OGC Op. No. 08-11-09
The Office of General Counsel issued the following opinion on November 19, 2008, representing the position of the New York State Insurance Department.
RE: ABC’s Tuition Guarantee Plan
Does ABC’s Tuition Guarantee Plan constitute the doing of an insurance business in violation of the New York Insurance Law?
Yes. ABC’s Tuition Guarantee Plan constitutes the doing of an insurance business in violation of the New York Insurance Law. Consequently, the Department directed ABC to cease and desist from offering that plan to its students and confirm as much, in writing to the Department, within ten (10) days of receipt of this letter.
On February 5, 2008, the Department’s Consumer Services Bureau (“CSB”) received a complaint alleging that ABC, a private catholic school, is not licensed to write insurance in New York, but is doing an insurance business in violation of the Insurance Law.
The Department requested in writing that ABC provide a full description of its Tuition Guarantee Plan. ABC’s president responded to the request explaining that ABC began its Tuition Guarantee Plan in 1987 in response to the “tremendous financial strains” students and their families face following the death of a parent or guardian, and that under the program, a student may remain enrolled in ABC despite any financial hardship that may befall a family following the death of a parent or guardian.
ABC’s president further explained that the Tuition Guarantee Plan is mandatory for all students and is effective when the student first enrolls at ABC. In addition, ABC’s president explained that as part of the annual tuition, ABC designates one hundred dollars as the fee for the Tuition Guarantee Plan. He stated that the Tuition Guarantee Plan rests not on an outside fund or company, but is backed-up by the financial status of the school. Moreover, in the event that a student’s parent or guardian passes away, ABC’s president explained that the family need not file any claims or complete any forms. Rather, ABC notifies the student’s family that the student may attend ABC tuition-free until graduation.
In October 2008, counsel for ABC provided additional documentation to the Department. Included in that submission was the “ABC – Tuition Guarantee Plan Registration Form” (the “registration form”). This form sets forth a place for the student’s name; year of graduation; the date; the names of the student’s parents, stepparents or guardians; their relationship to the student; and the parents’ or guardians’ signatures. The registration form states that “[p]articipation in the plan is mandatory for all students enrolled at ABC and is covered by the tuition guarantee fee.” Together with the form, counsel for ABC included a letter written on ABC letterhead and addressed to the student’s parents that reads in relevant part as follows:
Enclosed is the Tuition Guarantee Card for students who are returning to ABC in September for the 2006-2007 school year. As you know, all parents participate in this insurance program. In the event that a parent dies while the child is enrolled at ABC, all tuition costs will be covered by this insurance program for as long as the student attends ABC…The $100.00 fee for this program will be included with the September Tuition statement. Students whose tuition is already covered by the Tuition Guarantee Program do not need to return this card.
In addition to counsel for ABC’s submission, ABC’s president submitted a sample letter that ABC’s principal sends to a student’s family upon notice of the death of a student’s parent or guardian. The sample letter states in pertinent part that:
As you know, the Tuition Guarantee Plan becomes operative upon the death of either parent. (Student’s name) tuition will be covered by the actualization of the plan through the ABC Development Fund. The tuition for (student’s name) will be paid through the Tuition Guarantee Plan from now until graduation.
The question before the Department is whether ABC’s Tuition Guarantee Plan constitutes the doing of an insurance business in violation of the Insurance Law. Insurance Law § 1102 prohibits any person, firm, association, corporation, or joint-stock company from doing an insurance business in New York unless licensed by the Department or exempt from licensing. Insurance Law § 1101(b)(1) defines “doing an insurance business” in relevant part as:
(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;
(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;
(D) doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an insurance business within the meaning of this chapter;
(E) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this chapter.
Furthermore, Insurance Law § 1101(a)(1) defines an “insurance contract” as:
any agreement or other transaction whereby one party, the ‘insurer’, is obligated to confer [a] 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.
Pursuant to Insurance Law §1101(a)(2), a “fortuitous event” is “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 addition, Insurance Law § 1113(a) sets forth the permissible kinds of insurance in New York. One such permissible kind of insurance is life insurance, which Insurance Law § 1113(a)(1) defines in pertinent part as “every insurance upon the lives of human beings, and every insurance appertaining thereto….”
In the situation presented here, ABC requires its students’ parents or guardians to pay $100 per year for its Tuition Guarantee Plan, which permits a student to attend ABC tuition-free until graduation should the student’s parent or guardian pass away while the student is enrolled at ABC. By requiring its students’ parents or guardians to purchase the Tuition Guarantee Plan, ABC is entering into an agreement to provide a benefit of pecuniary value (i.e., attending ABC tuition-free) based upon the happening of a fortuitous event (i.e., the death of a parent or guardian). Thus, ABC’s Tuition Guarantee Plan constitutes the doing of an insurance business - specifically a life insurance business - in violation of the Insurance Law. Please be advised, however, that neither the Insurance Law nor regulations promulgated thereunder prohibit ABC from offering its students scholarships based upon financial need or even permitting a student to attend ABC tuition-free on a charitable basis.
Accordingly, the Department directed ABC to cease and desist from offering the Tuition Guarantee Plan to its students and their families, and confirm as much, in writing to the Department, within ten (10) days of receipt of this letter.
However, Insurance Law § 3103(a) states that any insurance policy or annuity contract delivered or issued for delivery in New York in violation of any provision of the Insurance Law shall be valid and binding upon the insurer issuing the policy or contract, and that when the policy or contract’s provisions violate the requirements or prohibitions of the Insurance Law, the policy or contract shall be enforceable as if the policy or contract conformed with the requirements or prohibitions. Thus, ABC must honor agreements into which it entered in previous school years pursuant to the Tuition Guarantee Plan. Having done an illegal insurance business does not void ABC’s obligations under those agreements.
For further information, you may contact Senior Attorney Joana Lucashuk at the New York City office.