The Office of General Counsel issued the following opinion on June 18, 2002, representing the position of the New York State Insurance Department.
Re: Surety Bonds.
1. Would ABC Co. be doing an insurance business, within the meaning of N.Y. Ins. Law § 1101 (McKinney 2000 & Supp. 2002), if it were to engage in the activity described in the facts portion of this letter?
2. Does guaranteeing a loan issued by a financial institution under a surety bond constitute fidelity and surety insurance or financial guaranty insurance?
1. Yes. ABC Co. would be doing an insurance business within the meaning of N.Y. Ins. Law § 1101 (McKinney 2000 & Supp. 2002).
2. This activity would constitute financial guaranty insurance pursuant to N.Y. Ins. Law § 6901(a)(1)(A)(McKinney 2000).
Mr. A is the President of ABC Co., a finance business located in New York, which is not an insurance company. Mr. A describes a scenario wherein an individual requests a loan from his company. Instead of issuing the loan, ABC Co. directs them to a financial institution that, in turn, issues the loan. ABC Co. would then guarantee the loan under a surety bond, for a fee. Mr. A would like to know whether these activities would constitute doing an insurance business, for which licensing would be required.
Mr. A asked whether ABC Co. would be doing an insurance business within the meaning of N.Y. Ins. Law § 1101 (McKinney 2000 & Supp. 2002). 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 & Supp. 2002) 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;
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; . . .
Subparagraphs (C), (D) and (E) are not relevant to this discussion.
N.Y. Ins. Law § 1101(a)(1) (McKinney 2000 & Supp. 2002) 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 & Supp. 2002) 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 ABC Co. promises the bank that it will pay the loan due to the financial default of a consumer, such activity would constitute doing an insurance business, for which licensing would be required. Based upon the limited facts provided, ABC Co. would be guaranteeing loans as a vocation and not as merely incidental to its legitimate business.
The next question that must be addressed is whether this activity would constitute financial guaranty or fidelity and surety insurance. N.Y. Ins. Law § 6901(a)(1) (McKinney 2000) defines the term "financial guaranty insurance", in pertinent part, as follows:
(a)(1) Financial guaranty insurance means a surety bond, insurance policy or, when issued by an insurer or any person doing an insurance business as defined in paragraph one of subsection (b) of section one thousand one hundred one of this chapter, 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 (including equity securities guaranteed under a surety bond, insurance policy or indemnity contract) 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 . . .
N.Y. Ins. Law § 1113(a)(16) (McKinney 2000 & Supp. 2002) provides that "fidelity and surety insurance" means, in relevant part:
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(C) Any contract bond; including a bid, payment or maintenance bond or a performance bond where the bond is guaranteeing the execution of any contract other than a contract of indebtedness or other monetary obligation;
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(E) Becoming surety on, or guaranteeing the performance of, any lawful contract, not specifically provided for in this paragraph, except (i) mortgage guaranty insurance, which may only be written by an insurer authorized to write such insurance pursuant to article sixty-five of this chapter, (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, (iii) any insurance contract unless such guaranty is authorized pursuant to subsection (c) of section one thousand one hundred fourteen of this article; or (iv) service contract reimbursement insurance as specified in paragraph twenty-eight of this subsection . . . (emphasis supplied)
Thus, the principal distinction between financial guaranty and fidelity and surety insurance rests on whether the primary obligation guaranteed is a financial debt or some other type of performance. In the instant case, ABC Co. would be guaranteeing the financial debt of the consumer. Accordingly, the type of arrangement that Mr. A described would fall under financial guaranty insurance. The organization and licensing of financial guaranty insurers are set forth in N.Y. Ins. Law Article 69 (McKinney 2000).
For further information, you may contact Attorney Pascale Joasil at the New York City office.