The office of General Counsel issued the following informal opinion on November 27, 2001, representing the position of the New York State Insurance Department.
Re: Workers Compensation Insurance, Issuance on a Quasi-Group Basis
May policies be issued in New York on a quasi-group basis to fulfill employers obligations under the New York Workers Compensation Law (McKinney 1994 and 2001 Supplement)?
Yes, such policies may be issued. However, the inquirers proposal would not be in compliance with the New York Insurance Law (McKinney 2000).
A corporation will be formed under the New York Business Corporation Law (McKinney 1986 and 2001 Supplement) for several purposes, including bulk purchase of services and supplies for its "members." The corporation will have at least two classes of stock. One class, which will have no voting rights, will be issued to individuals, partnerships, or corporations that own or operate motor vehicles for hire under the jurisdiction of the New York City Taxi & Limousine Commission. These shareholders will, inter alia, be obligated to make periodic contributions to the corporation in payment for their stock. Any shareholder that fails to make the required contributions will forfeit any rights incident to ownership of the stock.
The corporation will "sponsor" an offering of individual workers compensation insurance policies to those individuals and entities that purchase its non-voting stock. Only those individuals and entities that are shareholders in good standing would be eligible to purchase the policies. The premiums for the policies would be paid from a portion of the periodic shareholder contributions. Any amount of the contributions not expended for payment of premiums on the policies would be retained by the corporation for corporate purposes.
The inquirer seeks this Departments confirmation that such an arrangement would not be violative of the Insurance Law.
New York Business Corporation Law § 501(a) (McKinney 1986) authorizes the issuance of various classes of stock, which may differ, inter alia, as to voting rights. This opinion assumes that the above proposal is in compliance with all other applicable provisions of the New York Business Corporation Law.
An employer in New York may fulfill its obligation to secure workers compensation through, inter alia, the purchase of an insurance policy from an insurer licensed to transact the business of workers compensation insurance in New York. New York Workers Compensation Law § 50(2) (McKinney 1994). While the New York Workers Compensation Law has established detailed requirements for the content of such policies, that statute does not specify whether such policies may be issued on a group or quasi-group basis.
Prior to 1986, New York did not permit group property/casualty insurance. However, as part of its response to an "availability" crisis for property/casualty insurance, The Legislature in 1986 N.Y. Laws 220 enacted New York Insurance Law § 3435 (McKinney 2000). That statute authorizes group property/casualty insurance for limited classes of entities, which classes do not include the proposed entity.
In addition to "true" group insurance, New York recognizes certain types of quasi-group insurance as valid methodologies for the securing of property/casualty insurance. New York Comp. R. & Regs. tit. 11, §153.1(q) (2001) (Regulation 135) defines "quasi-group":
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.
Mass merchandising is defined, N.Y. Comp. R. & Regs tit. 11, §153.1(j):
Mass merchandising means a method of marketing individually underwritten and issued property/casualty or liability insurance policies to participants that are employees of an employer, or members of an association or organization, that has agreed to promote or otherwise facilitate such coverage from an insurer to such participants, with reasonably anticipated economies of acquisition or administration.
Safety group is defined, N.Y. Comp. R. & Regs. tit. 11, §153.1(r):
Safety group means a method of marketing individually underwritten and issued property/casualty or liability insurance policies to participants engaged in similar activities giving rise to similar risks, placing special emphasis on common safety controls and risk management measures among such participants to reduce such risks.
A safety group for the purpose of Regulation 135 must be distinguished from a safety group as contemplated in New York Workers Compensation Law §§ 90 and 91 (McKinney 1994), which policies may be issued only by the State Insurance Fund.
Since workers compensation insurance is not among those lines of insurance for which quasi-group insurance is prohibited, N.Y. Comp. R. & Regs. tit. 11, §153.3(d)(3) (2001), a quasi-group policy could be issued on either a mass merchandising or safety group basis to qualified employers. Since the corporation will have a purpose other than the purchase of insurance, the requirement that the individuals and entities securing the policies on a quasi-group basis make periodic contributions for the corporations stock would be the functional equivalent of membership dues and would not be violative of N.Y. Comp. R. & Regs. tit. 11, § 153.9 (2000), which prohibits "tie-in" sales; so long as the insurance is optional and not automatic or mandatory. Hence, any automatic coverage feature would have to be made optional.
Furthermore, New York Comp. R. & Regs. tit. 11, § 153.5(a) (2001) provides, in pertinent part:
(a) The premium for coverage: . . . (2) under a quasi-group policy shall be paid by each participant, and shall not be paid by the sponsoring entity from general funds or other source.
While the corporation could, if the insurer were amenable, in accordance with New York Comp. R. & Regs. tit. 11, § 153.5(b)(2), collect the premium from each insured for transmittal to the insurer, the mechanism proposed by the inquirer in which premiums would be paid through contributions to the corporations general fund would be violative of N.Y. Comp. R. & Regs, tit. 11, § 153.5(a)(2).
For further information you may contact Principal Attorney Alan Rachlin at the New York City Office.