New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

George E. Pataki
Governor

Gregory V. Serio
Superintendent

The Office of General Counsel issued the following opinion on August 23, 2004, representing the position of the New York State Insurance Department.

Re: Surety bond required by the New York City Department of Consumer Affairs

Questions Presented

(1) A debt collection agency that collects child support payments must obtain a surety bond payable to New York City pursuant to Local Law 70/2003, which amended the New York City Administrative Code as a condition of licensure by the New York City Department of Consumer Affairs ("DCA"). May such a bond be sold by an insurer in New York State?

(2) If the response to (1) above is yes, is an authorized insurer that sells the surety bond subject to rate and financial condition regulation under the New York State Insurance Law ("N.Y. Ins. Law")?

(3) Does the New York State Insurance Department ("Department") approve the form of or require the filing of any surety bond by an authorized insurer?

(4) May the surety bond required from a debt collection agency that collects child support payments be sold by an unauthorized insurer?

Conclusions

(1) Yes. The surety bond is an authorized type of performance bond pursuant to N.Y. Ins. Law § 1113(a)(16)(F) (McKinney Supp. 2004).

(2) Yes. A property/casualty insurer licensed to sell surety and fidelity insurance pursuant to N.Y. Ins. Law §§ 4101(a) and 4102(a) (McKinney Supp. 2004) or a financial guaranty insurer licensed to sell surety insurance pursuant to N.Y. Ins. Law § 6902(a)(1)(B) (McKinney 2000)

may sell the surety bond. The insurer is subject to file and use rate regulation pursuant to N.Y. Ins. Law §§ 2305(a), 2305(c), and 2307(a) (McKinney Supp. 2004). The insurer is subject to financial condition regulation by, among other provisions, N.Y. Ins. Law §§ 307 and 1111 (McKinney 2000).

(3) No. Pursuant to N.Y. Comp. Codes R. & Regs. tit. 11, § 66.1 (1996) (Regulation 96) the requirement of N.Y. Ins. Law § 2307(b) (McKinney Supp. 2004) regarding the filing and approval of surety bond forms was waived.

(4) Yes. Absent a requirement by the DCA, such a bond may be sold by an unauthorized insurer.

Facts

Subdivision (g) of a new § 20-494.1, which was an amendment of Subchapter 30 of chapter two of title 20 of the New York City Administrative Code provides:

g. As a condition to the issuance of a license to provide child support payment debt collection services, each applicant shall furnish to the commissioner a surety bond in the sum of five thousand dollars, payable to the city of New York, executed by such applicant and a surety approved by the commissioner. Such bond shall be conditioned upon the applicant's compliance with the provisions of this subchapter and any rules or regulations promulgated hereunder, and upon the further condition that such applicant will pay to the city any fine, penalty or other obligation within thirty days of its imposition, or any final judgment recovered by any person who received child support payment debt collection services from a licensee thereunder and was damaged thereby. The commissioner may, by rule, increase the amount of the surety bond required by this section to an amount not to exceed twenty-five thousand dollars. The commissioner may by rule authorize an applicant to, in lieu of a bond, deposit cash to satisfy the requirements of this section in an amount equal to the sum of the surety bond required by this section.

Analysis

First question

The surety bond is a license/permit bond. Wolcott B. Dunham, Jr., New York Insurance Law § 52.08[1] (1998) states in pertinent part: "New York State and the various political subdivisions within it require a bond to be obtained as a condition to both the granting of certain licenses to engage in specific businesses and the granting of a permit for a certain privileges. The purpose of requiring bonds is to enable the government to regulate professions and businesses."

N.Y. Ins. Law § 1113(a)(16)(F) (McKinney Supp. 2004) states in relevant part:

(16) "Fidelity and surety insurance," means: . . . (F) Becoming surety on, or guaranteeing the performance of bonds and undertakings required or permitted in all judicial proceedings or otherwise by law allowed, including surety bonds accepted by states and municipal authorities in lieu of deposits as security for the performance of insurance contracts;

The surety bond is an authorized type of surety bond, a performance bond, pursuant to N.Y. Ins. Law § 1113(a)(16)(F) (McKinney Supp. 2004). Enclosed is an August 11, 1994 opinion that provided detailed analysis of N.Y. Ins. Law § 1113(a)(16)(F) (McKinney Supp. 2004). It concluded: "Essentially, to come within subparagraph (F), the bond must provide a benefit to the public that has been identified by an appropriate legislative body as being necessary for the public good." That is the case for this surety bond which is required under the New York City Administrative Code.

Second question

An authorized insurer that sells the surety bond is subject to rate and financial condition regulation pursuant to the N.Y. Ins. Law.

A property/casualty insurer licensed to sell surety and fidelity insurance pursuant to N.Y. Ins. Law §§ 4101(a) and 4102(a) (McKinney Supp. 2004) or a financial guaranty insurer licensed to sell surety insurance pursuant to N.Y. Ins. Law § 6902(a)(1)(B) (McKinney 2000) may sell the surety bond.

An authorized insurer that sells the surety bond would be subject to file and use rate regulation pursuant to N.Y. Ins. Law §§ 2305(a), 2305(c), and 2307(a) (McKinney Supp. 2004). Essentially these provisions require an authorized insurer to submit its rates for the Department's review subject to the Department disapproving the rate as failing to meet the requirements of N.Y. Ins. Law Article 23 (McKinney 2000 & Supp. 2004).

An authorized insurer that sells the surety bond is subject to financial condition regulation by, among other provisions, N.Y. Ins. Law §§ 307 and 1111 (McKinney 2000). Section 307 provides for financial reporting requirements. Under Section 1111, the Department may issue a certificate of qualification confirming the solvency of an authorized insurer.

Third question

The Department does not approve the form of or require the filing of any surety bond by an authorized insurer. N.Y. Comp. Codes R. & Regs. tit. 11, § 66.1 (1996) (Regulation 96) states: "The requirement of section 2307(b) of the Insurance Law regarding filing and approval of surety bond forms is hereby waived."

Fourth question

The N.Y. Ins. Law does not require that New York State or any unit of government within New York State obtain a surety bond, should it desire to do so, from an authorized insurer and it does not appear that the DCA is requiring that the bond be obtained from an authorized insurer.

A policy from an unauthorized insurer may be procured only by a licensed excess line broker, in accordance with N.Y. Ins. Law §§ 2105 and 2118 (McKinney Supp. 2004) and N.Y. Comp. Codes R. & Regs. tit. 11, Part 27 (Regulation 41).

While N.Y. Comp. Codes R. & Regs. tit. 11, Part 27 (Regulation 41) contains certain protections to insureds under excess line policies, excess line insurers are not subject to the same regulation as are authorized insurers. The Department does not regulate the rates of unauthorized insurers and will not issue a certificate of qualification for such an insurer under N.Y. Ins. Law § 1111 (McKinney 2000).

For further information one may contact Robert Freedman, Senior Attorney at the New York City Office.