The Office of General Counsel issued the following informal opinion on May 3, 2001, representing the position of the New York State Insurance Department.

Re: Workers’ Compensation Insurance: "Black car" and "Silver car" Operations

Questions Presented:

1. May workers’ compensation insurance be issued on a purchasing group basis?

2. May workers’ compensation insurance be issued on a group basis under N.Y. Ins. Law § 3435 (McKinney 2000) or some other provision of New York law?

3. May a workers’ compensation policy be issued on a "shared interests" basis under N.Y. Comp. Codes R. & Regs. tit. 11 Part 153 (1995) (Reg. 135)? If so, do shared interests exist between a corporation that purchases a workers’ compensation policy (the "Corporation") and livery car drivers who purchase stock in the Corporation ("Owner-Drivers")?

4. Would the Corporation and the Owner-Drivers be doing an insurance business if they entered into a joint liability agreement principally for the purposes of creating "shared interests"?

5. Would the Corporation need a license as an insurance broker or insurance agent if it solicits Owner-Drivers to become its stockholders for the sole purpose of obtaining workers’ compensation insurance, collects the premium as part of the price of the stock, and subsequently procures the insurance from an insurer?

6. May an insurer offer a discount on its livery liability insurance to persons who obtain workers’ compensation insurance from another insurer? If so, must such a discount be approved by the Department?

7. May the purchase of insurance from one insurer be conditioned upon the sale of insurance from another insurer?

Conclusions:

1. Workers’ compensation insurance may not be issued on a purchasing group basis under 15 U.S.C. § 3901 (1986) et seq. or N.Y. Ins. Law § 5901 et seq. (McKinney 2000).

2. Workers’ compensation insurance may not be issued on a group basis under N.Y. Ins. Law § 3435 (McKinney 2000) or any other provision of New York law.

3. A workers’ compensation policy may not be issued on a "shared interest" basis under N.Y. Comp. Codes R. & Regs. tit. 11 Part 153 (1995) (Reg. 135).

4. The Corporation and the Owner-Drivers would be doing an insurance business if they entered into a joint liability agreement principally for the purposes of creating "shared interests".

5. The Corporation would need a license as an insurance broker or insurance agent if it solicits Owner-Drivers to become its stockholders for the sole purpose of obtaining workers’ compensation insurance, collects the premium as part of the price of the stock, and subsequently procures the insurance from an insurer.

6. An insurer may not offer a discount on its livery liability insurance to persons who obtain other insurance from another insurer unless the discount has been filed and approved by the Superintendent.

7. The purchase of insurance from one insurer may not be conditioned upon the sale of insurance from another insurer unless both insurance policies contain a provision to that effect.

Facts:

As we understand it, the inquirer has clients who have inquired about joining the subject program. Apparently, the program is currently in effect.

The proposed program involves the provision of workers’ compensation coverage to owner-drivers of "black cars" (where a taxi or car service works under contract to a radio group) and "silver cars" (where luxury sedans are dispatched by two-way radio or computer) by an authorized insurer. In order to obtain coverage, an Owner-Driver must agree to purchase non-voting stock in the Corporation, which is a business corporation that is neither registered as a risk purchasing group nor licensed as an insurance agent, broker or consultant.

The non-voting stock of the Corporation is subject to specified restrictions. These include a requirement of periodic "renewal" of the stock purchase in return for an additional payment and relinquishment of the stock (which is held in escrow at all times), in the event of nonpayment of any installment of the purchase price.

The Corporation would purchase a workers’ compensation insurance policy under which it is the first named insured. An Owner-Driver who becomes a "shareholder" of the Corporation is included as an additional named insured on the policy. Each purchase of a share therefore results in the addition to the policy of a new insured. One share of stock must be purchased for each vehicle owned, rented, or leased by the Owner-Driver. The payment made by the Owner-Driver to the Corporation for the purchase of the stock is used to pay the premium that results from the addition of the Owner-Driver to the policy. The price for the shares of stock is greater than the purchase price for the insurance and it can therefore be assumed that, after the Corporation pays the workers’ compensation insurance premium, the Corporation would retain some portion of the payment.

The workers’ compensation coverage would be written in conjunction with a public automobile liability insurance program of a different insurer. If accepted for the workers’ compensation coverage, the Owner-Driver would receive a 15% discount on the personal injury protection (PIP) coverage under the other insurer’s automobile policy. The liability insurer would specifically require that its application accompany the application for workers’ compensation insurance. The inquirer did not indicate how the liability insurance is obtained and what role, if any, the Corporation would have in obtaining the insurance from the liability insurer, so we will assume that the Corporation has no active role.

The inquirer asks that we assume that the Corporation would not function as a dispatcher; that none of the vehicles would have signs indicating that they operate under the Corporation; that the vehicles would operate only pursuant to the program; and that all of the drivers are owner-drivers.

Discussion:

Purchasing groups

Prior to 1986, property/casualty insurance could not permissibly be written in New York on a group basis. Responding 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 (1986) et seq. 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 et seq. (McKinney 2000)), conforming New York law to the LRRA.

The LRRA applies only to insurance for liability, as those terms are defined in 15 U.S.C. § 3901. Section 3901(a)(2)(B) specifically provides that liability "does not include personal risk liability and an employer's liability with respect to its employees other than legal liability under the Federal Employers' Liability Act (45 U.S.C. 51 et seq.)". The identical provision is contained in N.Y. Ins. Law § 5902(h)(2) (McKinney 2000). Therefore, a purchasing group may not purchase workers’ compensation insurance on a group basis.

Group insurance pursuant to Section 3435

New York responded to the availability crisis in 1986 by passing 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. Unlike the LRRA, § 3435 is not limited to just liability insurance, but applies to most of the property/casualty kinds of insurance, including workers’ compensation and employers’ liability insurance.

However, while the LRRA permits group insurance generally in a commercial context, § 3435 permits group insurance only where the members of the group are public entities or nonprofit organizations. Since the Owner-Drivers are neither, a group insurance policy may not be written under § 3435 covering their risks.

While New York has enacted several provisions since 1986 that permit group property/casualty insurance in specific context (see, for example, N.Y. Ins. Law § 3442 (McKinney 2000), N.Y. Ins. Law § 3445 (McKinney 2000) and N.Y. Ins. Law § 3446 (McKinney 2000)), none of these provisions are relevant to the current inquiry. Accordingly, workers’ compensation coverage for Owner-Drivers may not be written on a group basis.

Shared interests

Even though prior to 1986 New York did not permit group property/casualty insurance, certain types of collective policies had long been permissible because they were not considered to be in the nature of group insurance. The risk in these policies generally involved a commonality of interests between the named insured and an individual additional insured, such as may exist for affiliated corporations, members of partnerships, and family members. When the Department promulgated a regulation in 1989 to clarify the language of § 3435 and to establish rules regarding purchasing groups, the Department crafted several exceptions to the definition of a group policy so as continue to allow these permissible collective policies to be written on a non-group basis. These exceptions are contained in N.Y. Comp. Codes R. & Regs. tit. 11 § 153.1(g)(2) (1995) (Regulation 135).

The first four of these exceptions recognize formal relationships between the insureds (corporate affiliates, franchise relationships, partners, and family membership). None of these relationships exist in this case. The fifth exception, the so-called "shared interest" exception, does not require a formal relationship, but does require a commonality of interest among all of the persons insured, not just the named insured and the particular additional insured. Shared interests are excluded from the definition of group insurance "provided that such shared interests exist among all additional insureds, and only to the extent of such shared interests." N.Y. Comp. Codes R. & Regs. tit. 11 § 153.1(g)(2) (1995).

Shared interests is defined differently for property and liability insurance in N.Y. Comp. Codes R. & Regs. tit. 11 § 153.1(s) (1995):

(s) Shared interests mean:

Liability insurance is defined in N.Y. Comp. Codes R. & Regs. tit. 11 § 153.1(i) (1995), in relevant part to mean:

Section 1113(a)(15) defines workers’ compensation and employers’ liability insurance. However, only the employers’ liability insurance portion of §1113(a)(15) is included within the definition of liability insurance under Regulation 135. Accordingly, workers’ compensation insurance is not included within the definition of liability insurance. (Workers’ compensation insurance is explicitly excluded from the definition of liability insurance that pertains to purchasing groups. See N.Y. Comp. Codes R. & Regs. tit. 11 § 153.1(i)(3) (1995).

Nor is workers’ compensation insurance a form of property insurance. Since, workers’ compensation insurance does not come within either definition of shared interests, the shared interest exception may not be used. However, even if the shared interest definition applied to workers’ compensation insurance, there is no commonality of interest in this case that would unite all of the additional insureds because they are not jointly liable.

Acting as an insurer

The joint liability agreement is an attempt to create a shared interest among the additional insureds. Since there is no shared interest exception for workers’ compensation, the agreement would not alter the result. However, it would create additional concerns. Since there is no relationship between any of the parties other than would be created by the agreement, a joint liability arrangement would probably constitute the doing of an insurance business in violation of N.Y. Ins. Law § 1102 (McKinney 2000). By assuming liability of the other "stockholders", essentially what is created is a reciprocal insurer.

In summary, there is no exception to Regulation 135 that would apply to the Corporation and the Owner-Drivers. Hence, the policy is a group insurance policy of a kind that is not permitted in New York.

Acting as an insurance agent or broker

N.Y. Ins. Law § 2102 (McKinney 2000) provides, in pertinent part, that no person, firm, association or corporation shall act as an insurance agent or broker in this state without a license.

N.Y. Ins. Law § 2101(a) (McKinney 2000) defines an agent, in pertinent part, to mean any authorized or acknowledged agent of an insurer, any sub-agent or representative of an agent, who acts as such in the solicitation of, negotiation for, or procurement or making of, an insurance contract. N.Y. Ins. Law § 2102(c) (McKinney 2000) defines a broker, in pertinent part, to mean any person, firm, association or corporation, who or which for any compensation, commission or other thing of value, acts or aids in any manner in soliciting, negotiating or procuring the making of any insurance contract or in placing risks, or taking out insurance, on behalf of an insured other than himself or itself, or on behalf of any licensed insurance broker. None of the exceptions enumerated in § 2101(a) or (c) are relevant to this discussion.

The Corporation would be acting as an insurance agent or broker in that it solicits the Owner-Drivers to become "stockholders" for the sole purpose of obtaining workers’ compensation insurance, the Corporation collects the premium within the price of the stock, and the Corporation subsequently procures that insurance from the insurer. Furthermore, since insurance under the liability policy is mandatory before the Owner-Driver stockholder will be insured under the workers’ compensation policy, in essence the Corporation is soliciting insurance on behalf of the liability insurer as well.

Tie-in sales and rebating

The inquirer stated that an Owner-Driver insured under the workers’ compensation policy would receive a 15% discount on PIP coverage under another insurer’s automobile liability policy. The liability insurer would specifically require that its application accompany the application for workers’ compensation insurance.

N.Y. Ins. Law § 2324(a) (McKinney 2000), as amended by Chapter 482 of the Laws of 2000), in pertinent part, prohibits any authorized insurer, licensed insurance agent or broker, or any employee or representative of such an insurer, agent or broker, from making, procuring, or negotiating any insurance contract other than as plainly expressed in the policy; or from paying, or allowing, or offering to pay or allow, any rebate from the premium specified in the policy, either as an inducement to the making of the policy or after the insurance has been effected; or to give or offer to give any valuable consideration or inducement of any kind, directly or indirectly, which is not specified in the policy (other than an article of merchandise not exceeding $15 in value); nor shall the insured, his agent or representative knowingly receive, directly or indirectly, any such rebate.

Each policy is an inducement to the other. The worker’s compensation policy is an inducement to the purchase of the liability policy because the workers’ compensation policy is not available in any other manner, and because purchase of the workers’ compensation policy will lower the premium of the liability policy. The liability policy is an inducement to the purchase of the workers’ compensation policy also because of the discounted premium.

Unless the liability policy specifies that the workers’ compensation policy is only available to insureds that have purchased the liability policy, the liability insurer would violate Section 2324. Similarly, unless the workers’ compensation policy states that it will be available only to those who purchased the liability policy, and that the liability policy’s premium is discounted, the workers’ compensation insurer would violate Section 2324.

In addition, the reduction in premium would be impermissible unless the approved rate filing specified such a reduction. We are not aware of having ever approved such policy language or rate deviation in connection with workers’ compensation and livery liability insurance.

In addition, because the workers’ compensation insurer is requiring sale of insurance from the liability insurer before it will issue its own policy, the workers’ compensation insurer is also acting as an insurance agent without a license.

For further information you may contact Supervising Attorney, Paul A. Zuckerman at the New York City Office.