OGC Opinion No. 05-01-11

The Office of General Counsel issued the following opinion on January 14, 2005 representing the position of the New York State Insurance Department.

Re: Fronting Question Presented

Does the New York Insurance Law restrict or prohibit "fronting" by authorized insurers for unauthorized insurers?


If under the guise of reinsurance, an unauthorized insurer engages in activities that would otherwise require a license under New York Insurance Law, the unauthorized insurer must obtain the required licenses.


The inquiry is of a general nature.


In the 1970's and 1980's the Department proposed a fronting regulation (Regulation 82) due to concern that authorized insurers were participating in reinsurance arrangements with unauthorized insurers that effectively aided the unauthorized insurers to do business in New York. Policies were issued with the implicit or explicit understanding that all or a portion of the risk would be reinsured directly, or indirectly through retrocession through other insurers, with unauthorized insurers that controlled, or were controlled by or affiliated with entities or persons that controlled, the placement of the risks, or their representatives. Other similar situations involving unauthorized insurers were also of concern. Under these reinsurance agreements, the authorized insurer remained at risk in the event of the demise of the unauthorized reinsurer.

Since the inquirer has not provided any facts, it is unclear whether these are the transactions the inquirer has in mind or whether there would be a transference of liability. Transference of liability implies that there was a novation of the original insurance agreement, and not merely a reinsurance agreement. If so, the unauthorized insurer would have to issue a new policy, which would probably place the unauthorized insurer in violation of N.Y. Ins. Law § 1102.

The Department's Regulation 82 was never promulgated. At this time, there is nothing in the Insurance Law that would preclude an unauthorized insurer from reinsuring 100% of an authorized insurer's risks so as long as the unauthorized insurer does not engage in any activities that would otherwise require it to obtain a license. Nevertheless, each case would have to be evaluated on its own facts.

Fronting is not deemed to exist solely because a certain percentage of an insurer's business is ceded to the unauthorized insurer. Rather, it is one factor that the Department would consider in determining whether a fronting arrangement exists. Therefore, it is irrelevant whether all of the risks located in New York are being ceded to the unauthorized insurer or if 100% of all existing risks are being ceded to the unauthorized insurer.

Please be aware that any arrangement or activity that would constitute the aiding of an unauthorized insurer would violate N.Y. Ins. Law § 2117 (McKinney 2000), and any unauthorized insurer that did any business in substance equivalent to one of the specified types of insurance business in § 1101(b)(1) in a manner designed to evade the provisions of the Insurance Law would be in violation of § 1102. Again, each case would have to be evaluated on its own facts.

For further information one may contact Principal Attorney Donald Carroll at the New York City Office.