The Office of General Counsel issued the following informal opinion on October 30, 2000, representing the position of the New York State Insurance Department.
Re: Service contract reimbursement insurance issued by federal risk retention groups
In light of the decision of the U.S. Court of Appeals for the Ninth Circuit in National Warranty Insurance Company, RRG v. Greenfield, will the Department now change its position that service contract reimbursement insurance issued by a risk retention group does not constitute acceptable proof of financial responsibility for purposes of service contract provider registration, under N.Y. Ins. Law § 7903(c)(1) (McKinney Supp. 2000), because a risk retention group is not an "insurer authorized to issue service contract reimbursement insurance" in this state?
No, the Department will not change its position.
An insurer risk retention group ("Insurer A"), is aware of its financial responsibilities regarding the insurance it issues, and selected a reinsurance company ("Insurer B"), to provide it with reinsurance coverage. Insurer B is a financially secure company. In light of the foregoing, a representative from Insurer A states that, " I am hoping this will satisfy New York's financial concerns in regards to [Insurer As] insurance for vehicle service contracts. In reality, the "ultimate" responsibility for obligations of the service contracts rests with [Insurer B]." The representative refers to the court's decision in National Warranty Insurance Company, RRG v. Greenfield, 24 F. Supp. 2d 1096 (U.S.District Court, D. Oregon, 1998), affirmed on appeal, 214 F.3d 1073 (U.S. Court of Appeals, Ninth Circuit, 2000) ("National Warranty") in which Oregon lost its case, regarding an identical financial responsibility statute, expressing the representatives hope that the issue can be resolved without further litigation.
Article 79 of the N.Y. Ins. Law governs the issuance of service contracts. In order to issue, sell or offer for sale a service contract in New York, a service contract provider must first register with the Superintendent of Insurance pursuant to § 7907 (McKinney Supp. 2000). In order to become registered, a service contract provider must, in order to assure the faithful performance of the provider's obligations to its contract holders, comply with one of the three methods for demonstrating their financial responsibility requirements contained in Subsection (c) of § 7903 of the N.Y. Ins. Law (McKinney Supp. 2000). Section 7903(c)(1) contains the insurance policy method for demonstrating financial responsibility. It provides, in pertinent part, as follows:
(c) In order to assure the faithful performance of a provider's obligations to its contract holders, each provider who is contractually obligated to provide service under a service contract shall comply with one of the following three paragraphs of this subsection:
(1) insure the performance of all its obligations under all service contracts pursuant to a service contract reimbursement insurance policy issued by an insurer authorized to issue service contract reimbursement insurance in this state .[Emphasis added]
The foregoing statute constitutes a financial responsibility statute within the reservation of state authority specified in § 3905(d) of the LRRA, as follows:
§ 3905 Clarification concerning permissible State authority:
(d) State authority to specify acceptable means of demonstrating financial responsibility
Subject to the provisions of section 3902(a)(4) of this title relating to discrimination [exemption of risk retention groups from State laws which discriminate against them] nothing in this chapter shall be construed to preempt the authority of a State to specify acceptable means of demonstrating financial responsibility as a condition for obtaining a license or permit to undertake specified activities. Such means may include or exclude insurance coverage obtained from an admitted insurance company, an excess lines company, a risk retention group, or any other source regardless of whether coverage is obtained directly from an insurance company or through a broker, agent, purchasing group, or any other person. [Emphasis added]
It is the Department's position that the New York service contract financial responsibility statute is excepted from federal preemption under the foregoing provision of the LRRA. A service contract provider may not use service contract reimbursement insurance issued by a non-authorized insurer (e.g., a risk retention group) to demonstrate its financial responsibility in New York State, under Article 79 of the Insurance Law.
If an insurer providing the service contract reimbursement insurance is not an insurer authorized to issue such insurance in New York State, whether or not the insurer happens to be a risk retention group, the insurance it writes does not constitute proof of financial responsibility for a service contract provider in New York. Under § 5913 of the N.Y. Ins. Law (McKinney Supp. 2000), when a New York law requires a demonstration of financial responsibility as a condition for obtaining a license or permit to undertake specified activities, if any such requirement may not be satisfied by insurance obtained from an insurer not authorized to do business in New York State, such requirement may not be satisfied by insurance issued by a risk retention group not chartered in this State.
For further information, you may contact Associate Attorney Barbara A. Kluger at the New York City Office.