OGC Opinion No. 06-04-12
The Office of General Counsel issued the following opinion on April 17, 2006, representing the position of the New York State Insurance Department.
Risk retention groups and motor vehicle financial responsibility insurance
Is a risk retention group (RRG), which is registered in New York but is not chartered or licensed in New York, considered to be "an insurer duly authorized to transact business in this state," for purposes of satisfying the financial responsibility requirements of the New York Vehicle and Traffic Law?
It remains the Department's position that a risk retention group, which is registered as such in New York but is not chartered or licensed in New York, is not "an insurer duly authorized to transact business in this state," and therefore an insurance policy issued by the RRG would not satisfy the financial responsibility requirements of the New York Vehicle and Traffic Law (VTL).
The insurance company requested that the New York Department of Motor Vehicles (DMV) issue an Insurance Company Code (ICC) to it, so that it may provide insurance in this state to its New York members for their New York registered motor vehicles. The company is neither chartered nor licensed in New York as an insurer but has registered with the Insurance Department as a risk retention group. In a June 12, 2003 letter responding to Associate Counsel at the New York Department of Motor Vehicles (DMV), this office stated that it was this Department's view that, while the company may provide liability insurance to its members, insurance written by a risk retention group that is not chartered or licensed as an insurer in New York is not proof of financial responsibility under Article VI of the VTL.
The inquirer represents the RRG and states that, relying upon the Department's letter, the New York Department of Transportation (DoT) will not accept the company's coverage as meriting issuance of a bar code, and without it the company's members cannot register their vehicles in New York. The inquirer states that DoT advised his client, the insurance company, that it does not meet the requirements of 11 NYCRR 855.
At issue is whether a state may determine that its financial responsibility requirements may not be satisfied by a RRG registered in that state. It is the inquirer's contention that the federal Liability Risk Retention Act 15 U.S.C. §§ 3901, et seq. ("LRRA") pre-empts state laws that prohibit insurance policies issued by risk retention groups as a class from meeting financial responsibility requirements.
Article VI of the New York Vehicle & Traffic Law is the "Motor Vehicle Financial Security Act". N.Y. Veh. & Traf. § 312(1)(a) states that no motor vehicle may be registered in New York unless application for such registration is accompanied by proof of financial security, which shall be evidenced by proof of insurance, or other acceptable proof not relevant to this inquiry. Insurance shall be in the form of an "owner's policy of liability insurance", which is defined in N.Y. Veh. & Traf. § 311(4)(b) to mean, "in the case of a vehicle registered in this state, a policy issued by an insurer duly authorized to transact business in this state"1
N.Y. Veh. & Traf. § 321(1) excepts certain vehicles from compliance with the provisions of Article VI, including the proof of insurance requirement in § 311. These vehicles must nonetheless be registered in accordance with the provisions of the VTL. Among those vehicles exempted are those operated under a permit or a certificate of convenience and necessity issued pursuant to the New York Transportation Law, those for which a permit or certificate is in force pursuant to the Interstate Commerce Act and any motor vehicle owned by the United States. This means that the owner of a vehicle that has a permit from either the United States or New York State Department of Transportation would be able to register the vehicle in New York.
In the Department's previous letter, the issue of whether the company's insurance policy may be used to obtain either such permit had not been raised as an issue, and the Department offered no opinion. DoT has now concluded that a policy from this insurance company is unacceptable. As stated in the Department's previous letter, determinations regarding financial responsibility including the decision as to whether coverage by a RRG that is not chartered nor licensed as an insurer in New York qualifies as proof of such responsibility are properly made by the agency enforcing the particular financial responsibility law at issue.
Although a RRG that is not chartered or licensed as an insurer in New York does not constitute an "authorized insurer" under the Insurance Law, the LRRA pre-empts most state insurance licensing laws and permits a RRG that registers in a state to sell liability insurance, as such term is defined in the LLRA, in that state. The Department, however, interprets § 3905(d) of the LRRA, entitled "Clarification concerning permissible State authority" as providing for a reservation of state authority with respect to financial responsibility requirements. It states, in pertinent part:
(d) State authority to specify acceptable means of demonstrating financial responsibility
Subject to the provisions of section 3902(a)(4) of this title relating to discrimination nothing in this chapter shall be construed to preempt the authority of a State to specify acceptable means of demonstrating financial responsibility as a condition for obtaining a license or permit to undertake specified activities. Such means may include or exclude insurance coverage obtained from an admitted insurance company, an excess lines company, a risk retention group, or any other source regardless of whether coverage is obtained directly from an insurance company or through a broker, agent, purchasing group, or any other person. [Emphasis added]
In response to the LRRA, New York enacted N.Y. Ins. Law Art. 59. N.Y. Ins. Law § 5913 (McKinney 2000) provides as follows:
Wherever pursuant to the laws of this state or any political subdivision of this state a demonstration of financial responsibility is required as a condition for obtaining a license or permit to undertake specified activities, if any such requirement may not be satisfied by obtaining insurance coverage from an insurer not authorized to do business in this state, such requirement may not be satisfied by insurance issued by a risk retention group not chartered in this state.
Congress in LRRA § 3905(d) provided that states retain their authority to devise and implement, without preemption by federal law, financial responsibility laws in connection with the granting of licenses and registrations to engage in specified activities. New York's requirement that the insurance must be provided by an insurer subject to all of its insurance laws and regulations and under its regulatory supervision is part of the overall statutory scheme to protect innocent persons who may be injured in motor vehicle accidents. In the event that an authorized insurer becomes insolvent, innocent victims may look to the property/casualty security funds under N.Y. Ins. Law Art. 76 for recompense. No such recourse is available when the vehicle is insured by a RRG that becomes insolvent.
Section 5913 makes clear that a RRG not chartered in New York may not be deemed to be an authorized insurer for the purposes of any financial responsibility requirement imposed under New York law. The Insurance Department interprets these provisions to exempt New York's financial responsibility statutes that require the use of authorized insurers from federal preemption under the LRRA. Therefore, a policy of motor vehicle liability insurance issued by a RRG that is chartered in another state and which is not licensed in New York as an insurer does not satisfy the financial responsibility requirements of the VTL since the VTL specifies that the policy must be issued by an authorized insurer.
There has been a split of opinion among federal courts as to whether state financial responsibility laws are preempted by the LRRA. National Warranty Insurance Company, RRG v. Greenfield, 24 F. Supp. 2d 1096 (D. Or. 1998), aff'd 214 F.3d 1073 (9th Cir. 2000), concluded that Oregon's service contract financial security law was preempted by the LRRA because it unfairly discriminated against RRGs. Two other circuits have concluded differently and upheld state financial responsibility laws that did not accept policies issued by a RRG. See Ophthalmic Mut. Ins. Co. v. Musser, 143 F.3d 1062 (7th Cir. 1998); Mears Trans. Group v. State of Fla, 34 F.3d 1013 (11th Cir. 1994). There has been no decision on point in the Second Circuit, which is where New York is located.
The inquirer makes the point that the United States Supreme Court refused certiorari in the National Warranty case. From this, the inquirer asks this Department to draw the conclusion that the Supreme Court concurs with the 9th Circuit decision. However, no such legal presumption arises from the Court's refusal to issue a writ of certiorari and the Court's refusal in the National Warranty case does not constitute an affirmation of the lower court's decision.
Thus, it remains the Department's position that the LRRA does not preclude a state from specifying that only insurance from an authorized insurer may satisfy financial responsibility requirements and under N.Y. Ins. Law § 5913 insurance written by a RRG that is not chartered or licensed as an insurer in New York is not proof of financial responsibility under Article VI of the VTL.
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.
1 As stated in N.Y. Veh. & Traf. § 310(2), Declaration of purpose, the legislature is concerned over the rising toll of motor vehicle accidents and the suffering and loss thereby inflicted. The legislature determines that it is a matter of grave concern that motorists shall be financially able to respond in damages for their negligent acts, so that innocent victims of motor vehicle accidents may be recompensed for the injury and financial loss inflicted upon them.