Re: Home Equity Protection Program
Does the proposed home equity protection program (the "Program") constitute insurance under the New York Insurance Law?
The Program as described in your letter of April 24, 2002 would not be viewed as insurance under the New York Insurance Law.
The proposed program is designed to protect homeowners against a general decline in property values in their geographic area. It would operate as follows. A homebuyer would pay a fee at the time of their home purchase. In exchange for this fee, in the event that real estate prices in the subject area have declined, the homeowner would receive, at the time of refinancing or sale of the property, either a reduction in mortgage balance or a cash payment. The amount of the mortgage relief/cash payment is based upon an index of home prices in the area selected.1
The making of payments or granting of mortgage relief to a homeowner is based solely on the performance of the index, and not on the actual gain or loss (whether realized or unrealized) personally experienced by the homeowner. In other words, in the event the index declined, a homeowner could receive a payment under the Program even if the house was sold for an amount greater than the purchase price. Similarly, if the index increased, a homeowner could suffer a loss on a house, but would not be granted any mortgage relief or receive any payment.
N.Y. Ins. Law § 1101(a) (McKinney 2000) defines "insurance contract", as follows:
In this article: (1) Insurance contract means any 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.
(2) Fortuitous event means any 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.
The Program does not meet this definition, and therefore should not be regarded as constituting insurance. This is so because the conditions under which the "insured" in this case (the homeowner) will receive payment are solely contingent upon a "fortuitous event" (the decline in real estate prices) in which the homeowner does not have a material interest that will be adversely affected. Furthermore, the Programs payments are made irrespective of any adverse affect on the value of the homeowners own property. Indeed, the homeowner could well receive payment even if the value of his or her house increased. The Program would be properly characterized as insurance only if the making of payments was contingent upon a decline in the value of the homeowners own property.
This conclusion is consistent with our findings in Office of General Counsel Opinion 00-02-05 (February 15, 2000). That opinion addressed the question of the proper characterization of weather derivatives, and concluded as follows:
Weather derivatives do not constitute insurance contracts under Section 1101(a) of the New York Insurance Law because the terms of the instrument do not provide that, in addition to or as part of the triggering event, payment to the purchaser is dependent upon that party suffering a loss. Under such instruments, the issuer is obligated to pay the purchaser whether or not that purchaser suffers a loss. Neither the amount of the payment nor the trigger itself in the weather derivative bears a relationship to the purchasers loss. Absent such obligations, the instrument is not an insurance contract.
The rationale of that opinion is equally applicable to the Program at issue herein. Such being the case, the Program does not constitute insurance and contracts entered into with homebuyers pursuant to the Program will not be viewed as insurance contracts.
For further information, you may contact Supervising Attorney Michael Campanelli at the New York City Office.
1The confines of the area from which the index is derived has not yet been determined. Your facts state that the specific geographic area used could be state-wide, regional, county-wide, census tract or delineated by zip code.