The Office of General Counsel issued the following opinion on June 16, 2004, representing the position of the New York State Insurance Department.
Re: Funding Agreements
Under the New York Insurance Law, are funding agreements issued by a life insurer treated pari passu with other life insurance contracts issued by the insurer?
Yes, under the New York Insurance Law, funding agreements issued by a life insurer are treated pari passu with other life insurance contracts issued by the insurer.
The inquiry is general in nature.
Funding agreements are addressed in the New York Insurance Law at N.Y. Ins. Law § 3222, which provides, in pertinent part, as follows:
Funding agreements. (a) Any insurer authorized to deliver or issue for delivery annuity contracts in the state may deliver or issue for delivery one or more funding agreements. The issuance or delivery of such funding agreements shall not be deemed to be doing a kind of business specifically authorized by section one thousand one hundred thirteen of this chapter or engaging in any business authorized by section one thousand seven hundred fourteen of this chapter. Notwithstanding the definition of "insurance contract" in paragraph one of subsection (a) of section one thousand one hundred one of this chapter, the issuance or delivery of a funding agreement by an insurer in this state shall constitute doing an insurance business herein.
N.Y. Ins. Law § 3222(a) (McKinney 2000).
As noted by the above-cited provision, as a general matter, the issuance of funding agreements is considered to constitute the "doing of an insurance business", which supports the view that funding agreements should warrant the same treatment as other types of insurance contracts. More specifically applicable to this inquiry is the following provision of the New York Insurance Law, which provides that, in the event that a life insurer is subject to an order of rehabilitation, liquidation, conservation or dissolution, claimants under insurance policies and funding agreements are accorded equal priority. Section 7435 of the New York Insurance Law provides, in pertinent part, as follows:
Distribution for life insurers. (a) The priority of distribution of claims from the estate of a life insurance company in any proceeding subject to this article shall be in accordance with the order in which each class of claims is herein set forth. Every claim in each class shall, subject to such limitations as may be prescribed by law and do not directly conflict with the express provisions of this section, be paid in full or adequate funds retained for such payment before the members of the next class receive any payment. No subclasses shall be established within any class. The order of distribution of claims shall be:
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(4) Class four. All claims under insurance policies, annuity contracts and funding agreements, and all claims of The Life Insurance Company Guaranty Corporation of New York or any other guaranty corporation or association of this state or another jurisdiction, other than (i) claims provided for in paragraph one of this subsection, and (ii) claims for interest.
(b) Every claim under a separate account agreement providing, in effect, that the assets in the separate account shall not be chargeable with liabilities arising out of any other business of the insurer shall be satisfied out of the assets in the separate account equal to the reserves maintained in such account for such agreement and, to the extent, if any, not fully discharged thereby, shall be treated as a class four claim against the estate of the life insurance company.
N. Y. Ins. Law § 7435 (McKinney 2000).
As indicated by the above-quoted provision, both life insurance policy claims and funding agreement claims are assigned the same level of priority (class four) in the event that the issuing insurer is subject to rehabilitation, liquidation, conservation or dissolution. Accordingly, under the New York Insurance Law, funding agreements issued by a life insurer are treated pari passu with other life insurance contracts issued by the insurer.
For further information you may contact Supervising Attorney Michael Campanelli at the New York City Office.