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. 09-01-11

The Office of General Counsel issued the following opinion on January 16, 2009 representing the position of the New York State Insurance Department.

Re: Investments in Federally Insured Credit Union by Co-operative Property /Casualty Insurance Companies

Question Presented:

May a co-operative property/casualty insurer organized under Article 66 of the New York Insurance Law purchase share certificates1 from a federally-insured credit union?

Conclusion:

No. A co-operative property/casualty insurer organized under Article 66 of the New York Insurance Law may not purchase share certificates from a federally-insured credit union.

Facts:

A New York co-operative property/casualty insurer aims to purchase share certificates of a federally-insured credit union and has inquired of the inquirer's association whether it may lawfully do so under New York law. The insurer seeks confirmation that such shares come within the scope of Insurance Law § 1404(a)(1), which enumerates the kinds of assets that qualify as “government obligations” under the Insurance Law.

Analysis:

N.Y. Ins. Law § 6623 (McKinney 2006) is relevant to the inquiry. That statute governs the investments that may be made by a co-operative property/casualty insurance company, and provides in pertinent part as follows:

The funds of every co-operative property/casualty insurance company shall be invested only as permitted by subsection (c) of section [1403] of this chapter….

Insurance Law § 1403(c), in turn, permits an insurer, once it has satisfied the minimum capital and minimum surplus investments requirements of Insurance Law § 1402, to invest in the investments permitted under Insurance Law §§ 1402, 1403 and 1404(a) (except for paragraphs (8) and (10) thereof).

Insurance Law § 1402 sets forth the requirements for an insurer’s investment of its minimum capital or minimum surplus to policyholders, and requires that those amounts be invested only in certain specified obligations that clearly exclude the share certificates of a federally-insured credit union. However, as noted above, once an insurer satisfies the requirements under § 1402, it may invest in assets permitted under § 1403 and certain paragraphs of § 1404(a).

Section 1404(a)(1) is most germane to the question asked. That section provides in pertinent part as follows:

(1) Government obligations. Obligations which are not in default as to principal or interest, which are valid and legally authorized, and which are issued, assumed, guaranteed or insured by:

(A) the United States or by any agency or instrumentality thereof,

(B) any state of the United States,

(C) any territory or possession of the United States or any other governmental unit in the United States, or

(D) any agency or instrumentality of any governmental unit referred to in subparagraphs (B) and (C) of this paragraph… .

Although fully insured2 by the National Credit Union Administration (“NCUA”), which is an agency of the federal government established by the Federal Credit Union Act (see 12 U.S.C. §1752a(a)), the share certificates of a federally-insured credit union do not qualify under Insurance Law § 1404(a)(1) because credit union share certificates do not constitute “obligations” of the credit union. Insurance Law § 107(a)(33) defines “obligations” as follows:

"Obligations" includes bonds, debentures, notes and other evidences of indebtedness (whether or not liability for payment extends beyond the security therefor) as well as participation interests in any of the foregoing.

The share certificates of a credit union are not “obligations” of a credit union to its members because under the Federal Credit Union Act, a credit union member, through its deposit of funds in a credit union, holds an equity interest in the credit union. Specifically, 12 U.S.C. § 1757(6), which sets forth the powers of a federal credit union, provides that a federal credit union is authorized to:

(6) … receive from its members … payments, representing equity, on - (A) shares which may be issued at varying dividend rates; (B) share certificates which may be issued at varying dividend rates and maturities; and (C) share draft accounts … ; subject to such terms, rates, and conditions as may be established by the board of directors, within limitations prescribed by the Board. (Emphasis added.)

Further, the National Credit Union Administration has expressly confirmed the nature of the relationship between credit unions and their members, stating:

The Federal Credit Union Act, which governs the relationship between a Federal credit union and its members, establishes not a debtor-creditor relationship but rather a debt-equity relationship, similar to the relationship between a shareholder and a corporation.

National Credit Union Administration Opinion Letter (September 30, 1983) (concluding that credit unions do not enjoy the same right of set-off against members that have borrowed from the credit union as banks do against depositors that have borrowed from the bank.)

The relationship between a credit union and its members thus differs significantly from that between a bank and its depositors, in that the latter is acknowledged to constitute a debtor-creditor relationship. Therefore, while a bank certificate of deposit constitutes an “obligation” under the Insurance Law, a credit union share certificate does not.

Accordingly, a New York co-operative property/casualty insurer may not purchase share certificates from a federally insured credit union, in that credit union share certificates do not constitute “obligations” under the Insurance Law.

For further information you may contact Supervising Attorney Michael Campanelli at the New York City Office.

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1 The “share certificates” of a credit union are often analogized to conventional bank certificates of deposit. However, because credit unions are all member owned, each depositor holds in fact owns shares in the credit union.

2 The NCUA is required to insure member accounts pursuant to federal regulation. See 12 C.F.R. §745.0 et seq. (2008). Share certificates are considered depositor accounts for deposit insurance purposes. See 12 C.F.R. §745.1(a)(2008).