Locke Lord QuickStudy: Excess Lines Association of New York Publishes Guidance on New York Group P&C Policies

On June 17th, the Excess Lines Association of New York (“ELANY”) published Bulletin No. 2019-19 (the “Bulletin”) detailing New York’s substantial restrictions on group property and casualty insurance policies. The Bulletin echoes some of the remarks at the most recent Surplus Lines Law Group Meeting where this author provided details on the growing regulatory concerns as to group P&C policies. The Bulletin also touches on a number of issues identified in our previous publication here.

The Bulletin reiterates New York’s long-held and codified position that group P&C policies are generally impermissible in the state unless they fall into a number of narrow exceptions, such as when additional-named insureds (1) are under common control, (2) are franchisees with regards to related interests, (3) are members of a joint venture, (4) are family members, or (5) otherwise have shared common interests in the risk being insured. Please see NYCRR § 153.1(g)(1). Other exceptions include writing coverage for groups comprised solely for public entities, nonprofit organizations or educational not-for-profit corporations. However, the most common recognized and utilized exception to the New York group P&C restrictions is the establishment of risk purchasing groups or risk retention groups under the Liability Risk Retention Act of 1986 (“LRRA”). New York expressly allows for risk retention groups (a particular species of captive insurers) and risk purchasing groups (vehicles established to purchase group liability insurance from admitted or surplus lines insurers) to provide or purchase group commercial liability insurance, respectively, without tripping New York’s group prohibitions.

However, the Bulletin goes further than simply outlining New York’s prohibitions and reminds insureds, insurers and brokers alike of common group P&C violations even when an exception from the group P&C prohibition is utilized. For example, New York prohibits the concept of “shared limits” whereby a certificate holder under a group policy may have its limits exhausted by virtue of losses under another certificate holder’s coverage; even if another state where the “master policy” is issued allows for shared limits, New York is likely to object to the imposition of a shared limit on any certificate holder residing in the state. In addition, with respect to surplus lines group policies, New York will not simply recognize the “home state” of the group to be where the “master policy” is issued, but will instead treat every certificate holder in the state as its own separate insured and, in the surplus lines insurance context, require that the diligent search of the admitted market be appropriately conducted and that surplus lines premium taxes be remitted by the surplus lines broker accordingly.

Finally, and perhaps most importantly from a practical perspective, is that the Bulletin notes that “[i]mpermissible groups have been a focal point for fines by the DFS in recent years.” Because the LRRA only allows for risk retention groups and risk purchasing groups to offer or purchase commercial liability coverage, group property programs have had no choice but to attempt to navigate state-level group P&C insurance laws; however, attempting to utilize a group property program in New York is essentially the equivalent of trying to fit a square peg into a round hole as the Bulletin notes that “[t]here is NO group insurance policy exceptions for ‘property programs’ under New York law.” (Emphasis in original). Yet, with the emergence of “InsurTech” products that depend on mass, efficient distribution of insurance, the demand group property programs is arising. For example, the success of “transportation network companies” such as Uber and Lyft, as well as car-share programs, necessitate broad, on-demand coverage that may extend beyond liability insurance and into property needs as well. Nevertheless, because group property insurance programs have had no federal protection and no legal recognition by New York, they are subject to challenge in the state, and New York appears to be taking a more aggressive stance on the issue.

The obvious fix from a compliance perspective, of course, would be to expand the LRRA to include property coverage and other forms of P&C coverage, such as business interruption insurance. Such proposals have gained traction in Congress, but to this date, no expansion legislation has been signed into law. We will continue to monitor and update the insurance community on this evolving issue both in New York and across the nation.