Regulatory Impact Statement for Proposed Thirteenth Amendment to 11 NYCRR 27 (Insurance Regulation 41).

1. Statutory authority: Financial Services Law Sections 202, 301 and 302 and Insurance Law Sections 301, 2101, 2104, 2105, 2110, 2116, 2117, 2118, 2121, 2130, 3103, 9102 and Article 59.

Section 301 of the Insurance Law and sections 202 and 302 of the Financial Services Law authorize the Superintendent of Financial Services (the "Superintendent") to prescribe regulations interpreting the provisions of the Insurance Law and to effectuate any power granted to the Superintendent under the Insurance Law.

Article 21 of the Insurance Law sets forth the duties and obligations of insurance brokers and excess line brokers. Section 2101 sets forth relevant definitions. Section 2104 governs the licensing of insurance brokers. Section 2105 sets forth licensing requirements for excess line brokers. Section 2110 provides grounds for the Superintendent to discipline licensees by revoking or suspending licenses, or, pursuant to section 2127, imposing a monetary penalty in lieu of revocation or suspension. Section 2116 permits payment of commissions to brokers and prohibits compensation to unlicensed persons. Section 2117 prohibits the aiding of an unauthorized insurer. Section 2118 sets forth the duties of excess line brokers in placing insurance with eligible foreign and alien insurers, including the duty to ascertain and verify the financial condition of an unauthorized insurer before placing business with that insurer. Section 2121 provides that brokers have an agency relationship with insurers for the collection of premiums. Section 2122 imposes limitations on advertising by producers. Section 2130 establishes the Excess Line Association of New York ("ELANY").

Insurance Law section 3103 provides that, subject to certain exceptions, insurance policies or annuity contracts that are delivered or issued for delivery in this state in violation of the Insurance Law are valid and binding upon the issuing insurer as though the policies complied with the Insurance Law.

Article 59 of the Insurance Law governs the formation and operation of purchasing groups. A purchasing group is a group formed pursuant to federal law that (1) has as one of its purposes the purchase of liability insurance on a group basis; (2) purchases liability insurance only for its group members to cover their similar or related liability exposures; (3) is composed of members whose businesses or activities are similar or related with respect to the liability exposure being insured; and (4) is domiciled in any state. Section 5907 provides that purchasing groups are subject to all applicable laws of this state, except that a purchasing group and its insurer are exempt from certain laws described therein. Purchasing groups are permitted to purchase liability insurance on a group basis in compliance with 11 NYCRR Part 153 (Insurance Regulation 135), and may purchase such coverage in the excess line market through licensed excess line brokers.

Insurance Law section 9102 establishes rules regarding the allocation of direct premiums taxable in New York where insurance covers risks located both in and out of New York.

2. Legislative objectives: Generally, an unauthorized insurer may not do an insurance business in this state. In permitting a limited exception for licensed excess line brokers to procure insurance policies in New York from unauthorized insurers, the Legislature established statutory requirements to protect persons seeking insurance in this state. An excess line broker must exercise due care and make a diligent effort to obtain insurance from authorized insurers before placing coverage with an unauthorized insurer. Generally, an excess line broker must obtain declinations from three authorized insurers before placing coverage with an unauthorized insurer. However, the regulation sets forth an “export” list of coverages that are not readily available in the authorized market and these may be placed through an excess line broker without obtaining the requisite three declinations.

The Legislature has recognized that in certain instances a different number of declinations may be appropriate and thus has permitted the Superintendent, after a public hearing, to change the number of necessary declinations. The proposed rule adds a number of coverages that will not require declinations to the export list.

3. Needs and benefits: Regulation 41 governs the placement of excess line insurance. The purpose of the excess line law is to enable consumers who are unable to obtain insurance from authorized insurers to obtain coverage from excess line insurers. By adding to the export list coverages that are hard to place and whose declinations become pro forma (since New York authorized companies are not writing adequate coverage), the proposed rule will increase efficiency in the placement of risks by excess line brokers with eligible excess line insurers.

4. Costs: The rule is not expected to impose any additional compliance costs on excess line brokers. In fact, the proposed rule should produce a cost savings, because it eases the requirements of obtaining declinations from authorized insurers for certain types of coverages before procuring a policy from an unauthorized insurer. The proposed rule also should benefit New York insurance consumers, who will be able to obtain more quickly coverages not readily available in New York.

5. Local government mandates: This amendment does not impose any program, service, duty or responsibility upon any city, town or village, or school or fire district.

6. Paperwork: There is no additional paperwork required. In fact, the proposed rule should reduce paperwork, because excess line brokers will not have to complete the declination sections of the affidavits they are required to file with ELANY pursuant to section 27.5 of this regulation for every policy or policy renewal procured from an unauthorized insurer for the coverages on the export list.

7. Duplication: This amendment will not duplicate any existing state or federal rule.

8. Alternatives: Pursuant to Insurance Law section 2118(b)(4), the Department is tasked with reviewing the export list annually. In its review of the state of markets for difficult-to-place insurance coverages, the Department considers, among other things, the following: (1) complaints received regarding availability of coverages; (2) supporting documentation of requests to add coverages to the export list; and (3) responses to the Department’s availability survey conducted every year pursuant to section 308 of the Insurance Law. The availability survey is sent to all authorized property/casualty insurance companies annually. The primary purpose of the survey is to ascertain the existence of markets for difficult-to-place insurance coverages.

In 2009, ELANY and a trade association submitted to the Department requests to add coverages to the export list. After publishing a notice in the State Register on July 7, 2010, the Department held a public hearing at its New York City offices on August 20, 2010. All interested parties, including authorized property/casualty insurance companies, were invited to testify orally or submit written comments. Additionally, on April 12, 2011, the Department performed outreach by posting the proposed rule on its website for additional comment.

After careful consideration of the written comments and oral testimonies received from the public hearing, publication of the proposed rule on the Department’s website, and discussions with ELANY (the association representing excess line brokers), the Superintendent has determined that certain coverages should be added to the export list.

The review of ELANY’s requested additions to the export list started with the fundamental premise that the authorized market is the preferred market. The excess line market exists specifically to meet the needs of New York residents only as a last resort. The Department’s review of the proposal included an analysis of the annual availability survey, consultations with Department staff responsible for the particular lines of business, analysis of the Department’s experience in processing inquiries from the public with respect to availability concerns, and a thorough review of all testimony, both oral and written, that was provided by interested parties. The Department now proposes to add to the export list many of the coverages requested by ELANY. If the proposed rule is adopted, it will increase the number of coverages on the export list that will not require declinations. ELANY will provide the Department with data regarding the effect the amendments to the export list have had on the availability of coverage(s) in New York.

The proposed additional coverages to the export list are as follows:

Asbestos, Fungi and Water Damage Remediation and Removal – Liability and Property Damage

This coverage was added based on the Department’s analysis of information and after consultation with Property Bureau staff. The Department concluded that the availability of this coverage through admitted channels is limited and that addition to the export list is appropriate.

Builders Risk Insurance: Coverage for construction projects where the total insured values exceed $10,000,000.

This coverage was added based on the Department’s analysis of information and after consultation with Property Bureau staff. The Department concluded that the availability of this coverage through admitted channels is limited for these high capacity risks, which require large limits, and that addition to the export list is appropriate.

Elevator Service and Maintenance Contractors – Liability and Property Damage

This coverage was added based on the Department’s analysis of information and after consultation with Property Bureau staff. The Department concluded that the availability of this coverage through admitted channels is limited and that addition to the export list is appropriate.

Excess Professional/Errors & Omissions Liability - All Classes: Coverage for excess liability where the underlying policy limits and/or self insured retention is at least $10,000,000 per occurrence.

The Department, based on information provided at the hearing, and in consultation with experienced Property Bureau staff, concluded that the availability of this coverage through admitted channels is limited due to the unusual nature of these high capacity risks. The Department further concluded that the characteristics of this type of coverage are unique and that the coverage generally needs to be customized or manuscripted to the features of the specific exposure. For these reasons, the Department favors adding this coverage to the export list.

Excess Professional/Excess Salary Protection (Disability) Insurance as monoline policy: Coverage for high excess disability.

Coverage is provided pursuant to Insurance Law section 1113(a)(31)(A), insuring against financial loss caused by the cessation of earned income due to disability from sickness, ailment or bodily injury, in an amount up to that portion of an individual’s annual earned income that is in excess of the amount of in-force disability insurance from an authorized insurer, in an amount not to exceed 75% of the individual’s annual earned income in total based upon the sum of the in-force disability insurance and salary protection insurance when the benefits are payable to the individual or the individual’s beneficiary; or (B) where such underlying disability insurance cannot be obtained by an individual from an authorized insurer, in an amount not to exceed seventy-five percent of the individual's annual earned income when the benefits are payable to the individual or the individual's beneficiary.

Coverage for high excess disability, as defined in Insurance Law section 1113(a)(31)(B), was added based on the Department’s analysis of information provided and in consultation with experienced Property Bureau staff. The Department further concluded that availability of this coverage through admitted channels is limited. For these reasons, the Department favors adding this coverage to the export list.

Large Law Firm Lawyers’ Professional Liability Insurance (LPL): Coverage for professional liability for a large law firm that employs more than 100 attorneys.

This coverage was added based on the Department’s analysis of information provided at the public hearing and after consultation with Property Bureau staff. The Department concluded that the availability of this coverage through admitted channels is limited and that addition to the export list is appropriate.

Recreational Guide Services: Coverage for bungee jumping, parachuting, hunting and fishing, hunting and fishing clubs, and shooting ranges was added.

The Department, based on information provided at the hearing and in consultation with experienced Property Bureau staff, concluded that the availability of this coverage through admitted channels is limited. The Department further concluded that the characteristics of this type of coverage are unique and that the coverage generally needs to be customized or manuscripted to the features of the specific exposure. For these reasons, the Department favors adding this coverage to the export list.

Vacant or Unoccupied Buildings: Coverage for primary and/or excess liability insurance for vacant or unoccupied buildings.

The Department proposes adding this coverage to the export list based on its analysis of information provided at the public hearing and after consultation with experienced Property Bureau staff. The Department concluded that the availability of the coverage through admitted channels is extremely limited. For this reason, the Department favors adding this coverage to the export list.

Other Coverages:

The Department opted not to expand the export list with regard to the following coverages:

Auto Physical Damage: Coverage for commercial trucks, black cars, limousines and other commercial passenger transportation vehicles.

Initially the Department considered adding only medallion taxis; however, following testimony that indicated such coverage is available from several admitted insurers, and ELANY’s withdrawal of the request to add this coverage, the proposed rule does not add Auto Physical Damage coverage to the export list.

Used Car Dealers – Liability and Physical Damage

The Department concluded that there is sufficient capacity for this coverage in the authorized market based on information provided and in consultation with experienced Property Bureau staff. For this reason, the proposed rule does not add Used Car Dealers – Liability and Physical Damage coverage to the export list.

With respect to the following coverage types, which currently are on the export list requiring two declinations, the Department opted not to reduce the number of declinations to zero:

Primary or Excess Errors and Omissions/Miscellaneous Professional Liability: Coverage (other than Medical Malpractice Insurance), including general liability coverage (if included in the same policy) with respect to the following risks or coverages:

Alcohol and/or drug rehabilitation centers;

Alcohol and/or drug rehabilitation programs;

Residential facilities including convalescent centers, nursing homes, and assisted care facilities;

Day care centers for adults, children or the physically or mentally disabled;

Halfway houses for adults, children and/or the physically or mentally disabled;

Hospice care service providers;

Social services agencies;

Foster care service providers; or

Home health care providers.

The Department concluded that there is sufficient capacity for these coverages in the authorized market based on information provided and in consultation with Property Bureau staff. The proposed rule does not reduce the number of declinations from two to zero for Primary or Excess Errors and Omissions/Miscellaneous Professional Liability coverages on the export list.

Primary and/or excess liability coverage for general contractors and subcontractors in all construction trades for damages that arise out of the construction, building, demolition or renovation of any building or structure.

The proposed rule amended the language of this coverage to clarify that it pertains to contactors and subcontractors in construction trades.

The Department conducted further outreach by posting the proposed amendment on its web site to solicit feedback on the proposed changes from interested parties. The Department received one outreach comment from the Excess Line Association of New York ("ELANY"), a non-profit industry advisory association representing excess line brokers. ELANY requested a reduction in the number of declinations from two to zero for certain coverages currently on the export list. ELANY explained that this class of coverage is very difficult to place in the licensed market. Specifically, ELANY commented that the extremely restrictive underwriting criteria of the limited number of licensed insurers that write this coverage severely limits the number of risks that are acceptable to them. This coverage is generally unavailable to New York brokers; consequently, a substantial volume of this business must be placed by wholesale excess line brokers on behalf of these retail brokers. ELANY also indicated that it is encountering programming difficulties in accommodating two declination transactions. The Department contends that the issue of amending the requisite number of declinations was not a part of this proposed rule. The Department received other comments in support for keeping the declinations at two. A commentator stated that a competitively priced admitted market exists in New York for the type of coverage requiring two declinations, which makes the need to reduce the requirement to zero declinations unnecessary. Therefore, the rule was not so modified.

9. Federal standards: There are no minimum standards of the federal government for the same or similar subject areas.

10. Compliance schedule: The amendment will take effect upon publication in the State Register.

Regulatory Flexibility Analysis for Small Business and Local Government for Proposed Thirteenth Amendment to 11 NYCRR 27 (Insurance Regulation 41).

1. Small businesses: Most excess line brokers are considered to be small businesses as defined in section 102(8) of the State Administrative Procedure Act. The Department of Financial Services finds that this rule will not have any adverse economic impact on these small businesses and will not impose any reporting, recordkeeping or other compliance requirements on these small businesses because the proposed rule liberalizes the requirements of obtaining declinations from authorized insurers for certain types of coverages before procuring a policy from an unauthorized insurer.

The proposed rule will streamline the process for obtaining coverage for difficult-to-place risks in the excess line market, because excess line brokers will not have to complete the declination sections of the affidavit with respect to coverages on the "export" list.

2. Compliance requirements: None.

3. Professional services: No additional professional services are anticipated to be needed to comply with the proposed rule.

4. Compliance costs: This rule would impose no additional compliance costs on excess line brokers. In fact, the proposed rule should produce a cost savings for excess line brokers inasmuch as they no longer will have to obtain declinations for the coverages added to the "export" list.

5. Economic and Technological Feasibility: Compliance with the rule is economically and technologically feasible as the rule merely eases the requirement of obtaining declinations from authorized insurers for certain types of coverages before procuring a policy from an unauthorized insurer.

6. Minimizing adverse impact: There is no adverse impact and, in fact, the rule should produce a cost savings for excess line brokers because the rule eases the requirements of obtaining declinations from authorized insurers for certain types of coverages before procuring a policy from an unauthorized insurer.

7. Small business and local government participation: In 2009, the Excess Line Association of New York ("ELANY") and a trade association provided a list of coverages to the Department on behalf of excess line brokers for consideration as additions to the "export" list. The Department held a public hearing on August 20, 2010 at its New York City offices regarding the adding of coverages to the "export" list. Prior notice of the hearing had been published in the State Register on July 7, 2010. The public had been invited to testify orally or submit written comments. The regulation resulting from the public hearing was posted to the Department’s website on April 12, 2011 as an outreach draft, and the public was provided an opportunity to submit comment on the draft proposal until April 26, 2011. The Department received one outreach comment, which was submitted by ELANY, requesting a reduction in the required number of declinations for certain of the coverages included on the “export” list.

Rural Area Flexibility Analysis for Proposed Thirteenth Amendment to 11 NYCRR 27 (Insurance Regulation 41).

1. Types and estimated numbers of rural areas: Excess line brokers licensed in New York State and subject to the provisions of the proposed rule do business in most, if not all, of the counties in this state including rural areas as defined in section 102(13) of the State Administrative Procedure Act. Some of these licensees may have offices in rural areas.

2. Reporting, recordkeeping and other compliance requirements, and professional services: The present rule requires that excess line brokers obtain three declinations from authorized insurers before procuring a policy from an unauthorized insurer, except for those coverages that are set forth on the "export" list, which do not require declinations. The proposed rule adds coverages that will not require declinations to the “export” list.

There are no additional reporting, recordkeeping, or other compliance requirements.

3. Costs: Implementation of the proposed rule will not cause excess line brokers any additional costs. In fact, the proposed rule should produce a cost savings for excess line brokers, because it eases the requirements of obtaining declinations from authorized insurers for certain types of coverages before procuring a policy from an unauthorized insurer.

4. Minimizing adverse impact: The proposed rule does not impose any adverse impact on excess line brokers, because it eases the requirement of obtaining declinations from authorized insurers for certain types of coverages before procuring a policy from an unauthorized insurer.

The rule will not have an adverse impact on the excess line market, or the ability of insureds to obtain coverage in the excess line market in any area of New York, including rural areas.

5. Rural area participation: In 2009, the Excess Line Association of New York ("ELANY") and a trade association provided a list of coverages to the Department for consideration as additions to the "export" list. The Department held a public hearing on August 20, 2010 at its New York City offices regarding the adding of coverages to the "export" list. Prior notice of the hearing had been published in the State Register on July 7, 2010. The public had been invited to testify orally or submit written comments. The regulation resulting from the public hearing was posted to the Department’s website on April 12, 2011 as an outreach draft, and the public was provided an opportunity to submit comment on the draft proposal until April 26, 2011. The Department received one outreach comment, which was submitted by ELANY, requesting a reduction in the number of declinations for certain of the coverages included on the “export” list.

Statement Explaining Why a Job Impact Statement for Proposed Thirteenth Amendment to 11 NYCRR 27 (Insurance Regulation 41) Is Not Necessary.

The Department of Financial Services has determined that this rule will have no impact on jobs and employment opportunities because it merely adds coverages that will not require declinations to the "export" list.