November 9, 2004

The staff of the Committee on Open Government is authorized to issue advisory opinions. The ensuing staff advisory opinion is based solely upon the facts presented in your correspondence, unless otherwise indicated.


I have received your letter in which you requested an advisory opinion concerning the ability of the Department of Insurance to withhold from the public under the Freedom of Information Law annual reports filed with the Department by group captive insurance companies.

According to paragraph (1) of §7003(a) of the Insurance Law, "a pure captive insurance company shall insure, on a primary basis, only risks of its parent and affiliated companies", and paragraph (2) states that a "group captive insurance company shall insure, on a primary basis, only risks of the industrial insureds that comprise the industrial insured group." A "group captive insurance company" is, according to subdivision (f) of §7002 of the Insurance Law, a domestic insurance company licensed "for the primary purpose of providing insurance or reinsurance covering the risks of the industrial insureds that comprise the industrial insured group", and subdivision (g) states that an "industrial insured group" is a "group of unaffiliated industrial insureds that are engaged in similar or related businesses or activities..." Subdivision (c) defines "captive insurance company" to mean "any pure captive insurance company or any group captive insurance company licensed to do a captive insurance business under the provisions of this article."

If I correctly recall our conversation, you indicated that legislation enacted in 1997 authorized the establishment of captive insurance companies, which are wholly owned by an insured or insureds and serve essentially as self-insurers. As self-insurance vehicles, these insurers are exempt from various sections of the Insurance Law. They are required, however, to maintain financial solvency and toward that end they are regulated and examined by the Department. The legislation authorized the creation of group captive insurance companies, which involve a consortium of entities, "parents", within the same industry. Those entities must have a value of at least one hundred million dollars. To date, there are thirty captive insurance companies, and one group captive, which includes as insureds the fifteen largest financial institutions doing business in New York.

Although the records filed with the Department when is a license is sought to engage in a captive insurance business are confidential and exempt from the coverage of the Freedom of Information Law pursuant to §7003 (c)(3) of the Insurance Law, there is no similar provision that pertains to annual reports filed by captive insurance companies pursuant to §7006. Any such report filed by a captive insurance company must include "a statement of its financial condition" and amendments to its plan of operation.

In this regard, as you are aware, the Freedom of Information Law is based upon a presumption of access. Stated differently, all records of an agency are available, except to the extent that records or portions thereof fall within one or more grounds for denial appearing in §87(2)(a) through (i) of the Law. From my perspective, the only exception to rights of access that would be pertinent in the context of your inquiry is §87(2)(d), which permits an agency to withhold records or portions thereof that:

"are trade secrets or are submitted to an agency by a commercial enterprise or derived from information obtained from a commercial enterprise and which if disclosed would cause substantial injury to the competitive position of the subject enterprise..."

Further, when a commercial entity is required to submit records to a state agency, pursuant to §89(5), at the time of submission it may request that the records or portions thereof be kept confidential in accordance with §87(2)(d).

In my opinion, the question under §87(2)(d) involves the extent, if any, to which disclosure would "cause substantial injury to the competitive position" of a commercial entity.

The concept and parameters of what might constitute a "trade secret" were discussed in Kewanee Oil Co. v. Bicron Corp., which was decided by the United States Supreme Court in 1973 (416 (U.S. 470). Central to the issue was a definition of "trade secret" upon which reliance is often based. Specifically, the Court cited the Restatement of Torts, section 757, comment b (1939), which states that:

"[a] trade secret may consist of any formula, pattern, device or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers" (id. at 474, 475).

In its review of the definition, the court stated that "[T]he subject of a trade secret must be secret, and must not be of public knowledge or of a general knowledge in the trade or business" (id.). The phrase "trade secret" is more extensively defined in 104 NY Jur 2d 234 to mean:

"...a formula, process, device or compilation of information used in one's business which confers a competitive advantage over those in similar businesses who do not know it or use it. A trade secret, like any other secret, is something known to only one or a few and kept from the general public, and not susceptible to general knowledge. Six factors are to be considered in determining whether a trade secret exists: (1) the extent to which the information is known outside the business; (2) the extent to which it is known by a business' employees and others involved in the business; (3) the extent of measures taken by a business to guard the secrecy of the information; (4) the value of the information to a business and to its competitors; (5) the amount of effort or money expended by a business in developing the information; and (6) the ease or difficulty with which the information could be properly acquired or duplicated by others. If there has been a voluntary disclosure by the plaintiff, or if the facts pertaining to the matter are a subject of general knowledge in the trade, then any property right has evaporated."

In my view, the nature of record, the area of commerce in which a commercial entity is involved and the presence of the conditions described above that must be found to characterize records as trade secrets would be the factors used to determine the extent to which disclosure would "cause substantial injury to the competitive position" of a commercial enterprise. Therefore, the proper assertion of §87(2)(d) would be dependent upon the facts and, again, the effect of disclosure upon the competitive position of the entity to which the records relate.

Relevant to the analysis is a decision rendered by the Court of Appeals, in which it considered the phrase "substantial competitive injury" [(Encore College Bookstores, Inc. v. Auxiliary Service Corporation of the State University of New York at Farmingdale, 87 NY2d 410 (1995)]. In that case, the Court reviewed the legislative history of the Freedom of Information Law as it pertains to §87(2)(d), and due to the analogous nature of equivalent exception in the federal Freedom of Information Act (5 U.S.C. §552), relied in part upon federal judicial precedent.

In its discussion of the issue, the Court stated that:

"FOIL fails to define substantial competitive injury. Nor has this Court previously interpreted the statutory phrase. FOIA, however, contains a similar exemption for 'commercial or financial information obtained from a person and privileged or confidential' (see, 5 USC § 552[b][4]). Commercial information, moreover, is 'confidential' if it would impair the government's ability to obtain necessary information in the future or cause 'substantial harm to the competitive position' of the person from whom the information was obtained...

"As established in Worthington Compressors v Costle (662 F2d 45, 51 [DC Cir]), whether 'substantial competitive harm' exists for purposes of FOIA's exemption for commercial information turns on the commercial value of the requested information to competitors and the cost of acquiring it through other means. Because the submitting business can suffer competitive harm only if the desired material has commercial value to its competitors, courts must consider how valuable the information will be to the competing business, as well as the resultant damage to the submitting enterprise. Where FOIA disclosure is the sole means by which competitors can obtain the requested information, the inquiry ends here", (id., 419-420).

It is my understanding that comprehensive financial and operational information relating to the management of the risk of the parent companies comprising a captive group insurance company is included in an annual report. If that is so, if the information is not available from any source other than the Department and differs from information contained in other filings that are accessible to the public (i.e., through the Securities and Exchange Commission, annual corporate reports, etc.), and if that information would be of such interest and value to the competitors of parent companies within the group that disclosure would result in competitive harm to those parent companies, I believe that §87(2)(d) could justifiably be asserted to deny access.

Another consideration relates to the practices of other jurisdictions that protect against disclosure of information equivalent to that found in an annual report. In short, it has been suggested that if the reports cannot be withheld, group captive insurance companies will not be formed in New York but will instead be domiciled either offshore or in other states. In this regard, the Court of Appeals in Encore referred to "the policy behind subdivision (2)(d)—to protect businesses from the deleterious consequences of disclosing confidential commercial information, so as to further the State’s economic development efforts and attract business to New York" (id., 420). The capacity to prevent injury to large companies’ competitive position in this instance apparently involves keeping the operation of a captive group insurance company in New York and perhaps attracting others do business in the state. If that is so, shielding the reports would appear to be consistent with the direction provided by the state’s highest court.

Notwithstanding the foregoing, it is emphasized that the effects of disclosure may change due to the occurrence of events or the passage of time. Disclosure of a report containing detailed current financial or operational information could be devastating to a company’s competitive position. However, the effect of disclosing the same report three years from now would likely not be as significant. Often the harmful effects of disclosing commercial information will diminish or even disappear over the course of time. When that is so, the ability to assert §87(2)(d) also diminishes.

I note, too, that when an agency’s denial of access is challenged in court, the agency bears the burden of proving that an exception was justifiably asserted [see §89(4)(b)]. The Court of Appeals expressed its general view of the intent of the Freedom of Information Law in Gould v. New York City Police Department [89 NY2d 267 (1996)], stating that:

"To ensure maximum access to government records, the 'exemptions are to be narrowly construed, with the burden resting on the agency to demonstrate that the requested material indeed qualifies for exemption' (Matter of Hanig v. State of New York Dept. of Motor Vehicles, 79 N.Y.2d 106, 109, 580 N.Y.S.2d 715, 588 N.E.2d 750 see, Public Officers Law § 89[4][b]). As this Court has stated, '[o]nly where the material requested falls squarely within the ambit of one of these statutory exemptions may disclosure be withheld' (Matter of Fink v. Lefkowitz, 47 N.Y.2d, 567, 571, 419 N.Y.S.2d 467, 393 N.E.2d 463)" (id., 275).

The Court also offered guidance to agencies and lower courts in determining rights of access and referred to several decisions it had previously rendered, emphasizing that:

" invoke one of the exemptions of section 87(2), the agency must articulate 'particularized and specific justification' for not disclosing requested documents (Matter of Fink v. Lefkowitz, supra, 47 N.Y.2d, at 571, 419 N.Y.S.2d 467, 393 N.E.2d 463). If the court is unable to determine whether withheld documents fall entirely within the scope of the asserted exemption, it should conduct an in camera inspection of representative documents and order disclosure of all nonexempt, appropriately redacted material (see, Matter of Xerox Corp. v. Town of Webster, 65 N.Y.2d 131, 133, 490 N.Y.S. 2d, 488, 480 N.E.2d 74; Matter of Farbman & Sons v. New York City Health & Hosps. Corp., supra, 62 N.Y.2d, at 83, 476 N.Y.S.2d 69, 464 N.E.2d 437)" (id.).

I hope that I have been of assistance.


Robert J. Freeman
Executive Director