The Office of General Counsel issued the following informal opinion on November 13, 2002, representing the position of the New York State Insurance Department.
Re: Excess Financial Guarantee Insurance
Does the proposed product constitute financial guaranty insurance?
Yes, the proposed product constitutes financial guaranty insurance under the New York Insurance Law.
A bank rating and research firm (the "firm") is not an Insurance Department licensee in New York State. It wishes to promote a product intended to insure savings deposits. This coverage would be for amounts exceeding the current $100,000 FDIC limit and would have a coverage period of one years duration. The firm was told by various insurers that they were unwilling to write such coverage because, in their view, such coverage constituted financial guaranty insurance.
The firm believes that the product is more in the nature of a surety bond, and, as such, should not be characterized as insurance. The firm also is of the opinion that the proposed product is not financial guaranty insurance because of its one-year term (i.e., the lack of any long-tail exposure). Finally, the firm states that the coverage does not conform to the New York Insurance Laws definition of financial guaranty insurance.
Financial guaranty insurance is defined under N.Y. Ins. Law § 6901(a)(1) (McKinney 2000) as follows:
"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;
(B) changes in the levels of interest rates, whether short or long term or the differential in interest rates between various markets or products;
(C) changes in the rate of exchange of currency;
(D) changes in the value of specific assets or commodities, financial or commodity indices, or price levels in general; or
(E) other events which the superintendent determines are substantially similar to any of the foregoing.
N.Y. Ins. Law § 6901(a)(1) (McKinney 2000).
The product described herein falls squarely within the scope of this definition and would be considered by this Department to constitute financial guaranty insurance.1 First, the contention that the proposed product is not financial guaranty insurance because it is a surety bond is not determinative. As indicated in the statutory definition quoted above, a surety bond is expressly contemplated as one of the forms that a financial guaranty insurance product may take.
Second, the length of exposure of the product is irrelevant to the determination of whether a product is financial guaranty insurance. Although many financial guaranty products insure long-term debt obligations, there is no provision or other requirement under the statute that limits the applicability of financial guaranty insurance to long-term financial obligations.
Finally, this office cannot agree with the firms view that the product does not meet the definition of the statute. As a review of its language indicates, the statute is quite broad in scope. A product which purports to provide coverage for financial losses (in excess of the FDIC provided $100,000 limit) incurred in deposit accounts (which represent the financial obligation of a bank) will be considered by this Department to constitute financial guaranty insurance.
In addition, should the firm eventually reach an accommodation with a financial guaranty insurer, it would be required to become licensed as an agent or broker in order to promote this product.
For further information you may contact Supervising Attorney Michael Campanelli at the New York City Office.
1 This Office has previously ruled on products quite similar to the one proposed herein and has concluded that such products constitute financial guaranty insurance under New York law. See Office of General Counsel Opinion No. 90-54 (NILS, June 1, 1990) and Office of General Counsel Opinion No. 90-16 (NILS, February 15, 1990).