The Office of General Counsel issued the following informal opinion on December 10, 2002, representing the position of the New York State Insurance Department.

Re: Business Insurance Plan.

Questions Presented:

1. Assuming that the Association wished to offer the specified insurance coverages under a "safety group" or "mass merchandising" program, and the insurance was to be placed through a licensed broker, would the Association be required to secure any license from or register with the Insurance Department?

2. What would be the process for securing approval of proposed mass merchandising and safety group programs to be offered by the Association and the premiums to be charged Association members for that coverage?

Conclusions:

1. No. So long as the Association does not provide any services that would require licensing by the Insurance Department (such as solicitation of insurance, adjusting of claims, etc.) it would not need to obtain a license from this Department.

2. The insurer agreeing to underwrite such a program would, if it did not already have a filing approved, need to submit a filing to the Department justifying the rate structure for each coverage, such as: (1) for a mass merchandising program, the economies of acquisition or administration; and (2) for a safety group, the common safety controls and risk management measures among the participants that are intended to reduce risk exposure.

Facts:

ABC Association is a voluntary membership association of consulting engineers. Membership is open to all firms that meet the licensing requirements established by New York State. Membership fees vary based upon the characteristics of the member, with larger entities generally paying a higher annual membership fee then smaller ones. Most if not all members are for-profit enterprises.

The Association has entered discussions with a licensed insurance broker concerning the possibility of offering Association members specific programs of commercial property/casualty insurance coverage(s) including professional liability, workers" compensation, motor vehicle physical damage and commercial property coverage. The insurance program is to be written and administered through the licensed broker.

Analysis:

Prior to 1986, property/casualty insurance could not permissibly be written in New York on a group basis. New York, responding to a property/casualty insurance availability crisis, passed omnibus legislation (Chapters 220 and 221 of the Laws of 1986.) One of the new sections added to the Insurance Law as part of the omnibus legislation was N.Y. Ins. Law § 3435 (McKinney 2000), which was New York’s first property/casualty group insurance law. However, § 3435 permits such group insurance only where the members of the group are public entities or nonprofit organizations. Since most, if not all, of the Association members are for-profit entities, they may not secure coverage under such a group insurance policy written pursuant to § 3435.

In response to the liability insurance availability crisis during the 1980s, the federal government enacted the Federal Liability Risk Retention Act of 1986 (LRRA), 15 U.S.C. § 3901-3906 (2001). One of the principal provisions of the LRRA was to permit the purchase of group liability insurance, notwithstanding state laws to the contrary, using a purchasing group as the means. New York recognized purchasing groups when it enacted Article 59 of the New York Insurance Law in 1988 (N.Y. Ins. Law § 5901-5913 (McKinney 2000)), conforming New York law to the LRRA. However, group coverage is permissible only with regard to liability insurance. Physical damage and workers" compensation may not be written on a group basis.

In 1989, the New York State Insurance Department promulgated Regulation No. 135, N.Y. Comp. Codes R. & Regs. tit.11, § 153 (1989), establishing standards and procedures for property/casualty insurance policies issued in New York on a group basis (pursuant to Ins. Law § 3435 or the LRRA and Ins. Law Art. 59) or on a "quasi group" basis. The regulation states that ""Quasi-group" means any method of marketing individually underwritten and issued property/casualty or liability insurance policies in a group context to participants engaged in similar activities or organized in a common network, through a mass merchandising, safety group or similar program, in connection with state law or a federal purchasing group." N.Y. Comp. Codes R. & Regs. tit. 11, § 153.1(q)(1989).

Accordingly, the three alternatives that may be utilized by members of the Association are: (1) formation of a purchasing group made up of the members of the association that wish to purchase liability insurance; (2) development of a mass merchandising program offering insurance to association members; or (3) formation of a safety group consisting of members of the association. The present inquiry concerns only the second and third alternatives. Each is discussed below.

Mass Merchandising Programs

N.Y. Comp. Codes R. & Regs. tit. 11, § 153.1(j)(1989)(Insurance Department Regulation No. 135) states as follows:

Members of the Association could secure insurance coverage for professional liability, workers" compensation, motor vehicle physical damage and commercial property coverage through an approved mass merchandising program, since all are types of property/casualty insurance pursuant to N.Y. Comp. Codes R. & Regs. tit. 11, § 153.1(j)(1989)(Insurance Department Regulation No. 135). The insurer agreeing to underwrite such a program would need to have a filing approved by the Department justifying the rate structure for each coverage, including the economies of acquisition or administration.

Safety Group Programs

N.Y. Comp. Codes R. & Regs. tit. 11, § 153.1(r)(1989)(Insurance Department Regulation No. 135) states as follows:

Members of the Association could secure insurance coverage for professional liability, workers" compensation, motor vehicle physical damage and commercial property coverage through an approved safety group program, since all are types of property/casualty insurance pursuant to N.Y. Comp. Codes R. & Regs. tit. 11, § 153.1(j)(1989)(Insurance Department Regulation No. 135). The insurer agreeing to underwrite such a program would need to have a filing approved by the Department justifying the rate structure, including the common safety controls and risk management measures among such participants that are intended to reduce risk exposure.

The inquirer’s letter offers brief descriptions of two proposed programs, one labeled as Mass Merchandising and the other as a Safety Group. The overviews presented are insufficient to allow determination as to whether either program would be approved by the Department. The inquirer was directed to submit either or both of these programs described in letter, with complete details, to the Department for review and approval prior to offering coverage to members of the Association.

For further information you may contact Associate Attorney Sam Wachtel at the New York City Office.