The Office of General Counsel issued the following informal opinion on May 13, 2002, representing the position of the New York State Insurance Department.
Re: Credit Life Insurance
1) May a nonprofit New York corporation that makes a business loan enter into an agreement with its debtor to forgive the loan in the event of the debtors death?
2) May a nonprofit New York corporation obtain a group credit life insurance policy from an authorized insurer to cover a portion of its loans and then enter into an agreement with a debtor to forgive the remainder of the loan in the event of the debtors death?
1) This would constitute doing an insurance business. The corporation would have to be licensed pursuant to N.Y. Ins. Law § 1102 (McKinney 2000).
2) This would constitute doing an insurance business. The corporation would have to be licensed pursuant to N.Y. Ins. Law § 1102 (McKinney 2000).
A firm represents a nonprofit New York corporation that provides loans to small business entrepreneurs in twenty countries. Its client would like to enter into agreements with its debtors to forgive the remaining loan amount in the event of the debtors death.
N.Y. Ins. Law § 1102(a) (McKinney 2000) prohibits any person, firm, association, corporation or joint-stock company from doing an insurance business in this state, unless licensed as an insurer or exempted from licensing.
N.Y. Ins. Law § 1101(b)(1) (McKinney 2000) defines the term "doing an insurance business" in pertinent part as follows:
(A) making, or proposing to make, as an 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; . . .
(C) collecting any premium, membership fee, assessment or other consideration for any policy or contract of insurance; . . .
(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.
N.Y. Ins. Law § 1101(a)(1) (McKinney 2000) defines "insurance contract" as follows:
(a)(1) [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 2000) defines "fortuitous event" as "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."
In accordance with the above, if a client were to offer to forgive the loan balance in the event of death, such agreement would be an insurance contract under New York law.1 The creditor (the insurer) would be providing a benefit of pecuniary value (the amount of the debt that is cancelled) to the debtor (the insured), dependent upon the happening of a fortuitous event (the death of the debtor), in which the debtor has, at the time of such happening, a material interest that will be adversely affected by the happening of the event. Offering such agreements would, in essence, be offering credit insurance. This would constitute doing an insurance business, for which licensing is required.2
It has long been the position of this Department that the making of a debt cancellation agreement constitutes the doing of an insurance business. Several New York cases and opinions of the Attorney General support this position. See Luc Leasing Corp. v. Muhl, 172 Misc.2d 753, 659 N.Y.S.2d 422 (Sup. Ct. 1997); Barna v. Clifford County Estates, 143 Misc. 813, 258 N.Y.S. 671 (City Court 1932); 1964 Op. Atty. Gen. 30; Op. Atty. Gen. 86-F9 (1986). Although N.Y. Ins. Law § 1108 (McKinney 2000) provides certain exemptions from licensing, based upon the facts provided, none of these exemptions apply to this inquiry.3
Although credit life insurance is sometimes sold on an individual basis, it is usually sold to creditor institutions on a group basis to cover the lives of their borrowers. William J. Toppeta, Life Insurance Policies, in 2 New York Insurance Law 32.01(3)(c)(iv)(C) (Wolcott B. Dunham ed., 2001). Group credit life insurance is a special kind of group term insurance. A group credit life insurance policy is issued by an insurance company to a creditor institution, such as a bank, covering the lives of the banks current and future debtors. Unlike other group life plans, the bank is both the policyholder and the beneficiary of the life insurance. The obvious purpose is to protect the bank as well as the debtors heirs with respect to debt. Usually, the amount of life insurance on each debtor equals the amount of the debt to the particular creditor policyholder. 2 id. at 32.01(4)(c).4
N.Y. Ins. Law § 4216(b)(3) (McKinney 2000) and N.Y. Comp. Codes R. & Regs. tit. 11, §§ 185.0-185.16 (1999) (Reg. 27A) contain provisions relating to credit life insurance, which may also be of interest.
The inquirer also asked whether, if its client were to obtain a group policy from a licensed insurer, it could retain a primary layer or deductible. If the client were to enter into an agreement with the debtor that, in the event of the debtors death, the remaining loan amount, not covered under the group policy, would be forgiven, the client would still be doing an insurance business for a which a license is required. The analysis and the consequent conclusion are the same whether, dependent upon the happening of a fortuitous event (the debtors death), the creditor agrees to forgive the entire amount of the loan or only that portion of the loan not covered under the group policy.
Any specific questions relating to credit life insurance may be submitted with an analysis for this Offices review.
For further information you may contact Supervising Attorney Joan Siegel at the New York City Office.
1 The analysis is the same whether or not separate consideration is charged for the benefit.
2 The requestor indicated that its client might want to include additional benefits. Although the requestor did not specify the benefits, the analysis would be the same and, consequently, the licensing requirement would also apply to the offer of these additional benefits.
3 With respect to federal law, on April 2, 2002, the Department opined 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.However, 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 must be made on a case-by-case basis.
4 The New York courts have held that a creditor may have an insurable interest in the life of a debtor. Cosentino v. William Penn Insurance Company of New York, 224 A.D.2d 777, 636 N.Y.S.2d 943 (3d Dept 1996); Silverman v. Steinback, 41 A.D.2d 608, 340 N.Y.S.2d 326 (2d Dept 1973).