The excess and surplus lines market is a market that functions with limited regulation. Most states have surplus lines laws that require surplus lines brokers to report their policies to state stamping offices to monitor the surplus lines business and collect taxes. The stamping offices are funded by stamping fees paid by the brokers based on a percentage of the policy premium. Surplus lines brokers are required by most state insurance laws to pay those fees to the stamping offices. But what if they don’t? Can the stamping office sue to collect the fees? The New York Court of Appeals just answered this question under New York law.
In Excess Line Association of New York v. Waldorf & Associates, No. 98 (N.Y. Ct. of App. Oct. 19, 2017), New York’s surplus lines stamping office, ELANY sued a broker for stamping fees on several years worth of policies it placed that, after an investigation by the New York Department of Financial Services, were deemed to be surplus lines policies (excess lines under New York law parlance). The broker reached a settlement with the DFS and ELANY sued to recover the stamping fees that would have been generated by all those policies. The broker moved to dismiss and the motion was granted and affirmed by the appellate division. The New York Court of Appeals granted ELANY leave to appeal, but ultimately affirmed.
In affirming, the court held that ELANY lacked capacity to sue for the fees. What all the courts found was that ELANY, a creature of the legislature, is an advisory association that merely acts as a record keeper for surplus lines transactions. All the enforcement power lies with the DFS. The right to sue, held the court, cannot be derived from ELANY’s enabling legislation or some other concrete statutory predicate. Although the court conceded that Section 2130 of the New York Insurance Law designates ELANY as the recipient of the stamping fees, the court rejected ELANY’s contention that capacity to sue for recovery of those fees can be inferred as a necessary implication from its responsibilities. Nor did the plan of operation approved by the DFS give ELANY the power to sue to collect these fees.