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

David A. Paterson
Governor

Eric R. Dinallo
Superintendent

The Office of General Counsel issued the following opinion on March 25, 2008, representing the position of the New York State Insurance Department.

Re: Retroactive Application of Regulation 41

Question Presented:

Does N.Y. Comp. Codes R. & Regs. tit. 11, Part 27 (Regulation 41), which was effective January 1, 1994, apply to a trust agreement that was entered into prior to the promulgation of the regulation, where the company was placed into liquidation and ceased writing new business prior to the promulgation of the regulation?

Conclusion:

No. Under those circumstances, 11 NYCRR Part 27 (Regulation 41) does not apply to the trust agreement.

Facts:

Regulation 41 sets forth certain standards for excess line brokers when placing excess line insurance with unauthorized insurers. Prior to 1993, Regulation 41 was silent as to whether trust funds could be used to pay claims on both direct and reinsurance policies. In 1993, the Insurance Department promulgated a new regulation that specifically states that disbursements from the trust fund may be made only to pay claims on direct policies. See 11 NYCRR 27.14(d)(1). After all claims on direct policies have been paid, the trust fund may be used to pay unearned premiums on such policies. See 11 NYCRR 27.14(d)(2).

The inquirer reports that he represents the liquidators of an unauthorized insurer, which is currently in liquidation and had entered into a trust agreement prior to the promulgation of the new regulation. The trust agreement states that the trust fund may be used to pay the claims of policyholders of both direct and reinsurance policies. The inquirer asks whether the new regulation applies retroactively to the trust agreement.

Analysis:

As noted above, 11 NYCRR Part 27 sets forth certain standards that excess line brokers must follow when placing excess line insurance with unauthorized insurers. In December 1993, the Department repealed the regulation and promulgated a new regulation with an effective date of January 1, 1994. 11 NYCRR § 27.13(h) of the new regulation provided:

(h) The trust fund shall be established pursuant to a trust agreement consistent with section 27.14 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 where the insurer does business on an unauthorized basis. . .

With respect to trust fund disbursements, 11 NYCRR § 27.14(d) provided:

(d) Disbursements from the trust fund shall be made only for the following purposes and only in the following priority:

(1) bona fide claims resulting from covered losses under direct policies issued within the United States by the insurer on an unauthorized basis; and

(2) after all such claims have been paid, then return of unearned premiums on such policies.

Prior to 1993, the regulation was silent as to whether trust funds could be used to pay claims on both direct and reinsurance policies. The trust agreement that the inquirer mentioned conformed to the provisions of the old regulation, and provides that the trust funds apply to the claims of both insureds and reinsureds.

11 NYCRR § 27.22 of the new regulation provided a transition period for compliance with the trust fund requirements set forth therein. That provision stated:

Unauthorized insurers not meeting the trust fund requirements contained in sections 27.13 and 27.14 of this Part, and which were in compliance with Part 27 previously in effect, shall comply with the new requirements of this Part no later than July 1, 1994.

The onus was on the excess line insurance broker to ensure that the trust agreement conformed to the provisions of the new regulation. In the instant case, however, the insurer ceased writing new business and was placed in liquidation prior to the promulgation of the new regulation. Consequently, the new regulation would not apply, and the Department would have no objection to the agreement being enforced as written.

For further information you may contact Associate Attorney Pascale Jean-Baptiste at the New York City Office.