The Office of General Counsel issued the following opinion on August 1, 2005, representing the position of the New York State Insurance Department.
Re: Special Risk Insurance Written in the Free Trade Zone - Purchasing Groups.
Is 11 NYCRR Section 16.8(b) of Regulation 86, which provides that group insurance policies may not be written as special risk insurance in the Free Trade Zone, insofar as it is applicable to policies written on a group basis to purchasing groups and their members, preempted by the federal Liability Risk Retention Act of 1986 (15 U.S.C.A. § 3901, et seq. (West Group 1998)) ("LRRA")?
The prohibition in Regulation 86 against group policies of special risk insurance being written in the Free Trade Zone is applicable to a policy written on a group basis to a purchasing group and its members and is not preempted by the LRRA.
The inquirer states that a policy of special risk insurance is proposed to be issued to a federal purchasing group under Article 63 of the New York Insurance Law. The inquirer requests the opinion of the Office of General Counsel as to the foregoing proposal.
Specifically, the inquirer would like to know the Departments position as to whether the prohibition contained in Regulation 86 against the issuance of group policies as special risk insurance in the Free Trade Zone applies to a group policy issued to a purchasing group and its members or, whether the regulatory provision is preempted by § 3903 of the LRRA (and the parallel N.Y. Ins. Law provision, N.Y. Ins. Law § 5907).
The inquirer's position is that, taken together, Section 16.8(b) of Regulation 86 and Section 153.1(g) of Regulation 135, which defines what is a "group policy" under both regulations, effectively preclude purchasing groups from the advantage afforded by the Free Trade Zone such as the exemption from filing requirements. The inquirer states that this exemption enables insurers to respond quickly to requests for coverage. The inquirer points out that while persons who are not members of a purchasing group may obtain their commercial liability insurance coverage in the Free Trade Zone, with all of its advantages, Section 16.8(b) of Regulation 86, by not allowing coverage on special risks to be written as a group policy effectively discriminates against purchasing groups. The implication of this argument is that the regulatory provision is preempted by the LRRA and, therefore, is not enforceable as to purchasing group policies and that such policies may be written in the Free Trade Zone.
Special Risk Insurance
Chapter 480 of the Laws of 1978 added former § 169-d to the N.Y. Ins. Law. The law authorized domestic insurers to acquire a special license to write certain kinds or large or specialized risks exempt from rate and form filing requirements. Such policies are commonly referred to as special risk insurance written in the Free Trade Zone. In 1984 the law was recodified into Article 63. The legislative intent in creating special risk insurance was to promote greater market flexibility in the areas of large or hard-to-place commercial risks. N.Y. Ins. Law § 6301(a) (McKinney 2000) empowers the Superintendent to create exemptions from the filing requirements for policy forms and rates. In promulgating Regulation 86 (N.Y. Comp. Codes R. & Regs, tit 11, Part 16 (1995)) the Superintendent exercised the power granted under § 6301 to delineate those authorized kinds of insurance which are exempted from filing requirements as special risk insurance. Those risks that qualify for participation in the Free Trade Zone remain subject to all laws and rules governing applicable insurance rates and forms besides the filing requirements.
Under Section 16.8(b) of Regulation 86 neither Class 1 nor the Class 2 coverages specified therein may be provided in a group policy as defined in Regulation 135 (N.Y. Comp. Codes R & Regs. tit.11, Part 153 (1995)). Regulation 135, which contains the standards for property/casualty group and quasi-group policies, defines what a "group policy" is and the definition specifically includes, among others, liability insurance covering a federal purchasing group or its members. See Section153.1(g)(1)(ii). Section 153.6(c) of Regulation 135 also provides that:
(c) No group or quasi-group policy shall qualify for exemption from filing under section 6301 of the Insurance Law.
The foregoing prohibition was adopted to assure that group and quasi-group property/casualty insurance policies written either pursuant to the group insurance provisions contained in N.Y. Ins. Law § 3435 (McKinney 2000) or under the LRRA (and Art. 59 of the N.Y. Ins. Law) are written on a sound basis for the protection of residents of New York State.
The Liability Risk Retention Act of 1986 ("LRRA"), 15 U.S.C.A. §§ 3901, et seq. (West Group 1998), authorizes persons with similar or related liability insurance risk to form a purchasing group in order to purchase commercial liability insurance on a group basis. Article 59 of the New York Insurance Law parallels the provisions of the LRRA, incorporating them into New York law. Regulation 134, N.Y. Comp. Codes R. & Regs. tit. 11, Part 301 (1988) implements Article 59 and it does not contain any provision that addresses purchasing groups and the availability of special risk insurance.
Because such groups are illegal under some state law and state regulation of insurance provided to such groups would otherwise be protected under the McCarran-Ferguson Act, 15 U.S.C.A. § 1012 (West Group 1997), the LRRA expressly preempts purchasing groups from certain state laws. In this regard, § 3903(a) exempts purchasing groups from certain State laws, as follows:
(a) Except as provided in this section and section 2905 of this title [clarification concerning permissible State authority], a purchasing group is exempt from any State law, rule, regulation, or order to the extent that such law, rule, regulation, or order would
(1) prohibit the establishment of a purchasing group;
(2) make it unlawful for an insurer to provide or offer to provide insurance on a basis providing, to a purchasing group or its members, advantages, based on their loss and expense experience, not afforded to other persons with respect to rates, policy forms, coverages, or other matters;
(3) prohibit a purchasing group or its members from purchasing insurance on the group basis described in paragraph (2) of this subsection;
(4) prohibit a purchasing group from obtaining insurance on a group basis because the group has not been in existence for a minimum period of time or because any member has not belonged to the group for a minimum period of time;
(5) require that a purchasing group must have a minimum number of members, common ownership or affiliation, or a certain legal form;
(6) require that a certain percentage of a purchasing group must obtain insurance on a group basis;
(7) require that any insurance policy issued to a purchasing group or any members of the group be countersigned by an insurance agent or broker residing in that State; or
(8) otherwise discriminate against a purchasing group or any of its members.
The Second Circuit Court of Appeals determined in The Insurance Company of the State of Pennsylvania v. Corcoran, 850 F.2d 88 (1988), that the LRRA does not preempt New York's policy form and rate approval requirements contained in Article 23 of the N.Y. Ins. Law. The plaintiff insurer wrote a nationwide insurance program of insurance covering the professional liability of nurse practitioners who were members of a purchasing group. The Court held that the State's policy form and rate approval law applied to the plaintiff insurer that issued liability insurance coverage to the purchasing group.
The regulatory prohibition against group policies qualifying for the special risk exemption was adopted to assure that group and quasi-group property/casualty insurance policies written either pursuant to the group insurance powers granted under § 3435, or to a purchasing group and its members under the LRRA, are written on a sound basis for the protection of New York residents. The Department concluded that with respect to group policies that there was a regulatory need to review policy forms and rates.
Section 3903(a)(8) of the LRRA exempts a purchasing group from any State law, rule, regulation or order to the extent it would otherwise discriminate against a purchasing group or any of its members. However, the prohibition against group or quasi-group policies qualifying for exemption from filling requirements under Section 6301 does not constitute discrimination against purchasing groups under the LRRA. This prohibition applies to all policies written on a group or quasi-group basis, not just to purchasing group situations. It is the group nature of the coverage which requires that the Superintendent not surrender the ability to review rates and forms in order to protect the public. Moreover, the requirement to file policy forms and rates is imposed on the insurer, not the purchasing group or its members. Further, the coverage that can be obtained is no different whether the forms are filed and approved, since even under
§ 6301 policies written as special risk insurance are still subject to Article 23 standards.
The statutory and regulatory prohibition against group insurance being written in the Free Trade Zone is not directed solely to purchasing groups. Group policies written to others, for example, pursuant to N.Y. Ins. Law § 3435, are also barred from the Free Trade Zone under subparagraph (d) thereof.
As to purchasing groups, the regulations do not make it unlawful for an insurer to provide the benefits of group insurance to a purchasing group or its members. Rather, they only disqualify insurers, as to all group policies they issue, from the filing exemptions. A purchasing group may obtain from an insurer a liability insurance policy that is written on a group basis, even though the insurer must comply with the policy form and rate filing requirements of New York law. Regulations 86 and 135 do not discriminate against a purchasing group or any of its members within the meaning of the LRRA and, therefore, they are not preempted by the LRRA.
For further information you may contact Supervising Attorney Barbara A. Kluger at the New York City Office.