The office of General Counsel issued the following informal opinion on June 28, 2000, representing the position of the New York State Insurance Department.

RE: XXX Insurance Reciprocal, Withdrawal of a Subscriber.

Question(s) Presented:

(1) Upon withdrawal from XXX Insurance Reciprocal, (a fictitious name), may a subscriber ("the County") withdraw contributions that it paid in to the insurer’s surplus (capital) account pursuant to N.Y. Ins. Law §6102(k) (McKinney 2000)?

(2) Upon withdrawal from the reciprocal insurer, may the County withdraw contributions that it paid in to the insurer’s operating reserve account?

(3) Upon withdrawal from the reciprocal insurer, may the County withdraw contributions that it paid in to the insurer’s unassigned surplus account?

(4) Would the County’s failure, to revoke the subscriber agreement at the end of a policy year, upon 60 days written notice to the Attorney-In-Fact, result in forfeiture of its right to contributions that it might otherwise recover?

Conclusion(s):

(1) Pursuant to section 10.1 of the "subscriber’s agreement", the subscribing County releases any claim or demand against the insurer for return of its contributions to the insurer’s surplus (capital) account.

(2) The County has the right to withdraw contributions remaining to its credit in the insurer’s operating reserve account, after resignation from the reciprocal, cancellation of all insurance contracts and giving of proper notice of its intent to withdraw the monies held in said account.

(3) Pursuant to section 10.2 of the subscriber’s agreement, all amounts in the County’s separate account, other than the amount accumulated as an operating reserve or as may be assessed by levy, shall be paid to the subscriber, with the approval of the New York State Insurance Department. This would include separately designated funds held in the insurer’s unassigned funds account.

(4) No. Nothing in Article 61 of the New York Insurance Law or the subscriber agreement requires such a forfeiture. Even if the terms of the agreement were to be given literal application the subscriber could cancel all insurance coverage immediately and withdraw from the reciprocal at the end of the following policy year by serving proper notice upon the reciprocal insurer. The right to withdraw monies must be determined separately by referring to the applicable statutes and provisions of the subscriber agreement.

Facts:

The XXX Reciprocal Insurer was formed in 1994 pursuant to Article 61 of the Insurance Law to provide various forms of property/casualty insurance to its members. The County was an original subscriber of the reciprocal insurer and purchased a variety of insurance coverages from the reciprocal insurer from 1994 through early 1999. ABC Insurance Agency, Inc. ("ABC") placed the coverage for the County. The County paid insurance premiums directly to ABC and ABC would transmit them to the reciprocal insurer. When the reciprocal insurer needed information concerning the policies it would contact ABC, which would obtain the necessary information and/or documents from the County and transmit them to the reciprocal insurer.

The policy anniversary date for all policies written for the County through the reciprocal insurer was April 1st. On January 15, 1999, ABC, at the request of the reciprocal, sent the County a "Year 2000 Application and Municipal Renewal Questionnaire". Shortly thereafter, the County informed ABC that the County had determined that it wished to put its insurance coverage account "out for bids". Four separate bids were received, including one submitted by ABC on January 21, 1999 on behalf of the reciprocal insurer. Ultimately, the coverage was placed with an insurer other than the reciprocal insurer, effective April 1, 1999.

There is no evidence that, prior to April 1, 1999, the County notified the reciprocal insurer in writing of its intention to terminate its membership in the reciprocal by revoking the subscriber agreement.

The reciprocal insurer has made no claim that the County failed to effectively terminate coverage on April 1, 1999. The County has made no claim that coverage remained in force after April 1, 1999. The dispute between the parties relates to the right of the County to recover contributions which it made to the insurer’s surplus (capital) account, operating reserve account and unassigned funds account.

Sometime after April 1, 1999, the County contacted the reciprocal insurer, asking for an "accounting" for monies held by the insurer for the County. The County put that request in writing by letter dated December 7, 1999, requesting an accounting for any balances remaining in the county’s operating reserve account and any other monies held by the reciprocal insurer which were to be credited to the County.

The reciprocal insurer replied on December 22, 1999. With respect to the operating reserve account, the projected balance for the County was stated to be approximately $24,000. However, the reciprocal insurer raised an issue concerning the County’s entitlement to recover the proceeds of the account based upon the County’s failure to provide 60 days notice of its intent to withdraw from the reciprocal insurer. The reciprocal insurer maintained that such notice was required pursuant to N.Y. Ins. Law §6109(c)(2) (McKinney 2000) and the terms of the subscriber agreement.

In a second letter dated February 2, 2000, the County took exception to the reciprocal insurer’s interpretation of the 60 day notice requirement, maintaining that it referred solely to the request for the return of the subscriber’s operating reserve funds, not to the subscriber’s intent to terminate membership in the reciprocal insurer and cancel its insurance coverage. The letter also requested the return of funds to the credit of the County in the insurer’s surplus capital and unassigned funds accounts, as well as the amount held in the operating reserve account.

The reciprocal insurer replied in a letter dated February 14, 2000. With regard to surplus capital the letter cited Section 10.1 of the subscriber agreement as authority for its position that the County had released any claim to return of those funds. It repeated its assertion that 60 days notice of withdrawal from the reciprocal insurer was a condition precedent to the subscriber’s right to the return of funds in the operating reserve account. Finally, with respect to the unassigned funds account, the reciprocal insurer maintained that its Board had unfettered discretion whether to transfer such funds into subscribers’ separate accounts. The letter asserted that the Board had not chosen to make such a transfer and that, accordingly, no right of withdrawal existed.

The "subscriber accounting statement" sent by the reciprocal insurer to the County in 1998 indicates balances in subscriber accounts for year-end 1997 in the following amounts:

During the course of performing the background research for this opinion, we discussed the matter with the President of the reciprocal insurer. He extended an offer to restore the amounts credited to the County’s accounts, but only on the condition that the County resume membership in and purchase insurance from the reciprocal insurer. He continued to maintain that the County has no right to withdraw funds in any of the three accounts, as stated in the February 14, 2000 letter discussed above.

Analysis:

With regard to the surplus (capital) account the final sentence of section 10.1 of the subscriber agreement states that "Subscriber acknowledges and represents that it releases any claims or demands against the Insurer for return of its surplus contribution…." Absent a basis for invalidating this provision, the County did not have the right to withdraw funds it paid into the insurer’s surplus (capital) account upon its withdrawal from membership in the reciprocal insurer.

The reciprocal insurer states in its letter of 2/14/00 to the County that, "…surplus contributions would be returned upon dissolution of the company,…." Whether a former subscriber’s claim for return of surplus funds (if the reciprocal were dissolved) would survive its withdrawal is not clear.

The reciprocal insurer cites N.Y. Ins. Law §§6109 and 6111 (McKinney 1985 and Supp. 2000) and section 10.1 of the subscriber agreement as authority for its position that a member must give 60 days written notice of its intent to terminate its membership in the reciprocal or forfeit its right to recover any monies held to the subscriber’s credit in the operating reserve account. Nothing in the statutes or the subscriber agreement requires such a forfeiture and, in fact, other provisions of both Article 61 and the subscriber agreement support the conclusion that the 60 days notice of withdrawal refers to notice of intent to withdraw monies held by the reciprocal to the subscriber’s credit.

N.Y. Ins. Law §6109 (McKinney 1985 and Supp. 2000) reads as follows:

(a)(1) Every subscriber of an authorized reciprocal insurer in which subscribers are subject to contingent liability shall accumulate a minimum operating reserve, to be credited to such subscriber on the books and records of such reciprocal insurer, by authorizing the attorney-in-fact to credit to such account at the end of the fiscal year of such reciprocal insurer, an amount not less than one quarter of such subscriber's underwriting earnings during such period.

(2) Such accumulation shall be made so long as such subscriber's operating reserve is less than twice the amount of annual premiums in force.

(3) Notwithstanding the foregoing, the superintendent may, upon application from the attorney-in-fact, approve other methods for accumulating such subscriber's operating reserve.

(b) Any authorized reciprocal insurer may, pursuant to the terms of the subscriber's agreement and to any action of its advisory committee authorized thereunder, require its subscribers to accumulate subscriber's operating reserves in excess of the minimum specified in subsection (a) hereof and may require a longer period of notice for the withdrawal of all or any part of such reserve than that herein specified.

(c)(1) No subscriber shall have a secured or preferred claim against any assets of the reciprocal insurer arising out of such operating reserve, but all assets held by such insurer shall be available for the payment of claims of policyholders and creditors of such reciprocal insurer in preference to any claim for withdrawal by a subscriber as such.

(2) Any subscriber's operating reserve accumulated by any such reciprocal insurer shall be maintained at all times, except that a subscriber may, upon withdrawal from membership and cancellation of all insurance contracts held by him in such insurer, and after giving to the attorney-in-fact written notice of withdrawal at least sixty days in advance, withdraw the amount of his operating reserve less such surrender charges as may be deducted pursuant to the subscriber's agreement.

(3) No such withdrawal shall be permitted after an order of liquidation of, or the appointment of a receiver or liquidating trustee for, any such reciprocal insurer.

The statutory language uses the term "withdrawal" to refer to two separate types of events. On the one hand, the statute refers to "withdrawal from membership" in the reciprocal and, on the other hand, it refers to withdrawal of funds held by a reciprocal to the credit of the subscriber.

The 60 day notice requirement referred to in N.Y. Ins. Law §6109(c)(2) (McKinney 1985 and Supp. 2000) requires that a subscriber give 60 days written notice of its intention to withdraw funds. This is made clear by reference to other sections of Article 61 of the Insurance Law that refer to "withdrawal" of subscriber accounts. The preceding subsection of the same statute (quoted above) gives the insurer the right to "require a longer period of notice for the withdrawal of all or any part" of the subscriber’s operating reserve account than the period "herein specified." N.Y. Ins. Law §6109(b) (McKinney 1985 and Supp. 2000). The period herein specified is the 60 days notice of intent to withdraw funds established in subsection (c) of the statute.

N.Y. Ins. Law §6111(d) (McKinney 1985), cited by the reciprocal insurer in support of their position in a letter of May 10, 2000 to this Department, states as follows:

"(d) Subscribers" operating reserves for which notice of withdrawal has been given shall be reported as liabilities until paid."

We believe the statute refers to notice of a subscriber’s intent to withdraw funds held in its operating reserve account, not withdrawal from the reciprocal, contrary to the position taken by the reciprocal insurer in the May 10 letter.

Section 10.1 of the subscriber agreement, which deals with termination of membership in the reciprocal, reads as follows:

"Subscriber reserves the right to revoke this Agreement and the power of attorney at the end of any policy year upon sixty day’s written notice to the Attorney-In-Fact. As of such date, such Subscriber shall cease to assume any liability as an insurer in any policy of insurance thereafter issued by the Insurer and the Subscriber’s liability as an insurer in all policies of insurance issued prior thereto shall terminate with respect to occurrences after such date. Subscriber remains liable as an insurer on all policies issued prior to the date of revocation with respect to occurrences prior to such date, such liability being discharged by the surrender of its operating reserve pursuant to this Agreement, and by way of any assessment which may be levied in accordance with this Agreement. If it is determined by the Attorney-In-Fact that the Subscriber’s share of liability for losses, expenses and assessments is less then its operating reserve, such reserve, less surrender charges, will be returned. Subscriber’s revocation of this Agreement shall be construed as simultaneously ordering cancellation of all outstanding policies of insurance granted by the Insurer. The provisions of this Section shall be applicable in the case of any withdrawal, whether voluntary or at the direction of the Insurer. Subscriber acknowledges and represents that it releases any claims or demands against the Insurer for return of its surplus contribution and subordinated loan payments and as otherwise determined by the Board of Governors."

Section 10.1 of the subscriber agreement requires that a subscriber serve 60 days written notice of its intent to "revoke" the subscriber agreement and power of attorney granted pursuant thereto. But it does not require that a failure to serve such notice result in the subscriber losing the right to recover money held to its credit by the insurer. With regard to amounts held in the operating reserve account, other provisions of the subscriber agreement refute the reciprocal insurer’s position that the failure of a subscriber to serve 60 days written notice of withdrawal on the reciprocal results in forfeiture of the right to recover.

Section 9 of the subscriber agreement establishes specific requirements concerning the "Subscriber’s Operating Reserve". Section 9(c)(2) reads as follows:

"(2) Upon withdrawal from membership, and after giving 60 days written notice of withdrawal to the Attorney-In Fact, a subscriber may withdraw the amount of his operating reserve less such surrender charges provided for in the subscriber’s agreement."

While the above provision could be more clearly stated, it is obvious from the structure of the sentence that the 60 day notice refers to the intent to withdraw money, not the intent to withdraw from membership in the reciprocal.

Under the language of section 10.1 of the subscriber agreement, the subscriber’s failure to serve written notice might prevent the subscriber from seeking the return of money held in the operating reserve account until it had properly revoked the subscriber agreement. It would not prohibit the subscriber from canceling all insurance coverage and it would not result in forfeiture of the right to ever withdraw subscriber’s money held in the insurer’s operating reserve account.

With regard to the unassigned funds account the reciprocal insurer’s letter of February 14, 2000 to the County states as follows: "The Board has the authority to transfer unassigned funds to the subscribers separate account, thereby creating a right of withdrawal, however thus far they have not done so."

If we were to accept the reciprocal insurer’s position, the Board would have unfettered discretion regarding when to transfer funds into an account to the subscriber’s credit or, whether to ever make such a transfer at all. It is true that nowhere in Article 61 are guidelines established as to when the reciprocal must allocate unassigned funds to the credit of each subscriber. However the subscriber agreement directs the Attorney-In-Fact to make such an allocation on an annual basis and the facts indicates that, in this instance, such an allocation was made.

Section 5 of the subscriber agreement deals with the "powers and Duties of Attorney-In-Fact." Section 5.3 of the subscriber agreement directs that the Attorney-In-Fact shall:

"5.3 Annually, or as otherwise directed by the Board of Governors, render to each Subscriber a statement showing a summary of collective transactions of the Insurer and also a statement of each subscriber’s separate account." (emphasis added.)

The annual "subscriber accounting statement", dated 6/9/98 and issued by the reciprocal insurer, states that the County has $153,929 in its unassigned funds account. This would establish an account in the name of the County "separate" and apart from the insurers other assets. Said statement is issued pursuant to section 5.3 of the subscriber agreement.

Section 10.2 of the subscriber agreement states as follows:

"10.2 Within one year after receipt of notice of revocation, all amounts in Subscriber’s separate account, other than the amount accumulated as an Operating Reserve or as may be assessed as levy shall be paid to Subscriber, upon approval by the New York State Insurance Department."

The County should have the right to return of the money’s held to its credit in the insurer’s unassigned funds account, subject to compliance with the requirements for revocation of the subscriber agreement, notice of intent to withdraw the funds and subject to the approval of the New York State Insurance Department.

Based upon the evidence presented, the following resolution would appear to be appropriate:

* The County should be held to continued membership in the reciprocal until such time as it serves written notice of revocation of the subscriber agreement on the reciprocal insurer as required by section 10.1 of said agreement. This means the County would continue as a member of the reciprocal. However, the County’s participation as an "insurer" terminated on April 1, 1999, when all policies were effectively cancelled. Section 7.2 of the subscriber agreement states as follows:

"7.2 For each policy issued by the Insurer, and in force as of any date, each Subscriber shall underwrite an amount which equals that proportion which the individual Subscriber’s own earned premium bears to the total earned premiums of all such underwriting."

As of April 1, 1999, the County had no earned premium, since it had no longer had any policies in force with the reciprocal insurer. Thus, the County was not an insurer of claims based upon acts occurring subsequent to that date, although it would remain an insurer on claims based upon acts occurring prior to that date.

* The County may revoke the subscriber agreement by serving the written notice as required by section 10.1 of the subscriber agreement. Once having effectively "revoked" the agreement, the County may seek return of money held by the reciprocal insurer to its account, as stated below:

(1) The County waived the right to claim return of money held to its credit in the insurer’s surplus (capital) account, based upon section 10.1 of the subscriber agreement.

(2) The reciprocal insurer should return money held in the operating reserve account to the credit of the County, pursuant to the provisions of N.Y. Ins. Law §6109 (McKinney 2000) and section 9(c)(2) of the subscriber agreement.

(3) The reciprocal insurer should return money held in the unassigned surplus account to the credit of the County, after revocation of the subscriber agreement and with the approval of the New York State Insurance Department, as required by section 10.2 of the subscriber agreement.

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