OGC Opinion No. 07-09-11

The Office of General Counsel issued the following opinion on September 12, 2007, representing the position of the New York State Insurance Department.

Request for Classification of Insurance Coverage as Credit Insurance

Question Presented:

May an insurance program that insures lenders against loss arising from a default due to non-payment by a borrower on a loan secured by a lien on real estate that has no residential building be classified as credit insurance, or something substantially similar thereto?

Conclusion:

No. Such coverage neither constitutes credit insurance nor something substantially similar thereto; rather, it constitutes mortgage guaranty insurance, albeit of a type not authorized to be written in New York.

Facts:

MGIC Assurance Corporation (“MAC”) filed its policy form pertaining to unimproved properties with the Insurance Department’s Property Bureau, which in turn suggested that the inquirer seek a legal opinion from the Department’s Office of General Counsel as to the proper classification of the program. Under that proposed program, a lender would be insured against loss arising from the default by a borrower who fails to pay a loan secured by a residential lot that lacks any residential building thereon.

The MAC program provides the same type of coverage issued by MAC’s mortgage guaranty affiliate, Mortgage Guaranty Insurance Corporation (“MGIC”), which filed its program as mortgage guaranty insurance against defaulted loans secured by real estate on which there is a residential building for occupancy by not more than four families or that is a condominium unit. Unlike MGIC, MAC is a property/casualty insurer, and therefore not licensed to write mortgage guaranty insurance in New York. MAC, however, is licensed to write credit insurance.

The two programs of MAC and MGIC are, or would be, issued to mortgage lenders that would be common customers and insureds of both insurers. Among other aspects, each program requires the mortgagor to initiate foreclosure proceedings or to obtain title to the property when there is a default, in order both to mitigate the insurer’s loss and to file a claim with the insurer.

Analysis:

The MAC program proposes to insure lenders in a real estate mortgage transaction admittedly similar to the one filed by MGIC. The only significant difference is that the MAC program lacks the type of improved residential building that is statutorily required under Article 65 of the Insurance Law. Because MAC is a property/casualty insurer and therefore not licensed in New York to sell mortgage guaranty insurance, see N.Y. Ins. Law § 4102 (McKinney 2007), MAC seeks to have the product re-classified under a category of insurance that it is licensed to sell in New York, such as credit insurance.

“Mortgage guaranty insurance” is authorized to be issued pursuant to Insurance Law §1113(a)(23), which in turn refers to the definition set forth in Insurance Law § 6501. Insurance Law § 6501(a) defines “mortgage guaranty insurance” as “insurance against financial loss by reason of nonpayment of any sum required to be paid under the terms of any instrument of indebtedness secured by a lien on real estate.” That is precisely the coverage that MAC intends to offer here.

However, while the Insurance Law broadly defines mortgage guaranty insurance, it authorizes such insurance only where the underlying mortgage constitutes an “authorized real estate security,” which, under Insurance Law § 6501(c)(1)(B), requires that “the improvement is a residential building or buildings designed for occupancy by not more than four families or is a condominium unit...” But as stated on the Declaration Page attached to MAC’s submission to the Department, the program is limited to “Unimproved Properties,” which takes MAC’s program outside the scope of permissible mortgage guaranty insurance.

Significantly, the Legislature, while broadly defining mortgage guaranty insurance, chose not to permit insuring securities on unimproved real estate. Nor is the approach of broadly defining a kind of insurance but limiting its permissible scope unique to mortgage guaranty insurance; the Legislature has written similar constraints around other kinds of insurance, such as financial guaranty insurance.

In the inquirer’s letter, it is asserted that the proposed program should be deemed to be substantially similar to credit insurance, which is defined by Insurance Law § 1113(a)(17) to mean, in pertinent part:

However, credit insurance was never intended to cover mortgages. If it were, there would have been no need for the Legislature to have added mortgage guaranty insurance as a separate kind of insurance under the Insurance Law. Furthermore, the scope of credit insurance, as defined in Insurance Law § 1113(a)(17)(A), was significantly narrowed in 1989 when the Legislature added the words “for goods and services provided in the normal course of their business” at the time that financial guaranty insurance, defined in Insurance Law § 1113(a)(25), was added as a new kind of insurance. As a consequence, the applicability of credit insurance, under paragraph (A) of Insurance Law § 1113(a)(17), became limited to debts involving goods and services. See Office of General Counsel Opinion dated June 16, 2000.

The inquirer also referred to the Department’s discretion to consider a particular type of policy as “substantially similar” to credit insurance pursuant to Insurance Law § 1113(a)(32), which provides:

This provision affords the Superintendent flexibility to permit the writing of a kind of insurance that may not fall precisely within one or more of the specified kinds of insurance under Insurance Law § 1113 but is so similar to a specified kind that it is appropriate to deem it to be included as part of that kind of insurance.

However, the Department would be undermining the insurance regulatory structure when the coverage clearly comes within a specified kind of insurance, and, as in this case, override the legislative intent to preclude coverage of certain risks. Moreover, mortgage guaranty insurance is a monoline coverage - with the Legislature recognizing the unique financial risks of such coverage - and property/casualty insurers cannot write such coverage in this state. See Insurance Law § 4102.

Accordingly, since the proposed program literally comes within the definition of mortgage guaranty insurance, and the Legislature chose not to permit coverage on unimproved real estate, or to permit a property/casualty insurer to write mortgage guaranty insurance, the Department does not concur with the suggestion that the program should instead be viewed as a type of insurance that is “substantially similar” to credit insurance.

For further information you may contact Associate Attorney Jeffrey A. Stonehill at the New York City Office.