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

David A. Paterson
Governor

Eric R. Dinallo
Superintendent

OGC Op. No. 09-03-04

The Office of General Counsel issued the following opinion on March 6, 2009 representing the position of the New York State Insurance Department.

RE: Aggregate Limits

Question Presented:

May a liability policy covering a securities broker/dealer and its registered representatives provide for a group aggregate limit covering the broker/dealer and its registered representatives if the policy also affords a separate dedicated, smaller individual limit of liability to the New York members of the group in the event the group aggregate limit is exhausted by claims of other group members?

Conclusion:

No. A liability policy that covers a securities broker/dealer (as named insured) and its independent contractor registered representatives (as additional insureds) may not be issued except to a purchasing group formed pursuant to the requirements of N.Y. Ins. Law Article 59 (McKinney 2000), the federal Liability Risk Retention Act 15 U.S.C. §§ 3901, et seq., and N.Y. Comp. Codes R. & Regs., tit. 11, Part 310 (Regulation No. 134). Further, such a policy must comply with 11 NYCRR Part 153 (Regulation 135). Pursuant to Regulation 135, a policy that insures a securities broker/dealer and its registered representatives may not provide separate coverage to its New York members that is subject to a group aggregate liability limit of any kind at any time.

Facts:

The inquirer provides the following example:

Securities Broker/Dealer with 100 independent contractor representatives across the country. 20 of the 100 are New York Registered Representatives. Broker/Dealer maintains a Professional Liability policy, also affording coverage to the registered representatives, underwritten by Carrier X. Limits of the policy are $1,000,000 Each Occurrence and $2,000,000 Total Policy Aggregate for all claims, for all Insured parties. To satisfy the New York Insurance Regulation, Carrier X offers an endorsement to the policy that provides every New York Representative with an additional $250,000 Limit of Liability, should the $2,000,000 Total Policy Aggregate Limit be exhausted by other claims, and provided that these claims did not arise from the actions of the New York Representative him/herself.

The inquirer asks whether the arrangement described comports with the New York Insurance Law and regulations promulgated thereunder.

Analysis:

Under New York law, a policy covering a securities broker/dealer and its registered representatives may only be issued to a purchasing group formed pursuant to the requirements of Article 59 of the Insurance Law, the federal Liability Risk Retention Act, 15 U.S.C. §§ 3901, et seq., and 11 NYCRR Part 310 (Regulation No. 134). Otherwise, the coverage would be an impermissible group policy. See Opinion of Office of General Counsel No. 06-04-07 (April 5, 2006). To comply with governing law, the insurer must issue separate policies for the broker/dealer (the insured) and each of the representatives (each additional insured).

Even where issued as a purchasing group, the policy may not have aggregate limits for the New York members. 11 NYCRR § 153.4(c) prohibits the application of a group aggregate limit of any kind at any time to the New York members of a group policy. See Opinion of Office of General Counsel No. 06-07-03 (July 6, 2006). 11 NYCRR § 153.4(c) reads 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.

Because the insurer in the inquirer’s example would apply the $2,000,000 total policy aggregate limit for the group to the New York group members, the insurer would run afoul of Section 153.4(c). The fact that the policy also provides a separate limit for each registered representative in the event that the group aggregate limit is exhausted by the claims of other insureds does not remedy the violation. Regulation 135 plainly states that an insurer may not subject any New York member to any group aggregate limit of any kind at any time. The insurer may, however, provide a separate limit of liability to a New York group member that is separate and apart from any liability limit to which any other insured group member may be insured, and which operates unaffected by the experience of any other group member or the overall experience of the group itself.

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