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

David A. Paterson
Governor

Eric R. Dinallo
Superintendent

OGC Op. No. 08-08-02

The Office of General Counsel issued the following opinion on August 1, 2008, representing the position of the New York State Insurance Department.

Re: United States Customs Bonds

Questions Presented:

1. Would an unauthorized insurer that is approved by the United States Department of Treasury ("Department of Treasury") be "doing an insurance business" within the meaning of the New York Insurance Law by issuing surety bonds for the benefit of the United States Department of Homeland Security, Bureau of Customs and Border Protection ("Customs") where a non-resident insurance agent supplies the custom house broker with pre-signed surety bonds and the custom house broker negotiates the terms of the bond with the principal in New York?

2. Is the surety bond an authorized kind of insurance under the New York Insurance Law?

3. May a non-resident insurance agent and custom house broker aid an unauthorized insurer in issuing customs bonds in New York?

Conclusions:

1. Yes. The unauthorized insurer would be doing an insurance business in New York, for which a duly issued license is required. The fact that the unauthorized insurer is approved by the Department of Treasury does not exempt it from complying with the licensing requirements set forth in the New York Insurance Law.

2. Yes. The surety bond is a type of fidelity and surety insurance as defined by N.Y. Ins. Law § 1113(a)(16)(F) (McKinney Supp. 2008).

3. No. Neither a non-resident agent nor a custom house broker may aid an unauthorized insurer in effecting insurance in New York.

Facts:

The inquirer reports that she received an inquiry from Mr. A, a non-resident insurance agent located in Texas. Mr. A reports that an importer who desires to ship goods into New York is required to provide Customs with a surety bond from an insurer on a list maintained by the Department of Treasury. The bond will cover the importer's obligations with respect to taxes and duties owed to Customs on goods imported into New York.

Mr. A acts as a managing general underwriter (MGU) - a role similar to that of a managing general agent 1- for a monoline insurer that is authorized to do business in Texas, but not in New York. He seeks to supply a custom house broker located in New York with surety bonds that are pre-signed by the Texas insurer, and would also provide billing services to the insurer. He reports that he would not be involved in soliciting the principal, since the principal selects and contacts the custom house broker to obtain a surety bond from an insurer on the Treasury list. When the importer, located in New York or another state, contacts the custom house broker, the custom house broker would negotiate the terms of the bond with the importer and the bond would be signed by the importer or the custom house broker, if the importer gave the broker power of attorney for the importer. The custom house broker would then file the bond with Customs.

The inquiry asks whether this arrangement is permissible under the New York Insurance Law.

Analysis:

A. Licensing Requirements for Unauthorized Insurers

At the outset, we consider whether federal law preempts the licensing requirements for insurance companies set forth in the New York State Insurance Law.

The Department of Treasury issues certificates of authority to surety companies to do business with the United States, and maintains a list of authorized companies in Department of Treasury Circular 570 (available at http://www.fms.treas.gov/c570). Note (c) of the Circular states:

(c) A surety company must be licensed in the State or other area in which it provides a bond, but need not be licensed in the State or other area in which the principal resides or where the contract is to be performed (28 Op. Atty. Gen. 127, Dec. 24, 1909; 31 CFR Section 223.5(b)). The term "other area" includes the District of Columbia, American Samoa, Guam, Puerto Rico, and the Virgin Islands. . . .

The Department of Treasury issued the Circular pursuant to 31 U.S.C. §§ 9304-9308. Section 9304 of that statute reads as follows:

(a) When a law of the United States Government requires or permits a person to give a surety bond through a surety, the person satisfies the law if the surety bond is provided for the person by a corporation --

(1) incorporated under the laws of --

(A) the United States; or
(B) a State, the District of Columbia, or a territory or possession of the United States;

(2) that many under those laws guarantee--

(A) the fidelity of persons holding positions of trust; and
(B) bonds and undertakings in judicial proceedings; and

(3) complying with sections 9305 and 9306 of this title.

(b) Each surety bond shall be approved by the official of the Government required to approve or accept the bond. The official may not require that the surety bond be given through a guaranty corporation or through any particular guaranty corporation.

31 U.S.C. § 9306 is also relevant to the inquiry. That statute provides:

(a) A surety corporation may provide a surety bond under section 9304 of this title in a judicial district outside the State, the District of Columbia, or a territory or possession of the United States under whose laws it was incorporated and in which its principal office is located only if the corporation has a resident agent for service of process for that district. The resident agent-

(1) may be an official of the State, the District of Columbia, the territory or possession in which the court sits who is authorized or appointed under the law of the State, District, territory or possession to receive service of process on the corporation; or

(2) may be an individual who resides in the jurisdiction of the district court for the district in which a surety bond is to be provided and who is appointed by the corporation as provided in subsection (b). . .

31 C.F.R. Part 223 governs the issuance by the Secretary of Treasury of certificates of authority to bonding companies to do business with the United States as sureties. 31 C.F.R. § 223.5(b) provides:

(b) No bond is acceptable if it has been executed (signed and/or otherwise validated) by a company or its agent in a State where it has not obtained that State's license to do surety business. Although a company must be licensed in the State or other area in which it executes a bond, it need not be licensed in the State or other area in which the principal resides or where the contract is to be performed. . . . (Emphasis supplied)

The federal McCarren-Ferguson Act, 15 U.S.C. § 1012(a), provides that "[t]he business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the business of insurance." It further provides that "[n]o Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance." See 15 U.S.C. § 1012(b).

Here, the federal statutory scheme establishes minimum standards for surety companies when providing bonds for the federal government, but the framework evinces no unequivocally clear congressional intent to preempt state licensing laws, and confers no authority upon the Department of Treasury to promulgate regulations that preempt state licensing laws. In Fidelity & Deposit Co. of Maryland v. Commonwealth of Pennsylvania, 240 U.S. 319 (1916), the United States Supreme Court stated that neither circumstances nor the language of former 6 U.S.C. § 6 (now 31 U.S.C. § 9304, as set forth above) indicates design or necessity to limit application by the several states of a well-established system of licensing and taxing of bonding companies not incorporated under their own statutes, since the right to carry on business in a state depends upon company compliance with the laws of the state. Cf. State of Kansas v. United States of America, 995 F.2d 1505 (10th Cir. 1993) (holding that a federal regulation promulgated by the Federal Crop Insurance Corporation ("FCIC") preempted the state regulation of FCIC reinsurance contracts where the federal enabling statute specifically stated that state law was preempted and the federal agency relied upon the statute when drafting the regulation.) Accordingly, the surety in this case likewise must comply with state licensing requirements to issue the custom bonds in question.

New York has a comprehensive scheme of regulation of insurance that is designed to protect the public and policyholders. Insurance Law § 1102(a) 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 pursuant to the Insurance Law.

Insurance Law § 1101(b)(1) defines the term "doing an insurance business" in New York in pertinent part to mean:

(b)(1) Except as provided in paragraph two, three or three-a of this subsection, any of the following acts in this state, effected by mail from outside this state or otherwise, by any person, firm, association, corporation or joint-stock company shall constitute doing an insurance business in this state and shall constitute doing business in the state within the meaning of section three hundred two of the civil practice law and rules: . . .

B) making, or proposing to make, as warrantor, guarantor or surety, any contract of warranty, guaranty or suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the warrantor, guarantor or surety. . . .

C) collecting any premium, membership fee, assessment or other consideration for any policy or contract of insurance. . .

Because under the fact pattern presented by the inquiry the unauthorized insurer would be issuing surety bonds as a vocation, and not as merely incidental to any other legitimate business or activity, it would be doing an insurance business within the meaning of Insurance Law § 1101(b)(1)(B).

Insurance Law § 1101(b)(2) provides certain exceptions for transactions performed by an unauthorized foreign or alien insurer if effected by mail from outside of New York, provided that the insurer is licensed by its place of domicile to transact an insurance business. These are known as the "mail order" exceptions because they allow an unauthorized foreign or alien insurer, who is licensed to transact insurance business in its state of domicile, to engage in certain activities from without the state, without becoming licensed as an insurer in New York, so long as those activities are done by mail.

Here, however, none of the mail order exceptions would apply, since the custom house broker would be performing the transaction with the principal in New York. The unauthorized surety insurer, therefore, needs to be licensed as an insurer under the Insurance Law to issue surety bonds in New York for the benefit of Customs.

B. Fidelity and Surety Insurance

The next question asks whether surety is a specified kind of insurance under the Insurance Law. Insurance Law §1113(a)(16)(F) specifies the kinds of insurance that may be written in New York, and defines the term "fidelity and surety insurance" in pertinent part as:

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. . .

Insurance Law § 1113(a)(16)(F) refers to performance bonds that are allowed in satisfaction of a security requirement set forth in the law. The Insurance Department has previously opined that to come within the ambit of this provision, 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. See Office of General Counsel ("OGC") Opinion dated August 11, 1994.

19 U.S.C. § 1623 gives Customs the authority to require surety bonds or other forms of security. That statute reads in relevant part as follows:

(a) Requirement of bond by regulation

In any case in which bond or other security is not specifically required by law, the Secretary of the Treasury may by regulation or specific instruction require, or authorize customs officers to require, such bonds or other security as he, or they, may deem necessary for the protection of the revenue or to assure compliance with any provision of law, regulation, or instruction which the Secretary of the Treasury or the Customs Service may be authorized to enforce.2

In view of this federal legislative pronouncement, custom bonds are allowed by law to secure the obligations of importers for payment of taxes and duties on goods shipped into New York. Because the purpose of the bond is to protect revenue and/or to ensure payment of taxes and duties, the bond serves a purpose that is for the public good. Therefore, customs bonds are a type of fidelity and surety insurance under Insurance Law § 1113(a)(16)(F), which may be written either by a monoline financial guaranty insurer or a multi-line property/casualty insurer licensed to write such insurance. See OGC Opinion dated August 11, 1994.

C. Licensing Requirements for Insurance Producers and Aiding an Unauthorized Insurer

The final question asks about the assistance that a non-resident agent and custom house broker may lawfully provide to an unauthorized insurer that aims to issue customs bonds in New York. Insurance Law § 2102, which prohibits acting as an insurance producer3 in New York without a license, is relevant to this inquiry. Insurance Law § 2101 defines the term "insurance agent" as:

(a) [A]ny authorized or acknowledged agent of an insurer, fraternal benefit society or health maintenance organization issued a certificate of authority pursuant to article forty-four of the public health law, and any sub-agent or other representative of such an agent, who acts as such in the solicitation of, negotiation for, or sale of, an insurance, health maintenance organization or annuity contract, other than as a licensed insurance broker. . .

Insurance Law § 2101 defines the term "insurance broker" as:

(c) [A]ny person, firm, association or corporation who or which for any compensation, commission or other thing of value acts or aids in any manner in soliciting, negotiating or selling, any insurance or annuity contract or in placing risks or taking out insurance, on behalf of an insured other than himself, herself or itself or on behalf of any licensed insurance broker. . .

Thus, any person who solicits, negotiates or sells insurance in New York must be licensed as an insurance agent or broker. Although Insurance Law § 2101 provides certain exemptions from this licensing requirement, they are not relevant herein.4

Here, the non-resident insurance agent reports that he would provide the custom house broker with pre-signed surety bonds and provide billing services. Such activities come within the purview of Insurance Law § 2101, and require licensing as an insurance agent in New York. Additionally, by negotiating the terms of the surety bond with the principal in New York, the custom house broker would be acting as an insurance broker for the importer, which would require licensing as an insurance broker under Article 21 of the Insurance Law.

Nevertheless, whether licensed or unlicensed, neither a non-resident agent nor the custom house broker may aid the unauthorized insurer in any manner in effecting insurance in New York. Insurance Law § 2117(a), prohibits any person from acting on behalf of an unauthorized insurer. That statute provides:

(a) No person, firm, association or corporation shall in this state act as agent for any insurer or health maintenance organization which is not licensed or authorized to do an insurance or health maintenance organization business in this state, in the doing of any insurance or health maintenance organization business in this state or in soliciting, negotiating or effectuating any insurance, health maintenance organization or annuity contract or shall in this state act as insurance broker in soliciting, negotiating or in any way effectuating any insurance, health maintenance organization or annuity contract of, or in placing risks with, any such insurer or health maintenance organization, or shall in this state in any way or manner aid any such insurer or health maintenance organization in effecting any insurance, health maintenance organization or annuity contract.

Although Insurance Law § 2117 provides exceptions for licensed insurance brokers placing certain kinds of insurance with unauthorized insurers, they are not applicable here.

The Department has construed the prohibition against aiding an unauthorized insurer to be consonant with the mail order exception found in Insurance Law § 1101(b)(2) because only activities by an insurer permitted by mail under that section may be conducted in the same manner by persons on behalf of the insurer without running afoul of Insurance Law § 2117(a). Thus, unless specific acts fall within the mail order exception, any person, whether licensed or not, may not engage in such acts in New York on behalf of an unauthorized insurer, if such acts constitute doing an insurance business. See OGC Opinion No. 05-06-13, dated June 16, 2005; OGC Opinion No. 01-10-10, dated October 12, 2001. Accordingly, under the facts presented here, if the custom house broker became licensed as an insurance broker in New York, it would only be able to place customs bonds with an authorized insurer.

To obtain applications and further information regarding licensing requirements for insurers and producers, we directed the inquirer to consult the Department's website at http://www.ins.state.ny.us or call the Department's Licensing Bureau at (800)342-3736. We also suggested that the inquirer contact the Department of Treasury at (202)874-6850 regarding federal licensing requirements for sureties issuing customs bonds.

For further information you may contact Associate Attorney Pascale Jean-Baptiste at the New York City Office.

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1  N.Y. Comp. Codes R. & Regs. tit. 11, § 33.2 (Regulation 120) discusses the duties of a managing general agent. It provides:

(c) Managing general agent (MGA) means any person, firm, association or corporation that:

(1) manages all or part of the insurance business of an insurer (including the management of a separate division, department or underwriting office);

(2) acts as an insurance agent as defined in section 2101(a) of the Insurance Law for such insurer, whether known as a managing general agent, manager, or other similar term, or acts as an insurance broker as defined in section 2101(c) of the Insurance Law; and

(3) with or without the authority, either separately or together with affiliates, produces, directly or indirectly, and accepts or rejects risks on behalf of the insurer (underwrites) an amount of gross direct written premium equal to or more than five percent of the policyholder surplus as reported in the last annual statement of the insurer in any one quarter or year together with one or more of the following activities related to the business produced:

(i) Adjusts or pays claims in excess of $25,000, or

(ii) Negotiates reinsurance on behalf of the insurer.

2 See also 19 C.F.R. § 113.1.

3  Insurance Law § 2101(k) defines the term "insurance producer" as "an insurance agent, insurance broker, reinsurance intermediary, excess lines broker or any other person required to be licensed under the laws of this state to sell, solicit or negotiate insurance."

4 See, e.g., Insurance Law § 2101(c)(3) (providing an exemption, under certain circumstances, for a custom house broker who is licensed by the Treasury Department when placing certain open marine policies, a kind of insurance not implicated by the present inquiry).