OGC Opinion No. 10-01-10
The Office of General Counsel issued the following opinion on January 29, 2010, representing the position of the New York State Insurance Department.
RE: XYZ Boiler Inspection and Insurance Company Risk Retention Group
1) Is XYZ RRG, a risk retention group that is chartered and licensed as an insurance company in the State of Kentucky and is registered as a risk retention group in New York State, or its affiliate, XYZ Inc. (“XYZ Inc.”), a “duly authorized insurance company” within the meaning of Labor Law § 204(1)?
2) May XYZ RRG write boiler and machinery insurance pursuant to N.Y. Ins. Law § 1113(a)(9) (Mc Kinney Supp. 2009) in New York State?
1) No. Neither XYZ RRG nor XYZ Inc. is an “authorized insurer” within the meaning of Insurance Law § 107(a)(10), or a “duly authorized insurance company” within the meaning of Labor Law § 204(1), which this agency understands the inquirer to interpret in the same manner as “authorized insurer” under the Insurance Law.
2) No. XYZ RRG may not write boiler and machinery insurance in New York State because boiler and machinery insurance is property insurance, not liability insurance. A risk retention group may only write liability insurance for its members and members of other similarly-risked risk retention groups.
XYZ RRG is not licensed by the New York Department of Insurance (the “Department”) to do business as an insurer in this State. Rather, XYZ RRG is chartered and licensed as an insurance company in the State of Kentucky, from which it received its certificate of authority on January 21, 2009. Its Kentucky Certificate of Authority states that it is authorized in Kentucky to transact “the business of casualty (limited to liability, boiler & machinery and malpractice) Insurance…”
On January 21, 2009 XYZ RRG notified the Department that it intended to do an insurance business in New York State when it registered, in accordance with the requirements contained in § 3902(a)(1)(D) of the federal Liability Risk Retention Act (“LRRA”) and Insurance Law § 5904(a), by filing a Risk Retention Group Notice and Registration form (the “registration form”).
On its registration form, XYZ RRG described the coverage that it provides as malpractice for boiler inspectors errors and omissions. In response to question 8 on the registration form, XYZ RRG stated:
XYZ RRG policyholders own or operate boilers and pressure vessels which are subject to state regulation and explosion hazards which require sophisticated risk management and qualified inspectors to service the equipment. The typical policyholder is a Fortune 3000 type commercial industrial business enterprise. In addition to insurance to protect them from third party property damage liability claims following an explosion, these business [sic] seek to have their common interests represented before ASME and the National Board of Boiler and Pressure Vessel Inspectors through the National Association of Boiler and Pressure Vessel Owners and Operators.
XYZ RRG’s Organization Chart, which was filed with the Department along with the registration form, indicates that XYZ Inc. provides risk management services and human resources administration services to XYZ RRG. XYZ RRG’s Detailed Plan of Operation, also filed with the registration form, states that XYZ RRG’s purpose is “to provide safety, inspection, risk management and insurance coverage on a claims-made basis to the members of NABO and all other pressure vessel owners in the United States, who required boiler related risk management and insurance services and join NABO.” The risks that will be insured by XYZ RRG are described as follows: “[XYZ RRG] will primarily write third party Property Damage Liability arising out of pressure vessel explosion risk on an indemnity basis using a claims-made policy form….[XYZ RRG] will also offer a claims made professional liability policy for wrongful acts of boiler inspectors with up to $25,000 occurrence and aggregate in limits….” (Emphasis added.)
The Department sent a letter dated April 1, 2009 to XYZ RRG confirming that it submitted notice of its intent to do business in New York State and stating that, “If XYZ RRG is not in violation of any provisions of the LRRA or any applicable New York statute [,] the group is permitted to provide Boiler and Pressure Vessel Liability (property damage only) and Boiler Inspectors’ Professional Liability insurance in New York as a risk retention group not chartered in this State.”
The inquirer reports that XYZ Inc. sent the Department’s April 1, 2009 letter to it claiming that the letter constitutes recognition by the Department that XYZ RRG is an authorized insurer.
The inquirer further notes that “XYZ is claiming to be a ‘duly authorized insurance company’ entitled to conduct boiler inspections pursuant to Labor Law § 204 1 on the grounds that it has formed a risk retention group (RRG) in Kentucky…” The inquirer states that XYZ RRG takes the position that “it may be considered an insurance company authorized to do business in New York merely by filing registration documents with New York.”
The inquirer also reports that “XYZ has implied that since a portion of its stock was owned by various insurance companies at various times, it should be considered an authorized insurance company.”
The inquirer notes that it construes the term “duly authorized insurance company,” as it is used in Labor Law § 204, to have the same meaning as the term “authorized insurer” under the Insurance Law. The inquirer adds that it also construes “boiler insurance” under the Labor Law and its implementing regulations to be the same as “boiler and machinery insurance” under the Insurance Law.
The inquirer asks whether XYZ RRG or its affiliate, XYZ Inc., constitutes a “duly authorized insurer” such that it may perform boiler inspections in New York State under the Labor Law. The inquirer also asks whether XYZ RRG may lawfully write boiler insurance in New York State.
I. XYZ RRG is not a “duly authorized insurance company”
The inquirer’s first question asks whether XYZ RRG is a “duly authorized insurer” within the meaning of the Labor Law.
Risk retention groups like XYZ RRG are governed first and foremost by the federal LRRA. A risk retention group is chartered and licensed as an insurance company in one state of its choosing (the “state of domicile”) to write “liability insurance” (as that term is defined in § 3901(a)(2) of the LRRA). Thereafter, it may write liability insurance for its members (and members of other similarly-risked risk retention groups) in all other states without obtaining a license to do business as an insurer, provided that it registers in each other state as a risk retention group.
“Risk retention group is defined in § 3901(a)(4), in pertinent part, as follows:
(4) “risk retention group” means any corporation or other limited liability association –
(A) whose primary activity consists of assuming, and spreading all, or any portion, of the liability exposure of its group members;
(B) which is organized for the primary purpose of conducting the activity described under subparagraph (A);
(C) which –
(i) is chartered or licensed as a liability insurance company under the laws of a State and authorized to engage in the business of insurance under the laws of such State; or
(ii) before January 1, 1985, was chartered or licensed and authorized to engage in the business of insurance under the laws of Bermuda or the Cayman Islands and, before such date, had certified to the insurance commissioner of at least one State that it satisfied the capitalization requirements of such State, …
(D) which does not exclude any person from membership in the group solely to provide for members of such a group a competitive advantage over such a person;
(E) which –
(i) has as its owners only persons who comprise the membership of the risk retention group and who are provided insurance by such group; or
(ii) has as its sole owner an organization which has as –
(I) its members only persons who comprise the membership of the risk retention group; and
(II) its owners only persons who comprise the membership of the risk retention group and who are provided insurance by such group;
(F) whose members are engaged in businesses or activities similar or related with respect to the liability to which such members are exposed by virtue of any related, similar, or common business, trade, product, services, premises, or operations;
(G) whose activities do not include the provision of insurance other than –
(i) liability insurance for assuming and spreading all or any portion of the similar or related liability exposure of its group members; and
(ii) reinsurance with respect to the similar or related liability exposure of any other risk retention group (or any member of such other group) which is engaged in businesses or activities so that such group (or member) meets the requirement described in subparagraph (F) for membership in the risk retention group which provides such reinsurance; and
(H) the name of which includes the phrase ‘Risk Retention Group’
Article 59 of the Insurance Law implements the LRRA in New York State. Its provisions parallel, and thus are consistent with, those contained in the LRRA.
Under LRRA § 3902(a), a risk retention group that registers in a state is exempt from most, but not all, of that state’s insurance laws, rules, regulations and orders, including the requirement that it become licensed as an insurance company before it may conduct an insurance business in the state.
As a risk retention group operating in New York State pursuant to the LRRA and Article 59, XYZ RRG may only write for its members liability insurance, as that term is defined in the LRRA, as well as reinsurance covering members of other risk retention groups whose members have similar risks. LRRA § 3901(a)(4)(G).
Not every RRG registered in New York, however, is an authorized insurer within the meaning of the Insurance Law. Insurance Law § 107(a)(10) defines the term “authorized insurer” as follows:
[An] insurer authorized as such to do an insurance business in this state in compliance with this chapter, by reason of a license so to do issued and in force pursuant to the laws of this state or of a corporate charter granted and in force pursuant to the laws of this state, but not including any insurer herein exempted from compliance with the requirement that it obtain a license to do business.
Thus, an “authorized insurer” is an insurer that is licensed by the Superintendent of Insurance to do an insurance business in this State or that holds a corporate charter issued in New York State that allows it to do an insurance business in the State.
A risk retention group, such as XYZ RRG, that simply is domiciled in another state and registered as a risk retention group in New York State is not an authorized insurer under the Insurance Law, since it has neither a license issued by the Superintendent nor does it operate pursuant to a corporate charter granted pursuant to the laws of New York State.2 See Opinion of Office of General Counsel (“OGC Opinion”) No. 09-01-02 (January 8, 2009) (concluding that a captive risk retention group domiciled in Arizona is not an authorized insurer in New York State) Since the inquirer reports that DOL construes the term “duly authorized insurance company” under the Labor Law to have the same meaning as an “authorized insurer” under the Insurance Law, then XYZ RRG is not a duly authorized insurance company any more than it is an authorized insurer.
Similarly, XYZ Inc., which is not a risk retention group, is not an authorized insurer (or, for that matter, a duly authorized insurance company) because it is neither licensed in New York State to act as an insurer, nor does it hold the required New York State corporate charter. Whether it is owned by an authorized insurer has no bearing on its own status as an authorized insurer.
II. XYZ RRG may not write boiler insurance in New York
The inquirer’s second question asks whether XYZ RRG may lawfully write boiler insurance in New York State.
Under Labor Law § 204(1), the Commissioner of Labor (“Commissioner”) is required to conduct inspections of boilers in New York State, “except for boilers inspected and insured by a duly authorized insurance company in accordance with the provisions of subdivision eight of this section and with the rules of the commissioner.” N.Y. Comp. Codes. R. & Regs. tit. 12, § 4.1.2(j), promulgated by the Commissioner, defines “insurance company” to “mean a company which has been licensed in this State to write boiler insurance and which is actively engaged in writing such insurance for the general public.”
The inquirer reports that it considers the term “boiler insurance” as used in the Labor Law and accompanying regulations to mean the same as “boiler and machinery insurance”, an authorized kind of insurance under Insurance Law § 1101(a)(9). That statute provides:
(9) ‘Boiler and machinery insurance,’ means insurance against loss of or damage to any property of the insured, resulting from explosion of or injury to:
(A) any boiler, heater or other fired pressure vessel;
(B) any unfired pressure vessel;
(C) pipes or containers connected with any such boilers or vessels;
(D) any engine, turbine, compressor, pump or wheel;
(E) any apparatus generating, transmitting or using electricity; or
(F) any other machinery or apparatus connected with or operated by any such boilers, vessels or machines;
and including the incidental power to make inspections of, and issue certificates of inspection upon, any such boilers, apparatus, and machinery, whether insured or otherwise. (Emphasis Added.)
Boiler and machinery insurance only provides first-party coverage to an insured for loss or damage to the insured’s own property. See OGC Op. No. 03-05-18 (May 20, 2003). In OGC Op. No. 03-15-18, the Department concluded that a risk retention group providing a theft protection program, in which motor vehicle physical damage coverage is provided to purchasers of motor vehicles in the event that the vehicle is stolen and not recovered, does not constitute liability insurance under the LRRA - the only kind of insurance under the LRRA that a risk retention group may provide to its members.
Similarly, boiler and machinery insurance is not “liability insurance” under the definition of the term “liability” in the LRRA, or, for that matter, the Insurance Law. Under both, liability insurance provides coverage to an insured arising out of the insured’s liability to third parties. Indeed, § 3901(a)(2) of the LRRA reads, in pertinent part, as follows:
(2) ‘liability’ –
(A) means legal liability for damages (including costs of defense, legal costs and fees, and other claims expenses) because of injuries to other persons, damage to their property , or other damage or loss to such other persons …(Emphasis added.)
Since by definition boiler and machinery coverage does not provide coverage for injuries to other persons or damage to their property, see Ins. Law § 1101(a)(9), it is not liability insurance under the LRRA § 3902(a)(2). Accordingly, a non-domiciliary risk retention group like XYZ RRG may not lawfully provide boiler insurance in New York State.
For further information you may contact Principal Attorney Barbara A. Kluger at the New York City Office.
1 Section 204(1) of the Labor Law provides: “Inspection. The commissioner shall cause to be inspected at least once every two years all boilers as defined in this section, except for high pressure power boilers, antique boilers and miniature boilers, which the commissioner shall cause to be inspected at least once each year, and except for boilers inspected and insured by a duly authorized insurance company in accordance with the provisions of subdivision eight of this section and with the rules of the commissioner.”
2 Under New York Insurance Law § 5904(c) and (j) a risk retention group not chartered in New York State is deemed to be a “licensed foreign insurer” for purposes of taxation and the assessment of fines and penalties for violations of Article 59.