The Office of General Counsel issued the following opinion on August 18, 2004, representing the position of the New York State Insurance Department.
Re: Tuition Refund Program
Would a school be doing an insurance business, within the meaning of N.Y. Ins. Law §1101 (McKinney 2000 and Supp. 2004), if it were to refund all or portion of prepaid school tuition in the event that a student withdraws from the school prior to the end of the school term?
It depends. If the school agreed to refund all or a portion of prepaid school tuition based upon the happening of a fortuitous event then the school would be doing an insurance business for which licensing would be required. However, if the school promises to refund the prepaid tuition due to withdrawal for any reason, the withdrawal would not be a fortuitous event, and consequently the school would not be doing an insurance business. Please note that the school may also choose to offer this type of insurance through a third party licensed insurer.
The inquirer states that her client, a private school, is aware of other schools that are refunding all or part of prepaid school tuition in the event that a student withdraws from the school prior to the end of the term. The client would like to engage in this activity as well. However, it is the inquirers understanding that this activity constitutes the type of credit insurance described under N.Y. Ins. Law § 1113(a)(17)(C) (McKinney 2000 and Supp. 2004). The inquirer believes that a school may not provide this type of insurance unless it is appropriately licensed as an insurer. She would like to know whether her understanding is correct.
N.Y. Ins. Law § 1102(a) (McKinney 2000 and Supp. 2004) 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. Although N.Y. Ins. Law § 1108 (McKinney 2000) provides exemptions from this licensing requirement for certain entities, none of them apply to this situation based upon the facts provided.
N.Y. Ins. Law § 1101(b)(1) (McKinney 2000 & Supp. 2004) defines the term "doing an insurance business", in pertinent part, as follows:
(A) making, or proposing to make, as 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 . . .
N.Y. Ins. Law § 1101(a)(1) (McKinney 2000 & Supp. 2004) 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. 2004) 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 the school promises the student, or person responsible for the payment of the tuition, that it will provide a refund of the prepaid tuition based upon the happening of a fortuitous event (i.e. withdrawal due to injury or illness), then the agreement would constitute an insurance contract and the school would be doing an insurance business, for which licensing would be required. Specifically, this activity would fall under N.Y. Ins. Law § 1113(a)(17)(C) (McKinney 2000) which defines the term "credit insurance" in relevant part as follows:
(a)(17)(C) Indemnifying any person for tuition expenses disbursed or to be disbursed under a contract in connection with his dismissal or withdrawal from an educational institution; or indemnifying elementary or secondary schools, whether public, private, profit or non-profit, providing education in consideration of a tuition charge or fee against loss or damage in the event of non-payment of the tuition charges or fees of a student or pupil dismissed, withdrawn or leaving before the end of the school year for which the insurance is written. An educational institution may not require any person responsible for the payment of a students or pupils tuition charge or fee to pay for tuition refund insurance . . . (emphasis supplied)
Accordingly, the school would have to become licensed as a property/casualty insurer in order to provide the type of insurance described in Section 1113(a)(17)(C). However, if the school promises to refund the prepaid tuition due to withdrawal for any reason, the withdrawal would not be a fortuitous event, since it would not be substantially beyond the control of the student or payor. Therefore, there would be no insurance contract and the school would not be doing an insurance business. Consequently, the school would not have to become licensed as an insurer. Please note that the school may also choose to offer this type of insurance through a third party licensed insurer.
For further information you may contact Senior Attorney Pascale Jean-Baptiste at the New York City Office.