The Office of General Counsel issued the following opinion on May 4, 2004, representing the position of the New York State Insurance Department.
Re: "Lease Bond" as Financial Guaranty Insurance
Does a "lease bond", whereby a New York authorized insurer guaranties a tenants payment of rent, constitute financial guaranty insurance under the New York Insurance Law?
Yes, a "lease bond" would be viewed as a type of financial guaranty insurance under the New York Insurance Law, and may be issued only by a financial guaranty insurer, not a surety insurer.
A landlords tenant procured a lease bond from a New York surety in connection with a lease. The tenant filed for bankruptcy protection and the landlord has since attempted to collect on the bond from the New York surety. The New York surety is disclaiming liability for payment under the bond on the grounds that the lease bond constitutes financial guaranty insurance, a kind of insurance that it is not licensed to issue.
This inquiry requires a determination as to whether the bond in question is properly characterized as either fidelity and surety insurance or financial guaranty insurance. These kinds of insurance are respectively defined under the New York Insurance Law, in pertinent part, as follows:
(16) "Fidelity and surety insurance," means:
. . .
(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;
. . .
(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 . . . .
N.Y. Ins. Law § 1113(a)(16) (McKinney Supp. 2004).
'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 guarantied 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;
. . .
(2) Notwithstanding paragraph one of this subsection, "financial guaranty insurance" shall not include:
. . .
(B) fidelity and surety insurance as defined in paragraph sixteen of subsection (a) of section one thousand one hundred thirteen of this chapter . . . .
N. Y. Ins. Law § 6901(a) (McKinney 2000).
Both fidelity and surety insurance and financial guaranty insurance serve to guarantee performance under a contractual obligation. Indeed, financial guaranty insurance, until the enactment of Article 69 of the New York Insurance Law, was regarded as a subcategory of fidelity and surety insurance. In general, the Department considers as financial guaranty insurance any bond where the principal performance guaranteed is the payment of a debt obligation. It regards as surety insurance bonds in which the obligation is not related to the payment of a debt obligation, or where the payment of a debt obligation is incidental to the principal obligation, except where the statute defines the debt obligation explicitly as surety insurance or contains an exclusion.
The failure of a tenant to pay rent falls within the above-quoted definition of financial guaranty insurance; specifically, the failure to pay a monetary obligation as the result of a financial default. A bond guaranteeing the tenants payment of the rent does not come within any of the specific provisions of § 1113(a)(16) and, by virtue of the exclusionary language of subparagraph (E), does not come within that provision either. This conclusion is consistent with the established view of the Department on this matter. See Office of General Counsel Opinion No. 92-117 (NILS) (November, 1992).
Accordingly, the "lease bond" herein would be regarded by the Department as constituting financial guaranty insurance. With respect to the dispute generating this inquiry (i.e., the refusal of the surety to honor its contract on the grounds that it was not permitted to issue the bond), it is noted that the New York Insurance Law provides that insurers may not disclaim coverage on such grounds. Specifically, N.Y. Ins. Law § 3103(a) states that contracts entered into by an insurer remain valid and binding upon the insurer even though the insurer exceeded its authority by issuing such contract. Therefore, the New York surety should honor its contract in the instant case. Furthermore, as this is a matter within the ambit of the Departments enforcement powers, if the New York surety company continues to refuse to honor its contract, the name of the surety company should be provided to this office, which we will refer to our Consumer Services Bureau for investigation.
For further information you may contact Supervising Attorney Michael Campanelli at the New York City Office.