Opinion ID: 2038435
Heading Depth: 1
Heading Rank: 2

Heading: Applicability of Regulation 121

Text: Paterno argues that the Superintendent erroneously interpreted Regulation 121 to apply to claims-made policies procured through excess line brokers. However, the Superintendent's interpretation of Regulation 121, if not irrational or unreasonable, will be upheld in deference to his special competence and expertise with respect to the insurance industry, unless it runs counter to the clear wording of a statutory provision ( Matter of New York Pub. Interest Research Group v New York State Dept. of Ins. , 66 N.Y.2d 444, 448; see also , Matter of Medical Malpractice Ins. Assn. v Superintendent of Ins. , 72 N.Y.2d 753, 761-762). It is undisputed that Regulation 121, as a general rule, outlaws the placement of claims-made liquor liability policies in New York. What is disputed is whether this prohibition extends to claims-made policies procured through excess line brokers. In this regard, the Superintendent interpreted the former version of Regulation 41 ( see , 11 NYCRR 27.11 [repealed 1994]), which prohibited excess line brokers from placing risks not eligible under law, as prohibiting the placement, through excess line brokers, of claims-made liquor liability policies. Based on the language of Regulations 41 and 121, the Superintendent's interpretation is entirely reasonable ( see , 2 Dunham, New York Insurance Law § 19.08 [1], at 19-89, n 4 [If the risk would not be `eligible' under some provision of the Insurance Law, it is illegal coverage and cannot be obtained] [citing 11 NYCRR 27.11]). Moreover, the 1994 amendment of Regulation 41, which exempted excess line brokers from the reach of Regulation 121 ( see , 11 NYCRR 27.9 [a]), does not diminish the reasonableness of the Superintendent's position in this case involving the previously applicable regulations. Thus, the Appellate Division properly deferred to the Superintendent's interpretation of the regulations and upheld the finding that Paterno violated Regulation 121 by placing in New York, through an excess line broker, claims-made liquor liability policies. Paterno nevertheless argues on its cross appeal that Regulation 121's prohibition of claims-made policies does not apply to this case because Homestead is an unauthorized insurer beyond the regulatory reach of the Insurance Department. This argument is without merit. Whether Homestead is subject to the Insurance Department's regulations is not relevant to this case. Paterno, a licensed New York insurance broker, is indisputably subject to these regulations and it is Paterno, not Homestead, which is charged with violating Regulation 121 by placing the prohibited claims-made policies. The Determination of Untrustworthiness The next issue is whether the Superintendent rationally determined that Paterno's repeated violation of Regulation 121 demonstrated untrustworthiness within the meaning of Insurance Law § 2110 (a) (4). The Appellate Division, applying the wrong standard of review, overturned this finding based on its conclusion that Paterno acted according to the demands of the market and its intention was to serve, not deceive, its customers. However, the Superintendent had already addressed and rejected Paterno's market demand defense by concluding, I do not endorse the suggestion that a licensee may bow to customer preference in deciding to violate a regulation of the Department. The Superintendent's interpretation is not irrational or contrary to statute and accords with the commonsense notion that one who repeatedly violates rules, whether deliberately or carelessly, is less reliable than one who does not ( see , 11 NYCRR 27.0 [c] [2] [failure by an excess line broker to comply with the requirements of this Part may be considered as evidence of    incompetency or untrustworthiness within the meaning of section 2110 (a) of the Insurance Law]). Moreover, this interpretation is consistent with the type of showing that we have recognized as warranting a finding of untrustworthiness: [T]here should be such factual presentation concerning acts or conduct by the licensee or his agent as would warrant a conclusion of unreliability, and which establishes that any confidence or reasonable expectation of fair dealing to the general public would be misplaced ( Matter of Gold v Lomenzo , 29 N.Y.2d 468, 477 [quoting Matter of Chiaino v Lomenzo , 26 AD2d 469, 472] [involving regulation of real estate brokers]). Under the circumstances, the Appellate Division erred in not deferring to the Superintendent's rational determination that Paterno's repeated violation of Regulation 121 demonstrated untrustworthiness within the meaning of Insurance Law § 2110 (a) ( see , Matter of New York Pub. Interest Research Group v New York State Dept. of Ins. , 66 N.Y.2d 444, 448, supra ). The Number of Violations of Regulation 121 Paterno contends that the Superintendent's finding of 1,497 violations of Regulation 121, which was affirmed by the Appellate Division, is unsupported by substantial evidence. We disagree. At the administrative hearing, an Insurance Department examiner testified that his staff reviewed the Homestead claims-made liquor liability policies placed with New York clients in which Paterno acted as the retail or producing broker, and counted a total of 1,497 policies that violated Regulation 121. Contrary to Paterno's argument on appeal, the examiner testified that he included in his calculation only those policies, whether exclusively liquor liability policies or special multiperil policies, that provided liquor liability coverage on a claims-made basis, which constitutes substantial evidence to support the Superintendent's determination that Paterno committed 1,497 violations of Regulation 121. Judicial Review of Administrative Penalty Based on its annulment of the determination of untrustworthiness and its belief that Paterno's violation of Regulation 121 was attributable to market demand, the Appellate Division vacated the penalty set by the Superintendent at $45 for each violation and remanded the matter to the Superintendent with the instruction that the penalty not exceed $10 per violation. We have already upheld the Superintendent's determination of untrustworthiness and further conclude that the Appellate Division's vacatur of the administrative penalty based on its de novo weighing of mitigating factors was inappropriate. Under CPLR 7803 (3), judicial review of an administrative punishment is guided by the abuse of discretion standard, which translates into a circumscribed judicial inquiry: the administrative penalty must be upheld unless it shock[s] the judicial conscience ( Matter of Donati v Shaffer , 83 N.Y.2d 828, 830 [citing Matter of Pell v Board of Educ. , 34 N.Y.2d 222, 233]). In this case, the Superintendent took into account various mitigating factors and imposed a fine of $45 for each violation instead of revoking or suspending Paterno's license ( see , Insurance Law § 2110 [a]) or imposing the maximum authorized fine of $500 per violation ( see , Insurance Law § 2127). The Superintendent's penalty, well within the statutory range, did not constitute an abuse of discretion and therefore must be upheld. Accordingly, the order of the Appellate Division should be modified, with costs to appellant-respondent, by dismissing the petition in its entirety. Order modified, etc.