Opinion
01 Civ. 6023 (LLS)
July 31, 2002
Opinion and Order
Plaintiffs, Certain Underwriters at Lloyds ("Underwriters"), in this action to recover unpaid premiums under a prize indemnification policy ("the policy"), move for partial summary judgment dismissing defendant Plasmanet Inc.'s ("Plasmanet") second and third alternative affirmative defenses and first and second counterclaims.
Plasmanet's affirmative defenses claim regulatory violations rendered the policy void ab initio or voidable as of right because: (1) the broker did not stamp certain insurance documents with a notice of placement with an unauthorized insurer and did not list the insurer's address, and (2) the broker did not obtain declinations from three authorized insurers before placing the risk with plaintiffs, who are unauthorized. For the same reasons, Plasmanet's first counterclaim seeks rescission of the policy and return of $1,280,653.72 in premiums paid, plus interest and defense costs. The second counterclaim seeks return of any premiums paid prior to receipt of the required notice.
Plaintiffs' motion for partial summary judgment is granted. There are no genuine issues of material fact, and the challenged defenses and counterclaims are dismissed.
1. The relevant regulations
Plasmanet stakes its defenses and counterclaims on alleged violations of New York Insurance Department Regulation 41 (N.Y. Comp. Codes R. Regs., tit. 11, part 27), which governs the conduct of excess line agents, brokers and adjusters. The relevant sections of Regulation 41 provide:
Section 27.17 Advice to insureds and evidence of coverage.
(a)
(b) No excess line broker shall deliver, or cause to be delivered by the producing broker to a person or entity requesting coverage from an unauthorized insurer any memorandum, certificate or other document evidencing insurance coverage, unless the document constitutes an insurance policy or contract of insurance actually issued by the insurer, except that the excess line broker or producing broker may deliver written confirmation of placement of coverage with the unauthorized insurer if the confirmation identifies the insurer by name and address, accurately describes the coverage, premium and terms, and bears across its face, in no less than ten point bold red type, the following legend:
THIS IS NOT AN INSURANCE POLICY AND THE INSURER (INSURERS) HEREIN REFERRED TO IS (ARE) NOT LICENSED BY THE STATE OF NEW YORK AND NOT SUBJECT TO ITS SUPERVISION. THE INSURANCE CONFIRMED HEREIN, IN THE EVENT OF THE INSOLVENCY OF THE INSURER (INSURERS), IS NOT PROTECTED BY THE NEW YORK STATE SECURITY FUNDS. THE POLICY MAY NOT BE SUBJECT TO ALL OF THE REGULATIONS OF THE INSURANCE DEPARTMENT PERTAINING TO POLICY FORMS.
(c)-(d)
(e) No insurance policy or contract of insurance placed with an unauthorized insurer shall be binding upon the insured, and no premiums charged therefore shall be due and payable, until the excess line broker has provided, or caused to be provided by the producing broker, written notice to the insured that:
(1) the unauthorized insurer with which the excess line broker has placed the insurance is not licensed by this State and is not subject to its supervision;
(2) in the event of the insolvency of the unauthorized insurer, losses will not be covered by the New York State security funds; and
(3) the policy may not be subject to all of the regulations of the superintendent pertaining to policy forms.
Section 27.3 Submission of risk to authorized insurers.
(a) No excess line broker shall place coverage for a risk with any unauthorized insurer, unless the risk has been declined by at least three authorized insurers . . .
2. Undisputed Facts
Plasmanet operated an internet sweepstakes lottery website and used prize indemnification insurance to cover the $10 million grand prize in its FreeLotto-Superbucks game. Prize indemnification insurance is typically purchased in the excess line market for unusual or hard-to-place risks. In that market, insurers not authorized to conduct business in New York may nevertheless offer insurance through a licensed excess line insurance broker.
On September 28, 2000, when a winner claimed the $10 million grand prize, Plasmanet's prize indemnification policy with Lexington Insurance Co., an unauthorized insurer, expired. Plasmanet sought to replace that policy for the twelve-month period beginning the next day, September 29, 2000. On September 29, Plasmanet placed the risk with unauthorized insurer, Goshawk 102 (a syndicate of plaintiff underwriters in the Lloyd's of London insurance market), through Mr. Grimaldi of Millenium Brokerage, the excess line broker, and Mr. Brian Freeman of Tyser Special Risks, Ltd., the producing broker in London.
That same day, September 29, Mr. Freeman sent a handwritten fax from Tyser to Plasmanet, confirming coverage. See Pl. Mtn., Ex. 14. This fax described the coverage, premium, and terms of the policy, and identified Goshawk 102 by name. It did not, however, list the syndicate's address or warn (by legend or otherwise) that as an unauthorized issuer Goshawk 102 was not licensed in New York, not subject to the state's supervision, that losses in the event of insolvency would not be covered by New York State security funds, and that the policy might not be subject to all regulations of the superintendent pertaining to policy forms.
An unsigned letter to Plasmanet from Grimaldi, dated October 18, 2000 and entitled "Notice of Excess Lines Placement," related the substance of the three warnings listed in Section 27.17(e) regarding unauthorized issuers, using language identical to that suggested by the Excess Lines Association of New York ("ELANY") in a 1996 compliance bulletin. See Pl. Mtn., Ex. 15 (Oct. 18 letter) and Ex. 22 (ELANY Bulletin, August 15, 1996, attaching sample "Notice of Excess Line Placement" letter).
The sample ELANY letter and Grimaldi's letter (inserting name of insured and affirming broker) read: "Consistent with the requirements of New York Insurance Law and Regulation 41, Plasmanet, Inc. is hereby advised that after diligent effort to place the required insurance with companies authorized in New York to write coverages of the kind requested, all or a portion of the required coverages have been placed by Millennium Brokerage, LLC with insurers not authorized to do an insurance business in New York and which are not subject to supervision by this State. Policies issued by such unauthorized issuers may not be subject to all of the regulations of the Superintendent of Insurance pertaining to policy forms. In the event of the insolvency of the unauthorized insurers, losses will not be covered by any New York State Insolvency Fund." See Pl. Mtn. Exs. 15 (Grimaldi letter) and 22 (ELANY Bulletin, attaching letter with blanks for name of insured and name of affirming broker) (emphasis in original).
Plasmanet also received two cover notes from Grimaldi, one dated October 5, 2000, and another dated October 19, 2000, neither of which bore an ELANY stamp recording a date of filing or a stamped warning legend. See Def. Mtn. Exs. B and C. Plasmanet subsequently received another copy of the October 5 cover note which did bear an ELANY stamp recording an October 31, 2000 date of filing, as well as a stamped warning legend, identical to the one described in Section 27.17(b). See Def. Mtn. Ex. D. or Pl. Mtn. Ex. 23.
Plasmanet paid the minimum deposit premium of $250,000 at inception and was thereafter required to pay an additional monthly premium based upon the number of bets placed in the FreeLotto game. From September 29, 2001 until December 31, 2001, Plasmanet paid monthly premiums totaling $1,280,653.72. However, it failed to pay a total of $679,363.02 in monthly premiums for the period between January 1, 2001 and March 1, 2001. Underwriters thereafter cancelled the policy for non-payment of premium.
3. Discussion
Plasmanet has no grounds for challenging the enforceability of the policy or for demanding return of premiums paid prior to notice, even though certain documents it received, such as the September 29 handwritten fax and the unstamped cover notes, violated Regulation 41. The October 18, 2000 "Notice of Excess Lines Placement" letter satisfies the notice requirements of 27.17(e) and therefore the policy became binding upon Plasmanet, and the premiums charged became due and payable.
The subsequently received cover note stamped and filed with ELANY on October 31, 2000 also complied with Regulation 41 and repeated the requisite notice.
Nor does Section 27.17(e) entitle Plasmanet to the return of premiums paid before it received the requisite notice.
Section 27.17(e) states:
No insurance policy or contract of insurance placed with an unauthorized insurer shall be binding upon the insured, and no premiums charged therefore shall be due and payable, until the excess line broker has provided or caused to be provided by the producing broker, written notice . . .
Under this section, coverage is in effect before notice is given and the insurer is bound by the contract, but the insured has no obligation to tender the premiums charged. But once notice has been provided, the insured is also bound, and premiums charged become due and payable. This section does not state that an insurance policy is invalid prior to notice, and it does not state that an insured has a right to recover premiums voluntarily paid before receipt of the notice. There is no reason to imply such a cause of action.
"Typically, courts do not construe the Insurance Law as providing for a private right of action, in the absence of express language authorizing such enforcement." Bauer v. Mellon Mortgage Co., 680 N.Y.S.2d 397, 400 (1998). "A private right of action should not be judicially sanctioned where it is incompatible with the enforcement mechanism chosen by the legislature or discordant with some other aspect of the overall statutory scheme." Id. Under New York Insurance Law, excess line brokers are subject to the enforcement authority of the New York Superintendent of Insurance, who can impose monetary penalties or revoke or suspend an excess line broker's license. See N.Y. INS. LAW § 2127 (McKinney 2000) (Penalties for violations by agents, brokers adjusters); N.Y. INS. LAW § 2110(a) (McKinney 2000) (revocation or suspension of license of insurance agents, brokers or adjusters). The legislature, when it repealed a requirement that excess line brokers post a bond, found there was no need to supplement the enforcement mechanism provided by the Insurance Department: "The combination of the historical infrequency of the bond being drawn down and threat of regulatory action by the New York Insurance Department vis-à-vis any violation of the Insurance Law with disciplinary tools such as fines and licensure revocation have more than sufficient deterrence capabilities, thereby rendering this requirement vestigial." See New York State Senate, Memorandum in Support, S4372B, 224th Sess., at 1321 (2001).
Likewise, Regulation 41 does not excuse an insured's obligation to pay premiums in the event of the other alleged regulatory violations (the brokers' delivery of additional documents lacking the warning legend, or the broker's failure to secure three declinations prior to placing the risk). At most, those violations may subject the excess line broker to penalties or sanctions imposed by the superintendent.
Plasmanet was not prejudiced by any of the alleged regulatory defects because it was experienced in securing prize indemnification insurance from the excess line market. It previously had insured its $1 million jackpot with Goshawk 102, and its FreeLotto-Superbucks game with Lexington Insurance Co., another unauthorized issuer, each time receiving the requisite notice. See Pl. Mtn. Exs. 5 (Lexington Insurance Co. policy) and 7 (Grimaldi deposition excerpt); Ex. 10 (Grimaldi and Aronin deposition excerpts).
CONCLUSION
Accordingly, Plasmanet's second and third alternative defenses, and its first and second counterclaims are dismissed.
So ordered.