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

Andrew M. Cuomo
Governor

James J. Wrynn
Superintendent

OGC Op. No. 11-07-02

The Office of General Counsel issued the following opinion on July 29, 2011, representing the position of the New York State Insurance Department.

Re: Home Equity Protection Plan

Question Presented:

Does the proposed “home equity protection plan” constitute insurance?

Conclusion:

Yes. The proposed “home equity protection plan” constitutes insurance.

Facts:

An inquirer asked whether the contract he attached to his inquiry, which he referred to as a “home equity protection plan” (“Plan”), constituted insurance. Under the terms of the proposed Plan, a homeowner would pay the Plan sponsor, ABC Co., a one-time fee at the time the homeowner enrolled in the Plan. In exchange for that fee, ABC Co. would become obligated to pay a benefit at the time the contracted homeowner refinanced or sold his or her home, if at the time of the refinancing or sale the local real estate price index declined, irrespective of the actual selling price of the home.

Analysis:

In OGC Opinion No. 02-05-02, the Department determined that a home equity protection plan proposed by a not-for-profit organization (the “Program”) did not constitute an “insurance contract” as that term is defined in New York Insurance Law § 1101. Insurance Law § 1101(a) (McKinney 2006) reads 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.

The Department had concluded that the Program was not an insurance contract based on the definition of “insurance contract” in Insurance Law § 1101, because any payments that might be made under the Program would be made regardless of the occurrence of actual loss by the participating homeowner. Instead, in the event of a sale or refinancing, a participating homeowner would be entitled to payment upon demonstrating that the local real estate price index had declined overall. The opinion states: “The Program would be properly characterized as insurance only if the making of payments was contingent upon a decline in the value of the homeowner’s own property.”

In reality, however, a decline in the local real estate price index necessarily indicates a proportional decline in the value of a homeowner’s property. We think it unlikely, at best, for an average home within a local area that has been affected by declining prices overall also not to suffer a similar decline in value. A particular home may sell at a price higher than other homes in the area because the home has certain attributes that the other homes do not have. For instance, the home may have undergone substantial restoration, remodeling, improvement or expansion that increased its worth, or have particular historical or architectural significance. However, the increase in the value of a home will generally be less than it would have been had the market in the local area not suffered an overall decline. A home price simply will not be as high as it otherwise could have been, despite its attributes, when the market is suffering an overall loss. The selling price of a home will suffer a lost potential in proportion to the local real estate market decline.

Thus, the Program – and the inquirer’s proposed Plan, which is a near replication of the Program – would in actuality make payments that are contingent upon a decline in the value of a homeowner’s own property, because a homeowner’s property value will decline in relation to the overall decline in the local real estate price index (of which the homeowner’s abode is a part).

Under the terms of the inquirer’s proposed Plan, ABC Co. becomes obligated to pay a benefit at the time the contracted homeowner refinances or sells the subject property if at the time of refinancing or sale the local real estate price index – and thus the value of the homeowner’s property – has declined. Whether the local real estate price index – and thus, the value of the homeowner’s property – declines at any point in time is substantially beyond the control of either ABC Co. or the homeowner. Thus, the Plan constitutes an insurance contract within the meaning of Insurance Law § 1101(a).

Insurance Law § 1101(b)(1) sets forth the acts that constitute doing an insurance business in this state:

(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.

Thus, “doing an insurance business” includes “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,” and “solicitation of applications for any such policies or contracts.” Furthermore, Insurance Law § 1101(b)(1)(C) states that “collecting any premium, membership fee, or assessment or other consideration for any policy or contract of insurance constitutes the doing of an insurance business.” And, Insurance Law § 1101(b)(1)(E) provides that “doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of [the Insurance Law]” falls within the definition of “doing an insurance business.” Hence, the inquirer’s proposal to solicit and sell the home equity protection plan constitutes “doing an insurance business,” for which ABC Co. must be appropriately licensed by this Department as an insurer in New York before offering the Plan for sale, pursuant to Insurance Law § 1102.

The Department thus finds that the home equity protection plan under consideration in OGC Opinion No. 02-05-02 also constitutes insurance, because a homeowner’s property value will understandably decline in relation to a decline in the local real estate price index, of which the homeowner’s property is a part. OGC Opinion No. 02-05-02 is thus superseded by this opinion.

For further information you may contact Associate Attorney Sally Geisel at the New York City Office.