The Office of General Counsel issued the following opinion on June 27, 2002, representing the position of the New York State Insurance Department.
RE: Debt Cancellation Lender/Creditor Insurance.
1. Does the making of a debt cancellation agreement by a lessor or a lender constitute the doing of an insurance business in New York?
2. Assuming that the making of a debt cancellation agreement was exempted from the doing of an insurance business, would an insurance policy reimbursing the lessor or creditor be substantially similar to credit insurance?
1. The making of a debt cancellation agreement by a lessor or a lender constitutes the doing of an insurance business in New York, 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 law or pre-empted pursuant to federal law. 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)).
2. Assuming that the maker of a debt cancellation agreement was not subject to the Insurance Law, by virtue of either an exemption under state law or preemption under federal law, an insurance policy reimbursing the lessor or creditor is not credit insurance but may be another kind of insurance, depending upon the underlying ground for the debt cancellation.
ABC Insurance Company ("ABC") proposes to write what the inquirer calls a "debt cancellation contractual liability policy". The policy would insure a lender that has entered into a debt cancellation agreement with a borrower for a fee. Under the debt cancellation agreement, upon the happening of a specific event, the lender would cancel the debt obligation that remained under the loan agreement. Reasons for cancellation of the debt would vary, depending upon the specific agreement, but the most common reasons include death, disability, or unemployment of the debtor. The policy would compensate the lender for the amount of the debt that was cancelled. In a subsequent phone conversation the inquirer stated that the lenders would typically be banks, but may also include credit unions or finance companies.
The inquirer made a policy form filing with the Department, suggesting that the Department could approve the coverage under N.Y. Ins. Law § 1113(a)(30) (2000), as substantially similar to credit insurance (N.Y. Ins. Law § 1113(a)(17) (2000)) or gap insurance (N.Y. Ins. Law § 1113(a)(26) (2000)). The filing was not approved on May 3, 2001. The reason provided in the non-approval letter was that the "captioned policy does not provide a kind of insurance coverage permitted under Section 1113(a) of the insurance Law." Subsequently, the inquirer wrote to this office for a legal opinion.
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.
Before we can address whether an authorized insurer in New York may write a policy compensating a lender for the amount of a debt that was cancelled, the threshold question is whether such a debt cancellation agreement itself constitutes the doing of an insurance business in New York. Should the debt cancellation agreement constitute the doing of an insurance business, then, in effect, the authorized insurer is reinsuring the unauthorized insurer.
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) (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) (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. The inquirer seeks to distinguish debt cancellation agreements from contracts of insurance by suggesting that the difference is that in the former there is no spreading of the risk to a third party or an indemnification payout to the debtor. However, 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 Barna v. Clifford Country Estates, 143 Misc. 813, 258 N.Y.S. 671 (1932); Luc Leasing Corp. v. Muhl, 172 Misc. 2d 753, 659 N.Y.S.2d 422 (1997); 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.
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 contracts1. 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.
Although there may be circumstances when the making of such debt cancellation agreements would not violate New York law, or where the policy covered debt cancellation agreements that were legal where made, we cannot concur with the inquirer that the kind of insurance that would insure such policies would be substantially similar to credit or gap insurance.
In the past where an insurance policy covered obligations of an exempt insurer, the kind of insurance has been recognized as substantially similar to the kind of insurance for which the underlying obligation consists. In effect, the insurance policy is reinsuring the same kind of risk. In other words, an employer providing health coverage as an employee benefit to its employees is an exempt insurer, and insurance issued to the employer insuring those obligations so incurred are treated as a form of health insurance (N.Y. Ins. Law § 1113(a)(3) (2000)). Another example was the Departments determination that insurance reimbursing motor vehicle warrantors was substantially similar to motor vehicle and aircraft insurance (N.Y. Ins. Law § 1113(a)(19) (2000)). (Since there was no underlying kind of insurance for most other kinds of warranties, reimbursement insurance was not recognized in those cases.)
In other circumstances, a new kind of insurance was added to the Insurance Law to insure the obligations. Two examples include insurance covering gap waivers N.Y. Ins. Law § 1113(a)(26)(A) and (C) (2000) and service contract reimbursement insurance N.Y. Ins. Law § 1113(a)(28) (2000).
In this case, the analogues for the debt cancellation agreements, assuming that such agreements may be permissively made, would be life insurance (specifically credit life insurance) when the contingency is the life of the debtor or lessee (N.Y. Ins. Law § 1113(a)(1) (2000)); accident and health insurance (specifically credit accident and health insurance) when the contingency is the disability of the debtor or lessee (N.Y. Ins. Law § 1113(a)(3) (2000)); and credit unemployment insurance when the contingency is unemployment of the debtor or lessee (N.Y. Ins. Law § 1113(a)(24) (2000)).
Allowing a property/casualty insurer to insure the risk assumed by lessor or creditor where the contingency is the life of the lessee or debtor would effectively allow the property/casualty insurer to write life insurance and accordingly would exceed the insurers licensing authority.
Inasmuch as ABC is licensed to write credit unemployment and accident and health insurance, it may make filings to cover debt cancellation agreements where the contingency is disability or unemployment but not life, with the caveat that any such policy issued by ABC may not insure a debt cancellation contract that is issued in violation of the insurance law of this or another state.
We note that this opinion is limited to ascertaining the kind of insurance the proposed programs would come within. We have not examined whether the proposed coverages would meet the minimum statutory or regulatory requirements applicable to the analogue coverages. Such determinations will be made as part of the policy form review process.
We note further that, since the coverage is not liability insurance, the policies should not state that they are "contractual liability" policies.
For further information, you may contact Principal Attorney Paul A. Zuckerman at the New York City office.
1However, the opinion also stated that 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.