OGC Opinion No. 08-08-09

The Office of General Counsel issued the following opinion on August 27, 2008, representing the position of the New York State Insurance Department.

RE: Placement of Punitive Damages Insurance Coverage in the Excess Line Market

Question Presented:

1. May a New York-licensed insurance broker place insurance coverage in the excess line market on risks located in New York State that would cover punitive damages?

2. May a licensed insurance broker employ a third party outside New York to place the coverage?

Conclusions:

1. No, a New York-licensed broker may not lawfully place insurance coverage in the excess line market on risks located in New York State that would cover punitive damages.

2. No, a New York-licensed broker may not lawfully hire a third party to place insurance coverage in the excess line market on risks located in New York State that would cover punitive damages.

Facts:

The inquirer reports that the inquirer noticed materials from Bermuda marketed to New York-licensed brokers that advertise the availability of insurance intended to cover punitive damages on risks located in New York State. The inquirer states that “authorized” excess line insurers are writing the policies, and asks whether such contracts are enforceable in New York State. ¹

Analysis:

This analysis is based upon the representation that the insurance brokers in question are properly licensed to do business in New York State. The Department further assumes that the insurance brokers either are themselves excess line brokers, or are utilizing the services of licensed excess line brokers to access the unauthorized insurers. Section 27.11 of Regulation 41 prohibits excess line brokers from procuring coverage from an unauthorized insurer if such coverage is prohibited by law, including if such coverage is “determined by any Appellate Division of the New York State Supreme Court or the New York State Court of Appeals to be against public policy in this State.”

It is well-settled in New York that courts will not enforce liability insurance covering punitive damages. In Hartford Accident and Indemnity Company v. Village of Hempstead, 48 N.Y.2d 218 (1979), New York’s highest court explained that because punitive damages “are imposed not as compensation but as punishment and as a deterrent, the policy behind their imposition would be defeated were an individual permitted to avoid the burden of such damages by passing it on to an insurance carrier. . . .” Id. at 226; see also Zurich Ins. Co. v. Shearson Lehman Hutton, Inc., 84 N.Y.2d 309 (1994); Home Insurance Co. v. American Home Prods. Corp., 75 N.Y.2d 196 (1990); Opinions of the Insurance Department’s Office of General Counsel dated September 12, 2007; December 21, 2005; March 12, 1991; and June 3, 1991.

Neither a New York-licensed broker, nor a third party hired by a broker, may lawfully place insurance coverage in the excess line market on risks located in New York State that would cover punitive damages, because New York’s highest court has ruled that insurance coverage of punitive damages is contrary to public policy. Therefore, placement of liability insurance that covers punitive damages violates § 27.11 of Regulation 41. In addition, § 27.14(a) of Regulation 41 requires excess line brokers to place coverage with unauthorized insurers that maintain a trust fund that is in compliance with § 27.15 of Regulation 41, and § 27.15(a)(4)(i) of Regulation 41 prohibits the trust fund from being used to cover claims for punitive damages.

For further information you may contact Senior Attorney Susan A. Dess at the New York City office.

¹ There is no such thing as an “authorized” excess line insurer under the New York Insurance Law; by definition, an excess line insurer is not authorized in New York. An excess line insurer, however, may provide coverage in accordance with 11 NYCRR Part 27.0, et al. (Regulation 41).