NEW YORK STATE REGULATIONS APPLICABLE TO THE PLACEMENT OF EXCESS/SURPLUS LINES INSURANCE. Eric A. Portuguese, Esq. Lester Schwab Katz & Dwyer, LLP

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1 NEW YORK STATE REGULATIONS APPLICABLE TO THE PLACEMENT OF EXCESS/SURPLUS LINES INSURANCE by Eric A. Portuguese, Esq. Lester Schwab Katz & Dwyer, LLP 111

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3 NEW YORK STATE REGULATIONS APPLICABLE TO THE PLACEMENT OF EXCESS/SURPLUS LINES INSURANCE By: Eric A. Portuguese Lester Schwab Katz & Dwyer, LLP Although the Insurance Law generally prohibits the sale in New York of insurance underwritten by insurers not authorized to conduct business in New York (Insurance Law 2117 [a]), it permits certain licensed brokers, known as excess line brokers, to procure insurance from unauthorized insurers (Insurance Law 2105 [a]; 2117 [h]), if they have been unable after diligent effort to procure the full amount of required insurance from authorized insurers. Insurance Law, 2118 [b] [3] [A]. The excess line broker is required to apply for and receive an excess lines broker s license from the New York Department of Financial Services. 11 NYCRR The excess line broker is required to obtain rejections from three authorized insurers before placing the risk with an unauthorized insurer. Insurance Law 2118 [b] [4]. According to the regulations, the three authorized insurers must be authorized to write insurance of the kind requested and the excess line broker has to believe might consider writing the type of coverage or class of insurance involved. 11 NYCRR 27.3(d). Any failure of the excess lines broker to comply with the Insurance Law requirements does not provide a basis to deny enforcement of the policy. See 3405 Putnam Realty Corp. v. Chubb Custom Ins. Co., 14 A.D.3d 310, 788 N.Y.S.2d 64 (1 st Dept. 2005). Prior to placing business with an eligible excess line insurer, when the insured s home state is New York, an excess line broker must obtain and review the following documents (11 NYCRR 27.13): 1. If a foreign insurer, a copy of the insurer s most recent annual financial statement; 113

4 2. If an alien insurer, evidence that the insurer appears in the most recent NAIC IID list of alien insurers; 3. A copy of the insurer s latest available report on examination, as conducted by its home jurisdiction; and 4. A certificate of authority from the insurer s home jurisdiction to verify that the insurer is authorized to write the type of insurance policy sought to be procured. The New York Department of Financial Service has created an export list setting forth certain types of insurance coverages that the Department has determined are generally not available from licensed insurers. Three declinations from authorized insurers are not required for export list coverages. 11 NYCRR 27.3(g). These coverages include: liability coverage for asbestos, fungi and water damage remediation and removal, liability coverage for the owners of amusement rides, builders risk insurance (where the total insured values exceed $10 million), commercial excess and umbrella liability (where the underlying limits or self-insured retentions are at least $10 million), pollution liability and environmental impairment, and general liability (primary or excess) for general contractors and subcontractors for damages that arise out of the construction, demolition or renovation of any building or structure. The following language must be stamped on every excess line insurance policy (11 NYCRR 27.15(b)): THE INSURER(S) NAMED HEREIN IS (ARE) NOT LICENSED BY THE STATE OF NEW YORK, NOT SUBJECT TO ITS SUPERVISION, AND IN THE EVENT OF THE INSOLVENCY OF THE INSURER(S), NOT PROTECTED BY THE NEW YORK STATE SECURITY FUNDS. THE POLICY MAY NOT BE SUBJECT TO ALL OF THE REGULATIONS OF THE DEPARTMENT OF FINANCIAL SERVICES PERTAINING TO POLICY FORMS. In the event of the insolvency of an unauthorized insurer, losses will not be covered by any New York State insolvency fund. Insurance Law 2118 [e] [2] [c] [ii]. Excess line insurers 114

5 are not subject to residual market risk assignments (auto liability, property or medical malpractice), nor are they required to participate financially in any deficits for these residual market mechanisms. The eligible excess line insurers also do not have to contribute to any state guaranty or security fund assessments. Insurers seeking to become an eligible non-admitted insurer in New York need to submit an application to the Excess Line Association of New York. As of January 1, 2016, the minimum requirements for eligibility for a non-admitted insurer include a policyholders surplus of at least $46 million. 11 NYCRR 27.13(b). The Excess Line Association of New York includes a list of eligible excess and surplus lines insurers on its website. Note that the statutory cancellation and non-renewal notice requirements do not apply to excess and surplus lines policies. See Insurance Law 3426(l)(2); IDW Group, LLC v. Levine Ins. Risk Management Services, Inc., 40 Misc3d 368, 969 N.Y.S.2d 376 (NY Cty Sup Ct 2013). However, there is no express exemption for excess line insurers contained in the personal lines cancellation/nonrenewal statute, Insurance Law, 3425, and the New York Department of Financial Services has opined that excess line polices are subject to the requirements of the statute for personal lines insurance policies. See DFS Opinion No In addition, Regulation 121 (11 NYCRR Part 73), which limits the types of policies that can be issued on a claims-made basis and imposes certain minimum standards on those claimsmade policies that are permitted, does not apply to policies procured from unauthorized insurers by licensed excess line brokers. See 11 NYCRR [a]; Segal Co. v. Certain Underwriters at Lloyds, London, 21 A.D.3d 138, 798 N.Y.S.2d 3d (1 st Dept. 2005). Furthermore, Regulation 107 (11 NYCRR Part 71), which prohibits policies where defense costs reduce policy limits (with certain exceptions), also does not apply to unauthorized insurers. 11 NYCRR 27.10(a); In re September 11 th Liability Ins. Coverage Cases, 333 F. Supp2d 111 (S.D.N.Y. 2004). 115

6 Pursuant to Insurance Law 1213(c), any unauthorized foreign or alien insurer is required to post a bond (to secure payment of any final judgment which may rendered) prior to filing any pleading in a proceeding against it. This includes the filing of a motion to dismiss by such carrier. See Levin v. Intercontinental Cas. Ins. Co., 95 N.Y.2d 523, 719 N.Y.S.2d 634 (2000). The statute exempts such insurers where the policy designates the Department of Financial Services as the lawful attorney upon whom may be served all lawful process. Insurance Law 1213(e); see also NY General Counsel Opinion No (Aug. 16, 2006), 2006 WL Pursuant to Insurance Law 1213(b), an unauthorized insurer is deemed to have consented to the appointment of the New York Department of Financial Services as its agent for service of process, where such insurer commits any of the following acts in the State of New York, effected by mail or otherwise: (A) the issuance of delivery of contracts of insurance to residents of this state or to corporations authorized to do business therein, (B) the solicitation of applications for such contracts, (C) the collection of premiums, membership fees, assessments or other considerations for such contracts, or (D) any other transaction of business. If a policy is not issued or delivered in New York (including the mailing of the policy to the insured in New York), Section 1312(b) does not apply. See Blau v. Allianz Life Ins. Co. of North America, 124 F. Supp3d 161 (E.D.N.Y. 2015)

NEW YORK EXCESS & SURPLUS LINES LAWS AND REGULATIONS SUMMARY IN BRIEF

COMPLIANCE ADVISOR NEW YORK EXCESS & SURPLUS LINES LAWS AND REGULATIONS SUMMARY IN BRIEF A PUBLICATION BY THE EXCESS LINE ASSOCIATION OF NEW YORK One Exchange Plaza 55 Broadway 29th Floor New York, New