16.2 Excess Lines (Reg 41), Identity Theft, Watercraft, Recreational Vehicles & Difference in Conditions

Excess Lines (Reg 41), Identity Theft, Watercraft, Recreational Vehicles & Difference in Conditions

Exam Focus: The excess line rules are hard numbers and are reliably tested: three declinations, the Export List, the 3.6% premium tax, the § 2105 broker license, and — the point candidates miss — an excess line insurer is unauthorized, so its insolvency is not backed by New York's security funds. The remaining “other policies” in this section are short, high-yield definitional items.

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The Excess Line Market (Insurance Law §§ 2105, 2118; Regulation 41, 11 NYCRR Part 27)

What “Excess Line” Means

An excess line (elsewhere called surplus line) placement is insurance procured from an insurer that is not authorized to do business in New York. The market exists for risks the admitted market will not write at all, will not write at an acceptable price, or will not write with the needed limits or terms — amusement parks, demolition contractors, vacant buildings, high-limit professional liability, and similar exposures.

Licensing — § 2105

Only a person holding an excess line broker license issued under Insurance Law § 2105 may place business with an unauthorized insurer. The excess line broker license is separate from, and in addition to, a New York broker license.

Diligent Effort — Three Declinations

Before placing coverage in the non-admitted market the broker must make a diligent effort to place it with authorized insurers. Under § 2118(b)(3) and Regulation 41 § 27.3, diligent effort means obtaining declinations from three authorized insurers the broker has reason to believe would consider writing the coverage. Two refinements decide exam questions:

• A carrier's failure to respond to a submission is not a declination.
• If any authorized insurer offers to write the coverage, the broker may not place it in the excess line market — even if three others declined, and even if the excess line terms are better or cheaper.

The broker files an affidavit evidencing the diligent effort with the Excess Line Association of New York (ELANY), the statutory advisory association that reviews every placement.

Exceptions to Diligent Effort

• Export List (Regulation 41 § 27.3(g)(1)): coverages DFS has determined are unique or difficult to place — amusement parks and carnivals, auto racing and race track liability, skydiving, certain crime coverages and certain professional lines — may be exported without three declinations.
• Exempt Commercial Purchaser (Insurance Law § 2101(x)(2), implementing the federal Nonadmitted and Reinsurance Reform Act): a sophisticated commercial buyer meeting statutory size and risk-manager criteria is excused from the diligent effort and affidavit requirements.

Taxes and Fees

• Excess line premium tax: 3.6% of gross premiums less return premiums, imposed by § 2118(d)(1) directly on the excess line broker, not on the insured.
• ELANY stamping fee: 0.15% of premium (reduced from 0.17% effective January 1, 2023).
• Policy fees charged by the excess line insurer are treated as excess line premium for both the tax and the stamping fee.

The Consumer Warning

Every excess line policy must carry a Notice of Excess Line Placement advising the insured that coverage has been placed with an insurer not authorized to do business in New York and not subject to supervision by the State. The practical consequence is the one an adjuster must understand:

An excess line insurer is not a member of the New York Property/Casualty Insurance Security Fund. If an authorized insurer becomes insolvent, the Security Fund under Insurance Law Article 76 responds to covered claims. If an unauthorized excess line insurer fails, there is no state guaranty backstop for the New York insured. That is the price of the flexibility.

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Identity Theft Coverage

Identity theft coverage — available as the ISO Identity Fraud Expense endorsement HO 04 55 on a homeowners policy, as an add-on to a businessowners policy, and within personal cyber products — is an expense reimbursement coverage, not a fraud loss coverage. It typically pays, subject to a modest aggregate (commonly $15,000 to $25,000):

• Costs of notarising affidavits, certified mail and long-distance calls;
• Lost wages for time taken off work to restore identity records, usually capped per week and in total;
• Loan re-application fees where an application is rejected solely because of erroneous credit information;
• Reasonable attorney fees to defend suits brought by creditors or collection agencies, and to remove criminal or civil judgments wrongly entered;
• Credit monitoring and restoration services.

It does not reimburse the money the thief actually stole — that exposure sits with the bank or card issuer under federal consumer protection law, or with commercial crime coverage for a business (Section 7.4).

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Watercraft

Homeowners Section II gives only a narrow watercraft liability carve-back (small, low-horsepower craft). Anything larger needs its own contract.

• Boatowners / Yacht policies are package forms. A yacht policy combines hull coverage (usually on an agreed value basis) with protection and indemnity (P&I) liability, and adds medical payments, uninsured boater coverage and trailer coverage.
• Navigational limits and a lay-up period (during which the vessel must be out of service, typically the winter months in New York waters) are underwriting conditions that function as coverage restrictions; operating outside the navigational warranty can void coverage.
• Outboard motor and boat policies cover smaller craft on a named-peril or open-peril basis with ACV or agreed value settlement.
• Ocean marine principles — implied warranties, particular and general average — carry over to larger vessels (Section 9.2).

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Personal Recreational Vehicles

ATVs, snowmobiles, dirt bikes and golf carts are usually excluded from both the homeowners policy (as motorised land conveyances) and the personal auto policy (which covers only vehicles designed for use on public roads), so they need a specific policy or endorsement.

New York adds a statutory layer for snowmobiles: under Vehicle and Traffic Law and Parks, Recreation and Historic Preservation Law Article 25, a snowmobile operated on land other than the owner's must be registered and carry liability insurance at statutory minimum limits. ATVs operated on lands other than the owner's must likewise be registered and insured. An adjuster handling a New York recreational vehicle claim therefore checks registration status first, because an unregistered, uninsured machine frequently pushes the claim onto the homeowners policy where the motorised land conveyance exclusion is then litigated.

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Difference in Conditions (DIC)

A Difference in Conditions policy is a separate open-peril contract written to sit alongside an insured's underlying named-peril property program and fill its gaps — most commonly flood and earthquake, which the standard commercial property causes of loss forms exclude. Key features:

• Written on an excess or wrap-around basis over the scheduled underlying property policies, so it pays only what the underlying does not.
• Usually carries large deductibles, frequently expressed as a percentage of values for flood and earthquake rather than a flat dollar amount.
• Frequently placed in the excess line market, which ties this coverage straight back to the Regulation 41 rules above.