) sets forth exceptions that are commonly known as the “mail order” exceptions.  These are certain acts that, if effectuated by mail or email from outside the state by an unauthorized insurer duly licensed to transact business in the laws of its domicile, do not constitute the doing of an insurance business in this state. These exceptions include:

(E) transactions with respect to policies of insurance on risks located or resident within or without this state (except master policies or contracts of group insurance which are subject to the requirements of subparagraph (B) hereof), which policies are principally negotiated, issued and delivered without this state in a jurisdiction in which the insurer is authorized to do an insurance business[.]

Since the policy at issue here will be principally negotiated, issued and delivered in Italy, where the insurer is authorized to do an insurance business, the Italian insurer would not be “doing an insurance business” in New York within the meaning of the Insurance Law so long as, if the insurer engages in any communications or other transactions with any insured in New York (including any New York subsidiary) those communications or transactions are conducted through mail or email.

Franchise Tax

Article 33 of the Tax Law, which imposes liability for certain franchise taxes upon insurance corporations, is also germane to your inquiry. In pertinent part, Tax Law § 1500(a) defines “insurance corporation” as:

a corporation, association, joint stock company or association, person, society, aggregation or partnership, by whatever name known, doing an insurance business . . .

Although the phrase “doing an insurance business” is not defined in the Tax Law, according to a recent Tax & Finance opinion, a corporation is considered to be doing an insurance business if it is conducting any business that, pursuant to the Insurance Law, requires the corporation to be authorized to do an insurance business. See Lansdown Atlantic Ltd., Adv. Op. Comm. T & F, December 28, 2006, TSB-A-06(9)(C).

Since - as concluded above - the Italian insurer under the facts presented would not be “doing an insurance business” in New York, it appears that the insurer would not be subject to franchise taxes pursuant to Article 33 of the Tax Law as a result of the transaction you have described.  However, the insured nevertheless may be subject to a “direct procurement” tax which is imposed pursuant to Tax Law Article 33-A on insureds that have NY-based insurance exposure but purchase policies outside the state.

This opinion is limited to an interpretation of the Insurance Law. Given that interpretations of the Tax Law are outside the province of the Insurance Department, the inquirer was advised to contact Tax & Finance with any questions about the enforcement and proper interpretation of the Tax Law.

For further information you may contact Senior Attorney Brenda Gibbs at the Albany Office.