The Office of General Counsel issued the following informal opinion on April 13, 2001, representing the position of the New York State Department.
Re: Termination of Credit Life Insurance Policy by Bank
1. Is it permissible for a bank, as creditor, to terminate without the debtors signature, a creditlife insurance policy that was required for a loan?
2. Is it permissible for a bank to send, by bulk mail, a notice terminating such credit life insurance policy?
1. Yes. Pursuant to N. Y. Comp. Codes R. & Regs. tit. 11, § 185.1(h) (1999) (Regulation 27-A), a bank, as creditor, may discontinue a credit life insurance policy by giving the debtor at least thirty-one days notice. There is no requirement in the Insurance Law or Regulations that a bank obtain a debtors signature in order to terminate a credit life insurance policy.
2. Yes. There is nothing in the Insurance Law or Regulations that prohibits a bank from sending by bulk mail a notice terminating a credit life insurance policy.
A debtor secured a loan from a bank in 1993. At the time of the loan, the bank required that the debtor obtain group credit life insurance on the account. On May 13, 1998, the bank sent a letter via bulk mail advising debtor that effective September 30, 1998, the life insurance on the loan would be terminated and would no longer be an option. The bank further notified the debtor in that letter that after May 25, 1998 no monthly bill for life insurance premiums would be sent out. The debtor passed away in December of 1998.
The Insurance Law does not prohibit a bank, as creditor, from requiring as security for a loan that a borrower obtain life insurance. Credit life insurance has been recognized as a proper form of security for consumer loans.
N.Y. Comp. Codes R. & Regs. tit. 11, § 185.1(c) (1999), (Regulation 27-A), defines credit life insurance as:
(c) [i]nsurance on the life of a debtor in connection with a specific loan or other credit transaction in this State to provide payment to a creditor in the event of the death of the debtor.
The debtor in question had the option, pursuant to N.Y. Comp. Codes R. & Regs. tit. 11, § 185.2 (1999), (Regulation 27-A), to furnish another form of security for the loan but elected to obtain credit life insurance instead.
N. Y. Comp. Codes R. & Regs. tit. 11, § 185.2 (1999), (Regulation 27-A), states in relevant part:
When life insurance or accident and health insurance is required by a creditor, the debtor shall have the option, upon notice to the creditor, of furnishing existing policies of insurance, or procuring and furnishing new policies of insurance, owned or controlled by the debtor and issued by any insurer authorized to transact an insurance business in this State for an amount not less than the indebtedness and for a term not less than the term of the loan.
N.Y. Comp. Codes R. & Regs. tit. 11, § 185.5(h) (1999), (Regulation 27-A) states in relevant part:
(h) [A] group credit insurance policy under which premiums are paid to the insurer monthly on outstanding balances shall contain a provision that, in the event of termination of such policy by the insurer or creditor, 31 days notice of such termination shall be given to any debtor insured under the policy by the insurer where practicable, otherwise by the creditor, unless there is immediate replacement of the coverage by the same or another insurer.
This section allows a bank to terminate a credit life insurance policy by giving the debtor at least thirty-one days notice of its intent to terminate such policy. In addition, there is no requirement that the creditor obtain the debtors signature in order to effect such termination. Based on the facts presented, the bank gave the debtor more than thirty-one days notice of its decision to terminate the credit life insurance policy. The bank sent a letter dated May 13, 1998 informing the debtor that the credit life insurance policy would be terminated effective September 30, 1998. Further, the bank notified the debtor that May 25, 1998 would be the last time a monthly bill for the insurance policy would be sent out. There is nothing in any correspondence to this office that indicates that the debtor did not receive the notice of termination.
The inquirer also questioned whether the bank acted properly in sending the notice of termination by bulk mail. There is nothing in the Insurance Law or Regulations that prohibits a bank from sending the termination notice in question by bulk mail.
This opinion is limited to a discussion of the Insurance Law and how it applies to or affects the facts outlined. Any additional questions regarding banking procedures should be directed to the Banking Department.
For further information you may contact Attorney D. Monica Marsh at the New York City Office.