The Office of General Counsel issued the following opinion on May 3, 2002, representing the position of the New York State Insurance Department.
Re: Debt Cancellation Agreements.
Does the making of a debt cancellation agreement in an installment sale contract, where the goods being purchased are being acquired for commercial purposes, constitute the doing of an insurance business in New York by the seller?
The making of a debt cancellation agreement constitutes the doing of an insurance business in New York by the seller, within the meaning of N.Y. Ins. Law § 1101 (McKinney 2000) for which licensing is required pursuant to N.Y. Ins. Law § 1102 (McKinney 2000), unless exempted pursuant to state or federal law.
The inquirer asked whether the retail seller of commercial goods may sell a "debt cancellation agreement" to the buyer of the goods. Under the agreement, the seller would agree to cancel the debt upon the happening of specified cancellation events. These events include the death of the purchaser (unless the purchaser commits suicide within two years of the date of the agreement or reaches the age of 70 before the balance is paid in full) or if the property is stolen. The agreement is optional and not required for credit and the buyer will be advised of the additional cost of the agreement.
While the inquiry was in regard to debtor/creditor arrangements, our response will also apply to lessor/lessee arrangements, since the law is the same in both regards.
It has long been the position of this Department that the making of a debt cancellation agreement constitutes the doing of an insurance business. The maker of the agreement would have to be appropriately licensed as an insurer, unless specifically exempted under state or federal law.
N.Y. Ins. Law § 1101(a) (McKinney 2000), provides, in pertinent part:
"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.
N.Y. Ins. Law § 1102(a) (McKinney 2000), provides, in pertinent part:
(a) No person, firm, association, corporation or joint-stock company shall do an insurance business in this state unless authorized by a license in force pursuant to the provisions of this chapter, or exempted by the provisions of this chapter from such requirement.
A debt cancellation agreement is an insurance contract under New York Law because the lender (the insurer) agrees to provide a benefit of pecuniary value (namely, the amount of the debt that is cancelled) to the borrower (the insured), dependent upon the happening of a fortuitous event (the death, disability or unemployment of the borrower), in which the borrower has, at the time of such happening, a material interest that will be adversely affected by the happening of the event. While it has been suggested that the difference between debt cancellation agreements and contracts of insurance is that in the former there is no spreading of the risk to a third party or an indemnification payout to the debtor, there is no requirement in the New York definition of insurance for either condition.
Several New York cases, opinions of the Attorney General, and legislation support the Departments position. See Luc Leasing Corp. v. Muhl, 172 Misc. 2d 753, 659 N.Y.S.2d 422 (1997); Barna v. Clifford Country Estates, 143 Misc. 813, 258 N.Y.S. 671 (1932); 1964 Op. Atty. Gen. 30; Op. Atty. Gen. 86-F9 (1986); N.Y. Ins. Law § 1101(b)(3) (McKinney 2000).
In addition, N.Y. Ins. Law § 1101(b)(3) (McKinney 2000) was added in 1994 as an exception from the definition of doing an insurance business in order to specifically allow a lessor or creditor to waive, under certain conditions, the gap amount (which essentially is the difference between the amount owed under the lease or loan agreement and the actual cash value of the property that is the subject of the lease or loan agreement.) See N.Y. Ins. Law § 107(a)(52) (McKinney 2000) for a more precise definition. In making this amendment, the Legislature explicitly recognized that such agreements would otherwise constitute the doing of an insurance business.
For all of the above reasons, it remains the Departments position that debt cancellation agreements constitute the doing of an insurance business and that the maker of such an agreement must be licensed as an insurer unless specifically exempted under either New York law (as was the case for gap waivers) or federal law. In regard to the latter, the Department has recently opined on April 2, 2002, that State regulation of the underwriting of debt cancellation contracts or debt suspension contracts issued by a national bank in connection with credit card loans made by the bank to its cardholders is preempted by the provisions of § 104(d)(1) and (e)(3) of the Gramm-Leach-Bliley Act (15 U.S.C. § 6701(d)(1) and (e)(3)(2000)) in that application of New York State Insurance Law would prevent or restrict a national bank from carrying out the underwriting activity associated with such insurance contracts.1
For a more extensive discussion see the opinion entitled "Bank Issuance of Debt Suspension and Debt Cancellation Contracts in connection with its Customers Credit Card Account at the Bank", which is located on the Departments website at http:/www.ins.state.ny.us.
For further information, you may contact Principal Attorney Paul A. Zuckerman at the New York City office.
1However, an application of existing laws and regulations, relating to the sale of insurance, to a national bank engaged in the sale of debt cancellation contracts or debt suspension contracts issued by the national bank in connection with credit card loans made by the bank may or may not violate the proscription "prevent or significantly interfere" set forth in § 104(d)(2)(A). Such a determination will need to be made on a case-by-case basis.