The Office of General Counsel issued the following informal opinion on January 10, 2002, representing the position of the New York State Insurance Department.
Re: Credit Card Bond
May an authorized foreign insurance company, licensed only to write fidelity and surety insurance, issue a bond under which it agrees to pay the credit card debt of a business that incurred such debt by using the credit card to pay business expenses, or would such agreement violate the "Appleton Rule?"
A foreign insurance company, licensed only to write fidelity and surety insurance, may not agree to pay the credit card debt for a business using the cards to pay business expenses. Such insurance would not be characterized as credit card insurance as defined by N.Y. Ins. Law § 1113(a)(17) (McKinney 2000), but instead as "financial guaranty insurance" as defined by N.Y. Ins. L. § 6902 (McKinney 2000), and this company is not licensed to issue such insurance. Therefore, if this insurer, agreed to provide such insurance, it would violate the "Appleton Rule," which has been codified in N.Y. Ins. Law § 1106(f) (McKinney 2000).
Your insurance company is licensed in New York to write only fidelity and surety insurance, and primarily writes performance and payment bonds for construction sites. You explained that a request to you from an insurance broker precipitated this inquiry. The broker wanted to write a bond to cover credit card debt for an unnamed business (hereinafter company), that sends out newsletters that reports on trends in the information-technology field regarding computers and communications. The credit cards would be used by authorized employees of this company to buy authorized goods and services for the business, and for expenses incurred for business travel and entertainment.
You explained that the principal of the proposed bond would be the company, and that such bond would be on behalf of the principal, in favor of the credit card issuer, (hereinafter ABC), the obligee. Your company, (hereinafter XYZ) would be the surety. You stated that ABC required the company to obtain this bond insuring that any outstanding debts generated by the company using the credit cards issued by ABC would be paid by XYZ.
The first issue to be resolved is what kind of insurance is the bond that has been proposed. The proposed agreement falls within the definition of "financial guaranty insurance." N.Y. Ins. Law § 6901(a)(1) (McKinney 2000). It is a bond that ensures payment to ABC by XYC in the event that the Company defaults on such payment. N.Y. Ins. Law § 6901(a)(1) (McKinney 2000) defines "financial guaranty insurance" and states, in the relevant part:
(a)(1) "Financial guaranty insurance" means a surety bond, insurance policy or, when issued by an insurer or any person doing an insurance business 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 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;
(2) Notwithstanding paragraph one of this subsection, "financial guaranty insurance" shall not include:
(C) credit insurance as defined in paragraph seventeen of subsection (a) of section one thousand one hundred thirteen of this chapter;
Here, XYZ, a foreign insurer, is licensed to sell fidelity and surety insurance as defined in N.Y. Ins. Law §1113(a)(16) (McKinney 2000) which states, in the relevant part:
"Fidelity and surety insurance," means:
(A) Guaranteeing the fidelity of persons holding positions of public or private trust; and indemnifying banks, thrifts, brokers and other financial institutions against loss of money, securities, negotiable instruments, other specified valuable papers and tangible items of personal property caused by larceny, misplacement, destruction or other stated perils . . .
(E) Becoming surety on, or guaranteeing the performance of, any lawful contract, not specifically provided for in this paragraph, except . . . (ii) a 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 principal distinction between financial guaranty insurance and surety insurance is the type of underlying obligation. A financial debt, such as a credit card debt, serves as the underlying guaranteed obligation for financial guaranty insurance. In contrast, some type of physical performance, such as completion of construction of a building, generally serves as the underlying guaranteed obligation of surety insurance, unless otherwise specified in or permitted in Section 1113(a)(16). This is not the case for this particular bond.
N.Y. Ins. Law § 1113(a)(16)(E)(ii) (McKinney 2000) does not authorize an insurer licensed under this section to sell financial guaranty insurance. XYZ, as noted above, is only licensed to sell fidelity and surety insurance pursuant to N.Y. Ins. Law §1113(a)(16) (McKinney 2000). Therefore, XYZ would be prohibited from selling financial guaranty insurance pursuant to the "Appleton Rule," which has been codified in N.Y. Ins. Law § 1106(f) (McKinney 2000) and states in the relevant part:
No foreign insurer and no United States branch of an alien insurer which does outside of this state any kind or combination of kinds of insurance business not permitted to be done in this state by similar domestic insurers hereafter organized, shall be or continue to be authorized to do an insurance business in this state, unless in the judgment of the superintendent the doing of such kind or combination of kinds of insurance business will not be prejudicial to the best interests of the people of this state.
Pursuant to this statute, if a foreign insurer is licensed in New York, such insurer may only do outside New York what it would be permitted to do in New York, absent specific permission from the Superintendent. In this case, XYZ, a foreign insurer, licensed to sell fidelity and surety insurance as defined in N.Y. Ins. Law §1113(a)(16) (McKinney 2000), would be prohibited from selling financial guaranty insurance.
In addition, the proposed agreement is not "credit insurance" because it does not fall within the definition of N.Y. Ins. Law § 1113(a)(17) (McKinney 2000), which is defined in the relevant part as:
(17) "Credit insurance," means:
(A) Indemnifying merchants or other persons extending credit against loss or damage resulting from non-payment of debts owed to them, for goods and services provided in the normal course of their business, including the incidental power to acquire and dispose of debts so insured, and to collect any debts owed to such insurer or to the insured, but no insurance may be written as credit insurance if it 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 extension of credit, itself, is not "goods" or "services" as encompassed by the statutory definition of "credit insurance. "Nor would the proposed agreement come within N.Y. Ins. Law § 3442 (McKinney 2000) which allows credit card companies to purchase group property/casualty insurance for its members. This section enumerates specific types of coverage that may be provided, including N.Y. Ins. Law § 3442 (a)(16)(d)(6)(C) (McKinney 2000) which addresses credit card loss protection. This section protects for loss when an authorized user of the credit card makes an unauthorized purchase.
In this case, the credit card company seeks protection for payment of authorized expenditures; therefore N.Y. Ins. Law § 3442 (a)(16)(d)(6)(C) (McKinney 2000) does not apply. Although N.Y. Ins. Law § 3442 (a)(16)(d)(7) (McKinney 2000) grants flexibility to the Superintendent to determine that a coverage not specifically enumerated is substantially similar to one that is specified, in this case, the Superintendent would not determine that the proposed coverage, which is financial guaranty insurance, is substantially similar to an enumerated coverage. Moreover, because the proposed policy would not be a group policy, the Superintendent would not conclude that a fidelity and surety insurer could issue it pursuant to N.Y. Ins. Law § 3442 (McKinney 2000).
In summary, the proposed agreement comes within the definition of "financial guaranty insurance." N.Y. Ins. Law § 6901(a)(1) (McKinney 2000). XYZ may not issue this bond because it is not currently licensed to do so. If XYZ complied with all of the licensing requirements of N.Y. Ins. Law Article 69 (McKinney 2000), it could issue this bond, but then it would no longer be allowed to write insurance under N.Y. Ins. Law §1113(a)(16)(A) and (B) (McKinney 2000), since a financial guaranty insurer may only write the kind of surety insurance specified in paragraphs (C), (D), (E) or (F) of that subsection.
For further information you may contact Senior Attorney Susan A. Dess at the New York City Office.