OGC Opinion No. 06-04-08
The Office of General Counsel issued the following opinion on April 4, 2006 representing the position of the New York State Insurance Department.
Re: Group Property Policy
Question Presented:
May a property insurance policy or certificate thereunder be issued in this State to a construction lender as first named insured, and as additional insureds, builders that obtain loans from the lender?
Conclusion:
No, pursuant to Regulation 135, the policy is an impermissible group property policy.
Facts:
An inquirer represents a construction lender that plans to purchase a property insurance policy that would name as additional insureds the builders that borrow from the lender. The construction lender plans to charge a fee to the builders for adding them as additional insureds. According to the information provided by the inquirer, the policy would be a property policy since it would insure against fire, lightning, windstorm and theft of building materials with the option to also purchase coverage for flood and earthquakes. The policy would not provide any liability coverage.
Analysis:
Prior to 1986, property/casualty insurance could not permissibly be written in New York on a group basis. New York, responding to a property/casualty insurance availability crisis, passed 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. However, § 3435 permits group insurance only where the members of the group are public entities or nonprofit organizations and is, therefore, not applicable to these facts.
In response 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. §§ 3901-3906 (2001). 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 §§ 5901-5913 (McKinney 2000)), conforming New York law to the LRRA. However, since the insurance at issue in these facts is property insurance rather than liability insurance, the exception for federal purchasing groups is not applicable.
The only other provisions permitting certain types of property/casualty group policies, N.Y. Ins. Law § 3442 (McKinney 2000), regarding credit card, debit card, or checking account group policies; N.Y. Ins. Law § 3445 (McKinney 2000), regarding employer sponsored group personal excess insurance; and N.Y. Ins. Law § 3446 (McKinney 2000), regarding product or system group insurance policies; are also not applicable to these facts.
The term "group policy" is defined by Section 153.1(g) of Regulation 135, in relevant part, as follows:
(a) Group policy means:
(1) a policy underwritten and issued on a collective basis of:
(i) property/casualty insurance insuring the interests of two or more persons or entities; or
(ii) liability insurance insuring a Federal purchasing group or its members;
(2) Where an insurer elects to issue a single policy with a first-named insured and additional insureds, such policy shall not be considered a "group policy" in regard to the following:
(i) corporations or other entities under common control as defined in section 107(a)(16) of the Insurance Law, with regard to their related interests;
(ii) franchisors and their franchisees, with regard to their related interests;
(iii) members of a partnership or joint venture, with regard to their related interests;
(iv) family members, but only for purposes of policies subject to section 3425 of the Insurance Law; or
(v) shared interests, provided that such shared interests exist among all additional insureds, and only to the extent of such shared interests.
The term "shared interests" is defined by Section 153.1(s)(2) of Regulation 135 as:
ownership or control of an additional insured's operations and activities such that, if damages arise from such operations or activities, the first named insured and all insureds may be jointly liable. (emphasis added)
The policy described by the inquirer is a group policy as defined by Section 153.1(g)(1) of Regulation 135 and none of the exceptions provided for in Section 153.1(g)(2) are applicable. For example, the shared interests exception is not applicable because there is not a shared interest among all the builders.
Since the policy described is a group property policy and is not a type authorized by N.Y. Ins. Law §§ 3435, 3442, 3445 or 3446, and Article 59 is not applicable, the policy may not be issued to insure New York risks. This conclusion applies regardless of whether the master policy is issued outside of New York State.
Since the policy or certificates thereunder may not be issued in this State, it is not necessary to address other issues of concern identified by the Department regarding the manner in which the construction lender proposes to sell and market the insurance.
For further information you may contact Assistant Counsel Brenda M. Gibbs at the Albany Office.