The Office of General Counsel issued the following informal opinion on December 17, 2002, representing the position of the New York State Insurance Department.
Agreement to Pay Residual Loan Value to Lending Institution
1. Does an arrangement whereby ABC Company ("ABC") agrees in advance to purchase a vehicle from a lending institution for a specified price at the end of a loan or lease agreement constitute "an insurance contract" pursuant to N.Y. Ins. Law § 1101(a) (McKinney Supp. 2002)?
2. May an insurer issue one residual value insurance policy and add additional lenders as ABC enters into new agreements?
3. May ABC enter into an agreement with the lender, which provides that upon a borrowers default in loan payments ABC will assist the lender in the disposition of the vehicle to the extent that the institution specifically requests such assistance and the parties can agree to the terms of any such disposition arrangement?
1. No. The proposed arrangement, as described herein, does not constitute "an insurance contract" pursuant to N.Y. Ins. Law § 1101(a) (McKinney Supp. 2002). Accordingly, ABC is not "doing an insurance business" pursuant to N.Y. Ins. Law § 1101(b)(1) (McKinney Supp. 2002).
2. No. This would constitute an impermissible group property/casualty insurance policy. N.Y. Ins. Law § 3435 (McKinney 2000); N.Y. Comp. Codes R. & Regs. tit.11, §§ 153.0-153.11 (July, 1995) (Reg. 135).
3. Since each such arrangement will have to be separately negotiated at the time of the default and ABC undertakes no present obligation, this does not constitute insurance.
ABC, a limited liability company organized under the laws of the State of Texas, is in the business of providing a multitude of services to various lending institutions, with regard to balloon finance products, specifically automobile loans. ABC charges the lending institution a monthly fee for each such contract that it enters into. In the typical transaction, a customer visits a lending institution to apply for an automobile loan. The institution usually quotes both a conventional loan and a balloon loan from ABCs web site. The loan documents for the balloon loan provide that the lending institution will buy back the vehicle (at the customers choice/request) for a specified pre-determined residual value when the balloon payment comes due. If the customer chooses the balloon option, ABC enters into an agreement with the lending institution, which provides that, at the termination of the loan, if the borrower decides to turn the car in, rather than purchase it by making the balloon payment or re-finance it, ABC will purchase the vehicle from the lender for the pre-determined residual value, less excess mileage charges and vehicle condition charges, if any, established by the parties. Upon turning the car in, the borrower will sign the title over to the lender and the lender then will sign the title over to ABC. ABC will then sell the car and keep the proceeds. 1
ABC purchases residual value insurance from an authorized insurer for each vehicle that is financed with a balloon loan to protect itself against the possibility that it will be unable to sell the car for at least the pre-determined residual value. In that event, ABC would make a claim against the insurer under the residual value insurance policy. At present, as ABC enters into agreements with various lending institutions the insurer adds the additional automobiles to its residual value insurance policy and names the various lending institutions as "additional insureds" to that policy. ABC will not be purchasing gap insurance in connection with these transactions.
The agreement does not cover a default on the loan by the borrower. The inquirer states that in such a case, ABC has no obligation with respect to the vehicle. ABC, however, does agree to assist the institution in the disposition of the vehicle to the extent that the institution specifically requests such assistance and the parties can agree to the terms of any such disposition arrangement. This is a separate negotiation by the parties on a case by case basis. It is not a regular part of the agreement between ABC and the lender.
N.Y. Ins. Law § 1101(a)(1) (McKinney Supp. 2002) defines an "insurance contract" 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.
N.Y. Ins. Law § 1101(a)(2) (McKinney 2002) defines a "fortuitous event" as:
(A)ny occurrence or failure to occur which is, or is assumed by the parties to be, to a substantial extent beyond the control of either party.
N.Y. Ins. Law § 1101(a)(2) (McKinney 2002) defines a "contract of warranty, guaranty or suretyship" as:
(A)n insurance contract only if made by a warrantor, guarantor or surety who or which, as such, is doing an insurance business.
N.Y. Ins. Law § 1101(b)(1) (McKinney 2002) provides:
Except as provided in paragraph two, three or three-a of this subsection, any of the following acts in this state, effected by mail from outside this state or otherwise, by any person, firm, association, corporation or joint-stock company shall constitute doing an insurance business in this state and shall constitute doing business in the state within the meaning of section three hundred two of the civil practice law and rules:
(A) making, or proposing to make, as insurer, any insurance contract, including either issuance or delivery of a policy or contract of insurance to a resident of this state or to any firm, association, or corporation authorized to do business herein, or solicitation of applications for any such policies or contracts;
(B) making, or proposing to make, as warrantor, guarantor or surety, any contract of warranty, guaranty or suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the warrantor, guarantor or surety;
(C) collecting any premium, membership fee, assessment or other consideration for any policy or contract of insurance;
(D) doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an insurance business within the meaning of this chapter;
(E) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this chapter.
The above-described arrangement is not an insurance contract. Rather, it is an agreement between two parties, the lending institution and ABC, that ABC will purchase certain vehicles owned by the lender on set dates in the future, for sums certain that are determined at the time that ABC and the lender enter into this agreement. In no event is ABCs obligation dependent upon outside events, such as default, damage to the car, etc.
Accordingly, this agreement does not meet the definition of an "insurance contract", pursuant to N.Y. Ins. Law § 1101(a) (McKinney 2002), and ABCs activities do not constitute "doing an insurance business" pursuant to N.Y. Ins. Law § 1101(b)(1) (McKinney 2002).
The addition of various lending institutions to ABCs "master" residual value insurance policy would not be acceptable. This would constitute an unauthorized type of group property/casualty insurance in New York. N.Y. Ins. Law § 3435 (McKinney 2000); N.Y. Comp. Codes R. & Regs. tit.11, §§ 153.0-153.11 (July, 1995) (Reg. 135). A single policy issued with a first named insured and additional insureds is not considered a group policy only under the limited circumstances specified in N.Y. Comp. Codes R. & Regs. tit.11, § 153.1(g)(2). The only relevant item is subparagraph (v), which provides an exception for "shared interests, provided that such shared interests exist among all additional insureds, and only to the extent of such shared interests." The term "shared interest" is defined in N.Y. Comp. Codes R. & Regs. tit.11, § 153.1(s)(1) as:
(F)or property insurance, insurable interest in the additional insureds property, including legal interest in or control of such property, so that physical loss or damage to such property may result in pecuniary loss to the first-named insured; . . .
Under the inquirers proposal, a "shared interest" does not exist among all additional insureds, as is required by the Regulation. Lender A has no interest in the vehicles that are subject to lender Bs agreement with ABC. Accordingly, there would have to be a separate residual value insurance policy for each of the lenders with which ABC has agreements. Vehicles could then be added to each of the separate policies as additional agreements are entered into between ABC and that particular lender.
With respect to ABCs activities in the case of a borrowers default during the term of the loan, the inquirer states that ABC does agree to assist the lender in the disposition of the vehicle to the extent that the lender specifically requests such assistance and the parties can agree to the terms of any such disposition arrangement. This is a separate negotiation by the parties on a case by case basis. From the inquirers representation, it appears that in each instance of a borrowers default and the lenders request for assistance, ABC can choose whether or not to assist the lender and has no obligation to do so. Accordingly, the arrangement would be permissible because there is no obligation on ABCs part, which is a required element of an insurance contract.
This opinion is limited to the facts that the inquirer represented, as stated above.
For further information you may contact Supervising Attorney Joan Siegel at the New York City Office.
1 ABC also enters into these agreements with lessors. At the termination of the lease, if the lessee chooses not to purchase the vehicle, the lessor sells the vehicle to ABC. Because all other facts are the same, this opinion applies equally to lease transactions.