Appellate Division confirms foreign risk retention groups not subject to prompt-disclaimer requirement
In NadKos, Inc. v Preferred Contractors Insurance Company Risk Retention Group LLC [May 3 2018], the New York Appellate Division addressed for the first time whether foreign risk retention groups (RRG) are subject to New York Insurance Law which requires liability insurers issuing policies in New York, under penalty of preclusion, to promptly disclaim coverage of claims involving bodily injury sustained in New York (§ 3420(d)(2)).
The court found that New York law governing foreign RRGs, consistent with federal law limiting the right of states to regulate them, exempts such RRGs from complying with this requirement. Moreover, the court’s reasoning suggests that foreign RRGs are exempt from other important requirements found in § 3420.
In the 1980s, responding to disturbances in the interstate insurance markets, Congress authorized “persons or businesses with similar or related liability exposure to form ‘risk retention groups’ for the purpose of self-insuring.” A RRG is defined as “a liability insurance company owned and operated by its members, and those members are its insureds.”
The Liability Risk Retention Act of 1986 (LRRA) extended the right to form RRGs for all commercial liability insurance. The LRRA pre-empts “any State law, rule, regulation, or order to the extent that such law, rule, or order would . . . make unlawful, or regulate, directly or indirectly, the operation of a risk retention group.” That pre-emption notwithstanding, the LRRA permits a RRG’s chartering, or domicillary, state to regulate its “formation and operation,” and permits non-domicillary states to, among other things, require compliance with unfair claim settlement practices rules.
New York's position
Consistent with this federal law, New York’s Insurance Law recognizes the limits on its ability to regulate foreign RRGs by enumerating the limited types of regulation to which they are subject, including compliance “with the unfair claims settlement practices provisions as set forth in [Insurance Law § 2601].”
Section 2601, in turn, proscribes insurers from committing certain acts deemed “unfair claims settlement practices,” including “failing to promptly disclose coverage pursuant to [Insurance Law § 3420(d)].”
However, it does not distinguish between the time requirements for an insurer to “confirm” liability limits and “advise” when sufficient identifying information is lacking (§ 3420(d)(1)) and the time requirements for an insurer to disclaim coverage (§ 3420(d)(2)).
In Nadkos, the plaintiff general contractor, Nadkos, Inc., which was sued in a personal injury action by a worker hired by subcontractor Chesakl Enterprises, Inc., sought additional-insured coverage under a general liability policy issued by defendant Preferred Contractors Insurance Company Risk Retention Group LLC (PCIC), a RRG domiciled in Montana. PCIC disclaimed coverage to Nadkos under various policy exclusions; Nadkos argued that § 3420(d)(2) precluded PCIC from relying on the exclusions due to its alleged failure to promptly disclaim.
In contending that PCIC, despite being a foreign RRG, was not exempt from § 3420(d)(2)’s prompt-disclaimer requirement, Nadkos argued that, by referencing § 3420(d) without distinguishing between its subsections, § 2601 rendered the violation of any portion of that section an “unfair claims settlement practice” to which foreign RRGs like PCIC are subject.
The court disagreed, finding that § 2601’s use of the term “disclose” when referring to § 3420(d) made clear it referred only to § 3420(d)(1)’s insurance information disclosure requirements and not to § 3420(d)(2)’s disclaimer requirement. The court added that while a § 3420(1) violation “may result in a civil penalty for the unfair claim settlement practice, . . . failure to disclaim results in coverage being extended beyond the scope and clear language of a policy,” contrary to the LRRA’s purposes.
The court’s strict reading of § 5904(d) and recognition of the expansive scope of the LRRA’s pre-emptive effect with regard to foreign RRGs suggests that state courts would also find that, in addition to § 3420(d)(2)’s disclaimer requirements, foreign RPGS are exempt from other § 3420 requirements. This would include requirements that liability policies issued in New York contain provisions entitling injured persons and other claimants to satisfy such policies’ notice conditions in the insured’s stead and to sue the insurer directly to recover unsatisfied judgments against the insured.
Non-RRG insurers issuing commercial liability policies in New York should thus be aware that the tendering rights on which they typically rely may be significantly limited where the target insurer is a foreign RRG. With that in mind, such insurers issuing policies to building owners or general contractors, i.e., those that often benefit from additional-insured coverage for their insureds under subcontractor policies, may consider taking measures to encourage their insureds to hire contractors that are not insured under policies issued by foreign RRGs — both because such RRGS may be largely exempt from § 3420 and because the policies they issue often include a wide array of exclusions not typical to subcontractor policies.
The New York Court of Appeals has granted plaintiff’s motion for leave to appeal. We will provide an update when the Court of Appeals issues its ruling.