Chapter Thirty-Five

• Jurisdiction: New York

Chapter Thirty-Five

Insurance Regulation

John N. Emmanuel, Esq. Zachary N. Lerner, Esq. Aaron J. Igdalsky, Esq. Alexandra J. Cavaliere, Esq.

I. Introduction

The regulation of insurance throughout the United States is primarily conducted at the state level. Insurance has this distinction as a result of Congress’s adoption of the McCarran-Ferguson Act⁴⁸⁵⁶ of 1945 in response to a Supreme Court decision⁴⁸⁵⁷ that would have stripped the states of their historical role as insurance regulators.

The Act provides, in part, that the “Congress hereby declares that the continued regulation and taxation by the several States of the business of insurance is in the public interest”⁴⁸⁵⁸ and that “[n]o Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance.”⁴⁸⁵⁹ The Act contained specific exceptions for the Sherman Act, the Clayton Act and the Federal Trade Commission Act to the extent that state law does not regulate the business of insurance.

As a consequence of the McCarran-Ferguson Act, the insurance industry is subject to a patchwork of state laws and regulations across the country. While the past few decades have seen an effort by the states to harmonize regulation through the National Association of Insurance Commissioners (NAIC), there remains substantial variation. The state in which an insurer is domiciled has primary responsibility for the regulation of that company, but, as a general rule, an insurer must still become licensed in and comply with a multitude of market conduct, rate and form requirements in those other states in which it seeks to write business. Insurance producers are likewise subject to regulation that varies from state to state. Due to its commercial importance, a large number of insurers are either domiciled or licensed in New York, and the New York Department of Financial Services continues to play an influential role in the development and implementation of insurance regulation beyond its borders.

A single chapter devoted to New York insurance regulation can accomplish no more than a general overview. However, it is hoped that by reference to the material herein, the reader will be directed to the source material for further inquiry. It is also hoped that this chapter will provide a coherent picture of the scope and type of regulation that must be considered in connection with the transaction of insurance in New York.

II. Insurance Department: Basic Structure and Regulations

The New York State Insurance Department was created in 1859 by the New York State Legislature and began operations in 1860.⁴⁸⁶⁰ Effective October 3, 2011, the New York State Insurance Department and the New York Department of Banking were consolidated under the New York Department of Financial Services (Department), which is headed by a superintendent appointed by the Governor.⁴⁸⁶¹ The superintendent established an Insurance Division within the Department⁴⁸⁶² and appointed a deputy for insurance who heads the Insurance Division.⁴⁸⁶³ As head of the Department, the superintendent is given full authority to supervise and regulate insurance business activities in New York⁴⁸⁶⁴ and is vested with broad power to interpret, clarify and implement legislative policy.⁴⁸⁶⁵

The superintendent may prescribe regulations that are consistent with specific statutory provisions in order to effectuate any powers given to him by law, including the powers reasonably implied by statute.⁴⁸⁶⁶ Along with the authorization to grant any approval, authorization or permission, or to make any other order respecting insurance business activities in New York,⁴⁸⁶⁷ the superintendent is also authorized to conduct investigations, research, studies and analyses of matters affecting the interests of consumers of financial products and services, including tracking and monitoring complaints;⁴⁸⁶⁸ conduct hearings;⁴⁸⁶⁹ administer insurer annual statements;⁴⁸⁷⁰ and conduct periodic examinations of insurers.⁴⁸⁷¹ Any order, regulation or decision of the superintendent is subject to judicial review in a proceeding under article 78 of the New York Civil Practice Law and Rules (CPLR).⁴⁸⁷²

In order to defray some of the operating expenses of the Department that are solely attributable to regulating persons under the Insurance Law, the superintendent is authorized to assess expenses pro rata upon all domestic insurers and all licensed United States branches of alien insurers domiciled in New York in direct proportion to the business each insurer conducts in the state.⁴⁸⁷³

III. Insurers

A. Licensing

1. License Requirement

Article 11 of the Insurance Law governs the licensing of insurers. Insurance Law § 1102(a) states “[n]o person, firm, association, corporation or joint-stock company shall do an insurance business in this state unless authorized by a license in force.” “Making . . . any insurance contract” is considered to be “doing an insurance business.”⁴⁸⁷⁴ The Insurance Law provides the following definition of the term “insurance contract:”

[A]ny agreement or other transaction whereby one party, the “insurer”, is obligated to confer benefit of pecuniary value upon another party, the “insured” or “beneficiary,” dependent upon the happening of a fortuitous event in which the insured or beneficiary has, or is expected to have at the time of such happening, a material interest which will be adversely affected by the happening of such event. ⁴⁸⁷⁵

Therefore, an insurance contract involves (1) an insurable interest, (2) the transfer of risk of loss from one party to another, and (3) the obligation to pay a pecuniary benefit that is dependent upon a fortuitous event.⁴⁸⁷⁶ There are numerous Office of General Counsel opinions that discuss and analyze whether various types of agreements fall within the definition of “insurance contract” or “doing an insurance business” under the Insurance Law. Insurance Law § 1101(b)(1) provides as follows:

any of the following acts in this state, effected by mail from outside this state or otherwise, by any person, firm, association, corporation or joint-stock company shall constitute doing an insurance business in this state . . . :

(A) making, or proposing to make, as insurer, any insurance contract, including either issuance or delivery of a policy or contract of insurance to a resident of this state or to any firm, association, or corporation authorized to do business herein, or solicitation of applications for any such policies or contracts;

(B) making, or proposing to make, as warrantor, guarantor or surety, any contract of warranty, guaranty or suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the warrantor, guarantor or surety;

(C) collecting any premium, membership fee, assessment or other consideration for any policy or contract of insurance;

(D) doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an insurance business within the meaning of this chapter; or

(E) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this chapter.

2. Licensing and Formation

The licensing requirements under Insurance Law § 1102 apply to domestic insurers,⁴⁸⁷⁷ foreign insurers⁴⁸⁷⁸ and alien insurers.⁴⁸⁷⁹

a. Domestic Insurers

The Insurance Law provides for the formation and licensing of both stock and mutual insurance companies.⁴⁸⁸⁰ A domestic insurer must be organized pursuant to Insurance Law article 12 before it may obtain a certificate of authority to transact the business of insurance in New York.⁴⁸⁸¹ Once organized and capitalized, the domestic company must obtain a New York Certificate of Authority by filing with the superintendent the National Association of Insurance Commissioners—Uniform Certificate of Authority Application (UCAA) Primary Application⁴⁸⁸² materials and the New York State-specific requirements.⁴⁸⁸³

(1) Name Reservation

To organize the insurer, the proposed name must first be approved and reserved. A letter must be submitted by the proposed incorporators (comprising at least nine natural persons, or seven for title insurers) to the superintendent, requesting approval and reservation of the name and including the following information regarding the proposed company: (1) the company’s proposed name; (2) county in which the principal office of the proposed company will be located; and (3) the name and address of a newspaper of general circulation in the county where the company’s principal business office is proposed to be located in which the Notice of Intent (more fully discussed below) will be published.⁴⁸⁸⁴

(2) Notice of Intent

Upon approval of the name, the proposed incorporators must publish twice a week for three successive weeks (or once a week for six successive weeks) a Notice of Intent to form an insurance company in the newspaper approved by the superintendent, including the following information: (1) a notice of intent to form an insurance company; (2) the company’s name; (3) the kinds of insurance business to be transacted; (4) the names and city and state of the proposed incorporators; (5) the location of the principal office in New York; and (6) the amount of proposed initial capital, if the proposed corporation is a stock corporation.⁴⁸⁸⁵

(3) Incorporation Documents

Unless the superintendent determines that a hearing is necessary in connection with the application, the following items should be filed by the proposed incorporators following satisfaction of the publication requirements: (1) proof of publication by the affidavit of the publisher or of its foreman or clerk; and (2) a declaration signed by each of the incorporators and duly acknowledged before a notary public (or other officer...