OGC Op. No. 08-07-31
The Office of General Counsel issued the following opinion on July 16, 2008 representing the position of the New York State Insurance Department.
RE: Home Equity Protection Plan Proposal
Is the Plan permissible under the New York Insurance Law?
No. The Plan is a form of financial guaranty insurance that is not permitted by the Insurance Law because it purports to guarantee the value of a specific asset. Therefore, the product may not be written or marketed in New York.
ABC, Inc. (the “Company”) proposes to market a purported home equity protection plan (the “Plan”).1 The Company indicates that the Plan is intended to protect a homeowner from a decline in the value of his home during the duration of the contract with the Company. The Plan’s operation is described in the following example:
A homeowner purchases a plan to protect the value of their home. The market value of the home is $500,000. Our plan states that no matter what occurs in the real estate or economic markets the value of that particular home will be $500,000.
The Company further states that coverage is triggered by a proposed sale of the subject property and that under the terms of the Plan, a homeowner will be entitled to payment if, at the time of sale, an index of median home prices in the zip code area in which the subject property is located has declined. The Company states that it will “use a combination of appraisal value, previous sale and tax assessed value” to develop the index.
According to the sample contract included with the inquiry, there are a number of additional conditions to the submission of a claim by the homeowner. For example, the Company reserves a right of first refusal to purchase covered property for the covered property’s value in the event median prices in the covered property’s zip code decrease. In addition, the contract states that the Company reserves the right “not to accept an offer,” which suggests that the Company is free to refuse to consider a submitted claim.
The Plan as described, although amended from the proposal addressed by O.G.C. Opinion 08-01-11 (January 30, 2008), nevertheless constitutes an insurance contract under New York Insurance Law § 1101(a) (McKinney 2006). That statute provides in relevant part as follows:
(1) "Insurance contract" means any 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.
(2) "Fortuitous event" means 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.
Under the Plan, the Company is acting as an insurer, and homeowners purchasing the coverage provided by the Plan are insureds. The Plan obligates the Company to confer a benefit of pecuniary value (i.e., the payment of money) upon other parties (the homeowner insureds) dependent upon the happening of a fortuitous event (the decline in home prices) in which the homeowner insureds have material interests that will be adversely affected by the happening of such event. Thus, the elements of Insurance Law § 1101(a) are satisfied by the circumstances presented here.
While generally constituting insurance under the New York Insurance Law, the Plan more specifically constitutes financial guaranty coverage. Financial guaranty insurance is defined by Insurance Law § 6901(a) in pertinent part as follows:
"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:
* * * * *
(D) changes in the value of specific assets or commodities, financial or commodity indices, or price levels in general… (Emphasis added.)
The Plan satisfies the definition of “financial guaranty insurance” set forth in Insurance Law § 6901(a)(1)(D), in that it purports to provide indemnification for financial loss resulting from the change in value of a specific asset (i.e., the insured’s home).
Although the Plan constitutes financial guaranty insurance, our analysis does not end there. Under New York law, financial guaranty insurance may only be written with respect to permissible guarantees set forth in Insurance Law § 6904(b). That statute provides:
(b) Permissible guarantees. (1) The superintendent shall not permit the writing of financial guaranty insurance except as defined in subparagraph (A) of paragraph one of subsection (a) of section six thousand nine hundred one of this article, and a corporation may insure the timely payment of United States dollar debt instruments, or other monetary obligations, only in the following categories:
(A) municipal obligation bonds;
(B) special revenue bonds;
(C) industrial development bonds;
(D) obligations of corporations, trusts or other similar entities established under applicable law;
(E) partnership obligations;
(F) asset-backed securities, trust certificates and trust obligations other than mortgage-backed securities secured by first mortgages on real property which are insurable by a mortgage guaranty insurer authorized under paragraph twenty-three of subsection (a) of section one thousand one hundred thirteen of this chapter ... ;
(G) installment purchase agreements executed as a condition of sale;
(H) consumer debt obligations;
(I) utility first mortgage obligations; and
(J) any other debt instrument or financial obligation that the superintendent determines to be substantially similar to any of the foregoing or shall otherwise be approved by the superintendent.
In view of the plain terms of Insurance Law §§ 6901 and 6904, the proposed Plan, while constituting financial guaranty insurance, is not of the type that may be written and sold in New York. Accordingly, the Plan may not be marketed in New York.
In discussions with the Department, the Company has taken the position that its revised proposal is similar to the program addressed in O.G.C Opinion No. 02-05-02 (May 1, 2002). That opinion addressed a situation where the making of payments or granting of mortgage relief to a homeowner was based solely and absolutely on the performance of the index, and not on the actual gain or loss (whether realized or unrealized) personally experienced by the homeowner. Nor did any other factors within the discretion of the program administrator affect the payment. Under that program, in the event the index declined, the homeowner would receive a payment even if the house was sold for an amount greater than its purchase price.
Here, by contrast, the Company’s Plan does not contemplate payments to a homeowner that sells at a profit. Rather, it is aimed at providing indemnification for financial loss resulting from the change in value of a specific asset (a personal residence) and as such, constitutes an impermissible financial guaranty. Furthermore, the Company’s Plan imposes a number of conditions that confer on the Company virtually unfettered discretion in determining whether a claim will be considered or a payment will be made. Such conditions are entirely inconsistent with a true index-based financial product.
Finally, as noted in O.G.C. Opinion No. 08-01-11 (January 30, 2008) the Company must immediately revise its website to reflect the fact that the product is not available in New York State.
For further information you may contact Supervising Attorney Michael Campanelli at the New York City Office.
1 The Department’s Office of General Counsel previously considered an earlier version of the proposal and concluded that it constituted an impermissible form of financial guaranty insurance under the New York Insurance Law. See O.G.C. Opinion No. 08-01-11 (January 30, 2008) at http://www.ins.state.ny.us/ogco2008/rg080111.htm .