The Office of General Counsel issued the following opinion on December 2, 2004 representing the position of the New York State Insurance Department.
Re: Property/Casualty Security Fund
1. Who is entitled to payment of an allowed claim from the Property/Casualty Security Fund (the "Fund") - individuals or corporations, or both?
2. If an insured is covered under two policies, one primary and one excess, if the primary insurer is solvent but the excess carrier is insolvent, may the insured receive payment from the Fund for the unpaid excess coverage?
3. Would payment from the Fund for unpaid claims under the excess policy described in Question 2 fall under the definition of "surplus" or "reinsurance"?
4. Would the answer to Question 2 differ in a case in which an insured negotiated its primary coverage and the primary insurer then negotiated with another insurer to cover a portion of the primary's liability without the insured's prior knowledge?
5. If an insureds claim is paid using money from the Fund, is the amount that the insured is entitled to receive after liquidation of the insurer reduced by any amounts paid from the Fund? In other words, is the Superintendent of Insurance (or some other state agency) entitled to a portion of the proceeds (equal to the amount paid to the insured out of the Fund) to be paid to the insured after liquidation of the company's assets?
6. Is an insured required to offset the amount received from the Fund against the amount to which it is entitled to receive in the liquidation of an insurer?
1. Insureds may receive payments from the Fund irrespective of their form of organization.
2. The Fund exists to pay allowed claims in the event an insurer is insolvent. No distinction is made with respect to the coverage level or layer.
3. No, neither of those terms have anything to do with the making of payments from the Fund. They are distinct insurance concepts.
4. The situation posited by this question would constitute the obtaining of reinsurance by the insurer for a portion of the risk. The insurer remains liable to its insured for the payment of the claim. The reinsurer would have no obligation to the insured. The insurer would have recourse against the reinsurer.
5. In the event that a payment is made from the Fund to an insured, there would be no further payment from the insurer. Payments from the Fund are made only when the insurer is insolvent. If an insurer becomes insolvent, the procedures of liquidation or rehabilitation provide for addressing its liabilities. Allowed claims are paid to the extent assets of either the insurance company or the Fund are available. A claimant may not collect compensation in excess of the claim amount. The law provides that the custodian of the Fund is entitled to a claim against an insurer for amounts that the Fund expends to meet the liabilities of that insurer.
6. Payments would be made from the Fund only in the event that an insurer had insufficient assets for the payment of claims. Accordingly, there would be no other payments against which to offset.
The inquiry is general in nature and involves no particular factual scenario.
The inquiries require a general discussion of the operation and purpose of the Fund. The operation of the Fund is governed by the provisions of Article 76 of the New York Insurance Law, N.Y. Ins. Law §§ 7601 - 7614 (McKinney 2000 & 2004 Supp.). The Security Fund provides a means by which insureds can be assured of coverage for their claims in the event that their insurers become insolvent. It is used in the payment of allowed claims1 remaining unpaid, in whole or in part, due to an authorized insurer's inability to meet its policy obligations due to insolvency. N.Y. Ins. Law § 7603(a) (McKinney 2000) sets forth the requirements for coverage by the Security Fund, and provides, in pertinent part, as follows:
(a)(1) The property/casualty insurance security fund shall be used in the payment of allowed claims remaining unpaid, in whole or in part, by reason of the inability due to insolvency of an authorized insurer to meet its insurance obligations under policies:
* * *
(B) for all of the kinds of insurance specified in paragraphs four through fourteen, sixteen, nineteen through twenty-one, twenty-four and subparagraphs (A) and (B) of paragraph twenty-six of subsection (a) of section one thousand one hundred thirteen of this chapter with respect to coverage of property of risks located or resident in this state, or outside this state but within the United States, its possessions and territories and Canada.
N.Y. Ins. Law § 7603(a) (McKinney 2000).
The New York Liquidation Bureau processes individual claims against each insurer in liquidation. When a court order is issued directing that an insurer be liquidated, the Superintendent, as liquidator, is appointed by the court to take possession of the insurer's assets and to administer those assets under order of the court. N.Y. Ins. Law §7409 (McKinney 2000). It is the Liquidation Bureau that is charged with conducting the day to day business of the liquidated insurer, on behalf of the Superintendent as liquidator.
When claims and other expenses are allowed by the court, they are filed with the Insurance Department's Bureau of Taxes and Accounts. Taxes and Accounts forwards a request to the Commissioner of Tax and Finance2 to disburse moneys from the Fund for transmittal to the Liquidation Bureau, which pays out the individual claims against the liquidated company.
No payment made from the Fund on an allowed claim may exceed the liability limit provided for in the insurance policy or surety bond at issue. See N.Y. Ins. Law § 7608(c)(McKinney 2000). In addition, there are statutory limits on payments from the Fund. See N.Y. Ins. Law § 7603(a)(2)(McKinney 2000)($1,000,000 on any one claim).
The custodian of the Fund is entitled to a valid claim against an insolvent insurer in an amount equal to the liabilities paid from the Fund with respect to liabilities of that insurer. See N.Y. Ins. Law § 7609(a)(McKinney 2000). Thus, in the course of a liquidation or rehabilitation proceeding, assets recovered on behalf of an insolvent insurer will be used to reimburse the Fund for claims paid by the Fund.
For further information you may contact Supervising Attorney Michael Campanelli at the New York City Office.
1 An "allowed claim" is defined as a claim that has been allowed by the court in a proceeding under Article 74 (Rehabilitation, Liquidation Conservation and Dissolution of Insurers) of the N.Y. Ins. Law.
2 The Commissioner of Taxation and Finance is the custodian of the Fund and is responsible for the transfer, disbursement and investment of the Fund's assets. The Superintendent of Insurance is the administrator of the Fund, and is responsible for determining the value of the Fund for reporting purposes, appropriate payments from the Fund, and exercise any powers permitted to him with respect to the Fund contained in Articles 74 and 76 of the Insurance Law.