The law of New York recognizes and permits an insured to “directly” or “independently” procure insurance from an insurer who is not authorized to do an insurance business in the state. Insurance Law §1101(b)(2)(E) establishes a NARROW EXCEPTION to the general requirements that an insurer be authorized (licensed) to sell insurance to New Yorkers or when insuring New York risks. The pertinent language exempts “... policies of insurance on risks located within or without this state ... which policies are principally negotiated, issued and delivered without this state in a jurisdiction in which the insurer is authorized to do an insurance business.”
As explained in OGC Opinion of June 26, 2003, it is not sufficient for an insured to make direct contact from New York by phone or by mail with a London insurer or broker, but they literally must negotiate physically in the foreign location.
In addition to the requirement that the policy be principally negotiated, issued and delivered outside the state, the purchase must be “directly” or “independently” procured. The words “direct” or “independent” mean the purchase of coverage without a broker or agent’s involvement. The Nonadmitted and Reinsurance Reform Act (NRRA) 15 U.S.C. §8201 et. seq. defines “nonadmitted insurance” as “property and casualty insurance permitted to be placed directly or through a surplus line broker with a nonadmitted insurer ... .” The NRRA defines “independently procured insurance” as “insurance procured directly by an insured from a nonadmitted insurer.” This federal law therefore reinforces the distinction contained in most state laws that nonadmitted insurance is (with some exceptions, such as those for ocean marine business) either 1) placed by an excess or surplus lines broker or 2) purchased directly by the insured without a broker.
In New York, Article 33-A of the Tax Law is titled “Tax On Independently Procured Insurance.” It applies to premiums on contracts of insurance procured from unauthorized insurers except policies procured through excess line brokers or exempt transactions. OGC Opinions of October 30, 2002, and October 12, 2005, state this tax applies to insurance policies issued by a captive insurance company when the captive is not domiciled in New York.
For independent procurement transactions, effective on and after July 21, 2011, insureds must use the CT-33-D form to pay taxes. For all such transactions, taxes are due on 100% of the written premium except for premium attributable to risk exposures outside of the United States.
A question often asked is, “To what extent can a broker be involved in an independent or direct procurement transaction?” The answer, based on New York’s current laws and interpretations of the law by the Department of Financial Services is, "A broker cannot be involved at least not as a broker."
New York law clearly permits an insured to negotiate and acquire its own nonadmitted insurance; however, if it does so, for example, in England or Bermuda without the services of a United States-based broker, New York law requires a broker to be a licensed New York excess line broker when it sells, solicits or negotiates nonadmitted (excess line) insurance when New York is the home state of the insured. This is expressly set forth in Insurance Law §2102(a)(1)(B).
In addition to §2102, §2117(a) states (subject to limited exceptions not relevant to independent procurement), “No person, firm, association or corporation shall in this state act as an agent for any insurer ... not licensed or authorized ... or shall in this state act as an insurance broker in soliciting, negotiating or in any way effectuating any insurance ... or in placing risks with any such insurer ... or in this state in any way or manner aid such insurer.”
Circular Letter No. 9 (2011) states, “Insurance will be deemed to be independently procured only if the insured purchased or renewed the excess line insurance policy directly from an unauthorized insurer without any assistance from an insurance producer.”
In New York, a person or entity may be licensed as an insurance consultant in addition to, or in lieu of, holding licenses as a broker and excess line broker. A question often asked is, "Can an insurance consultant assist an insured with a direct or independent procurement?" The answer depends on what the consultant’s role and services are.
A broker or an excess line broker’s role includes selling, soliciting or negotiating insurance. These are defined terms in Insurance Law §2101.
OGC Opinion of April 2, 2004, opines that an insurance consultant not licensed as a broker or excess line broker “is precluded from engaging in the solicitation, negotiation or procurement of insurance.” So, first and foremost, a consultant needs to differentiate the services provided to a client seeking coverage, particularly if the consultant is also a broker involved with placing certain coverages for that client. By way of example, if a broker, in placing a large capacity tower of property or casualty coverage, exhausts the admitted and excess lines markets but has not acquired all of the coverage sought, can the broker then consult with the insured about options such as independent or direct procurement? The answer appears to be “yes,” as long as the consultant is licensed as a consultant in New York and is limiting their involvement to:
explaining why some capacity cannot be accessed from New York;
informing the client that the broker cannot act as a broker but only as a consultant regarding other potential available capacity;
not importuning a specific transaction with a specific carrier; and
not selling, soliciting or negotiating coverage.
A broker, in these circumstances, would be well advised to maintain and adhere to a written protocol differentiating its broker services from consulting services. An ability to demonstrate a good faith separation of these roles will provide the best protection from potential regulatory trouble and other liability exposures.
Independent procurements are subject to a New York tax payable by the insureds as noted above. The tax rate is currently 3.6% of the written premium.
The Independent Procurement Tax, set forth in Article 33-A of the Tax Law, exempts certain insureds from the tax completely. The exemption applies to the following types of insureds or transactions:
The government of the United States or any instrumentally thereof;
New York State and its political subdivisions;
The United Nations and any other international organizations of which the United States is a member;
Any foreign government; and
Any taxable insurance contract of the type described under the Insurance Law §2117 (b),(c) and (d).
***
ELANY DISCLAIMER:
This is not intended to be nor should it be construed as legal advice. Consult with your own legal counsel.
Last Reviewed/Revised: January 3, 2022