RE: Repossession and Total Loss Coverage
May "repossession insurance", as described in a particular policy, be offered in New York by an authorized multi-line property/casualty insurer or in the excess lines market?
No; the described coverage, although insurance, is a kind that may not be offered in New York either by an authorized multi-line property/casualty company or by an excess lines broker on behalf of an unauthorized insurer.
An insurer submitted a policy form covering "repossession insurance" to the New York State Insurance Department for approval and was advised by the Department that the endorsement could not be included in a residual value insurance policy because it represented an underwriting lending risk instead of an insurance risk. The Department further advised that the proposed coverage was not akin to residual value coverage or any other line of insurance pursuant to Section 1113 of the New York Insurance Law. In accordance with the Departments instructions, the insurer removed the coverage and the filing was then approved.
The insurer was advised by its counsel that neither admitted nor non-admitted insurers are permitted to offer repossession insurance in New York and that excess line brokers may not broker either repossession insurance or total loss coverage in New York on behalf of non-admitted insurers. However, the insurer contends that its competitors are offering this coverage in New York. The insurer asked the Department to review a copy of a policy being issued by one of its competitors and to advise whether or not the policy may be offered in New York.
The repossession insurance coverage in question appears to operate in the following manner: the insured lender would offer a vehicle loan structured in a manner that is commonly referred to as a balloon loan. There would be a set number of equal payments except for the final payment, which would be for the remaining outstanding principal balance (the balloon payment). This differs from the conventional fully amortized loan that has a set number of equal payments. Because of the difference in the way the loans are structured, the monthly payments for the balloon loan, except for the final payment for the remaining outstanding principal balance, will be substantially lower than for the conventional loan. Consequently, the balance remaining on the balloon loan will be larger than the balance remaining on the conventional loan at all times during the lives of the loans.
The insurer forwarded two amortization charts that illustrated the above and gave the following example for a vehicle that is repossessed in the 28th month of a 48 month loan. Based on the charts, the outstanding principal balance on a conventional loan in the 28th month would be $14,995, whereas the outstanding principal balance in the 28th month of a balloon loan would be $23,755.99, a difference of $8,760.99. Thus, in the event of a default by the borrower, the lender who offers a balloon loan has a much greater exposure than the lender who offers a conventional loan. The submitted policy provides that upon a default by the borrower, the insurer would pay the lender the $8,760.99, thereby putting the lender into the same position it would have been in if it had made a conventional loan and repossessed the vehicle in the 28th month.
The term "insurance contract" is defined in N.Y. Ins. Law § 1101 (a) (1) (McKinney 1985) as:
(A)ny agreement or other transaction whereby one party, the "insurer" is obligated to confer benefit of pecuniary value upon another party, the "insured" or "beneficiary", dependent upon the happening of a fortuitous event in which the insured or beneficiary has, or is expected to have at the time of such happening, a material interest which will be adversely affected by the happening of such event.
The term "fortuitous event" is defined in N.Y. Ins. Law § 1101 (a) (2) (McKinney 1985) as:
(A)ny occurrence of failure to occur which is, or is assumed by the parties to be, to a substantial extent beyond the control of either party.
An analysis of the repossession coverage described above leads to the conclusion that all of the elements of an insurance contract are present: the insurer underwrites an obligation to confer a benefit of pecuniary value (the difference between the amounts owed on the two loans) on the insured (the lender), dependent upon the happening of a fortuitous event (the default by the borrower on the loan, which leads to the repossession of the vehicle). Thus, the offering of this coverage in New York would constitute the doing of an insurance business for which a license is required. N.Y. Ins. Law § 1102(a) (McKinney 1985). However, a license will not be issued in New York unless the product comes within one of the statutorily authorized kinds of insurance, as defined in N.Y. Ins. Law § 1113 (McKinney 1985 & Supp. 2000).
The Department reviewed the described coverage to determine which kind of insurance, if any, it represents. Specifically, both residual value insurance and financial guaranty insurance were considered. "Residual value insurance" is defined in N.Y. Ins. Law § 1113 (22) (McKinney Supp. 2000) as:
(I)nsurance issued in connection with a lease or contract which sets forth a specific termination value at the end of the term of the lease or contract for the property covered by such lease or contract, and which insures against loss of economic value of tangible personal property or real property or improvements thereto except loss due to physical damage to property, excluding any lease or contract that falls within the definition of financial guaranty insurance as set forth in paragraph one of subsection (a) of section six thousand nine hundred one of this chapter.
The Department has previously determined that in order for coverage to come within the definition of residual value insurance several required elements must be present. (See opinion letters dated August 10, 2000 and October 24, 1996.) A review of the described coverage leads to the conclusion that it is not residual value insurance because not all of the required elements are present. First, residual value insurance must insure the loss of economic value of tangible personal property (in this case, the motor vehicle). Under the policy provided, the value of the motor vehicle at the time of the repossession is not a relevant factor. Rather, the values that are considered are the remaining balance on the balloon loan and the remaining balance on a fully amortized loan, with the difference between the two being the payment owed the insured. In the case where the vehicle is sold, the proceeds from the sale only become a factor in reducing the amount owed to the insured. This occurs in an instance where the proceeds are greater than the remaining balance on a fully amortized loan and the larger figure will then be subtracted from the balance left on the balloon loan to determine the payment due the insured. There still is no consideration of the actual cash value of the vehicle in arriving at the insurance payment due under the policy.
Additionally, the trigger for residual value insurance can not be the default of the borrower. In the policy provided, the sale of the repossessed vehicle appears to be contemplated, but does not appear to be required. Thus, it cannot be the triggering event. Rather, the default of the borrower and the subsequent repossession of the vehicle by the lender is the triggering event.
Financial guaranty insurance is defined in N.Y. Ins. Law § 6901 (McKinney Supp. 2000), in pertinent part, to mean:
As used in this article: (a)(1) 'Financial guaranty insurance" means a surety bond, insurance policy or, when issued by an insurer or any person doing an insurance business as defined in paragraph one of subsection (b) of section one thousand one hundred one of this chapter, an indemnity contract, and any guaranty similar to the foregoing types, under which loss is payable, upon proof of occurrence of financial loss, to an insured claimant, obligee or indemnitee as a result of any of the following events:
(A) failure of any obligor on or issuer of any debt instrument or other monetary obligation (including equity securities guarantied under a surety bond, insurance policy or indemnity contract) to pay when due to be paid by the obligor or scheduled at the time insured to be received by the holder of the obligation, principal, interest, premium, dividend or purchase price of or on, or other amounts due or payable with respect to, such instrument or obligation, when such failure is the result of a financial default or insolvency or, provided that such payment source is investment grade, any other failure to make payment, regardless of whether such obligation is incurred directly or as guarantor by or on behalf of another obligor that has also defaulted.
Although it appears that the proposed coverage may fall within the scope of financial guaranty insurance, pursuant to N.Y. Ins. Law § 6904 (McKinney Supp. 2000), a multi-line property/casualty insurer may not be licensed to write financial guaranty insurance in New York. Thus, a multi-line insurer may not write this coverage in New York.
The insurer also raised the question whether excess line brokers may sell this coverage in New York on behalf of non-admitted insurers. N.Y. Ins. Law § 2105 (McKinney Supp. 2000) delineates the kinds of insurance that may be written on an excess line basis. Assuming that the coverage in question is financial guaranty insurance, because that kind of insurance is not included in N.Y. Ins. Law § 2105 (McKinney Supp. 2000) an excess line broker may not sell this coverage in New York. Further, as discussed above, although a transaction may constitute an insurance contract under N.Y. Ins. Law § 1101 (a) (McKinney 1985), the product offered may not fall within the purview of one of the kinds of insurance authorized by N.Y. Ins. Law § 1113 (McKinney 1985 & Supp. 2000). In that instance, an excess line broker may not sell the coverage in New York because it would not be specified in N.Y. Ins. Law § 2105 (McKinney Supp. 2000).
For further information you may contact Associate Attorney Joan Siegel at the New York City Office.