OGC Op. No. 10-04-03
The Office of General Counsel issued the following opinion April 30, 2010, representing the position of the New York State Insurance Department.
RE: Applicability of Article 15
Does Insurance Law § 1505(a) apply to transactions between an insurer and another company that claim to be part of two different holding company systems where both are controlled by the same common holding company?
Yes. Transactions between ABC Claims (USA), Inc. (“ABC Claims”) and ABC Insurance Company of America (“ABC America”) would be subject to Insurance Law § 1505(a) because they are under common control within a holding company system.
ABC Claims is a wholly owned subsidiary of ABC Insurance Group Holding, Inc. (“Parent”) which is domiciled in Japan. ABC Claims acts as a third-party administrator for ABC America. ABC America, the controlled insurer, is also a subsidiary of the Parent. The inquirer asserts that ABC Claims and ABC America are members of two different holding company systems in that each company has a different set of companies that stand between it and the Parent.
Article 15 of the New York Insurance Law, (§§ 1501 – 1510) sets forth the rules governing insurer holding companies. Article 15 responded to the corporate trend in the 1960s to form diverse corporate conglomerates of widely disparate businesses. See OGC Opinion No. 01-11-03 (November 1, 2001). In this environment, cash-rich insurance companies were often viewed as favorable takeover targets. Id. It was of concern to regulators that insurance company subsidiaries would be abused as sources of funding for the weaker components of a corporate conglomerate. Id. This concern led to the formation and adoption of the Article 15 that governs the relationship between holding company affiliates and transactions between an insurer and other members of the holding company system.
A “holding company” is defined by Insurance Law § 1501(a)(3) as, “any person who directly or indirectly controls any authorized insurer.” “Person” is defined by § 1501(a)(1) as “an individual, partnership, firm, association, corporation, joint-stock company, trust, any similar entity or any combination of the foregoing acting in concert.” A “holding company system” is defined by N.Y. Ins. Law § 1501(a)(6) as, “a holding company together with its controlled insurers and controlled persons.”
“Control” is defined by Insurance Law § 1501(a)(2) (McKinney 2010) as:
The possession direct or indirect of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract (except a commercial contract for goods or non-management services) or otherwise; but no person shall be deemed to control another person solely by reason of his being an officer or director of such other person. Subject to subsection (c) hereof, control shall be presumed to exist if any person directly or indirectly owns, controls or holds with the power to vote ten percent or more of the voting securities of any other person.
In this case, ABC Claims and ABC America are both directly or indirectly controlled by Parent, within the meaning of Insurance Law § 1501(a)(2). Under Insurance Law § 1501(a)(6), ABC Claims and ABC America belong to one holding company system subject to the control of the Parent, which is the holding company. ABC Claims is a controlled person and ABC America is a controlled insurer under the definitions cited above. Because both companies belong to a single holding company system, Insurance Law § 1505(a), and indeed all of Article 15, apply to any transactions between the companies.
For further information you may contact Michael Campanelli at the New York City Office.