** OPINION WITHDRAWN **
The Office of General Counsel issued the following opinion on April 27, 2004, representing the position of the New York State Insurance Department.
Re: Proposed lease guaranty surety bond
Question Presented:
Does a proposed bond that guarantees against a tenant failing to pay rent or failing to pay for damage to the leased premises constitute surety insurance and not financial guaranty insurance?
Conclusion:
No, although part of the coverage under the proposed program would constitute surety insurance, part of the coverage is financial guaranty insurance under New York law. Therefore, only an authorized financial guaranty insurer may write the bond.
Facts:
An individual wishes to procure surety bonds for the benefit of landlords of apartment buildings to assure them that their tenants will perform their lease agreement obligations. The bond would substitute for the tenant’s security deposit that the landlord would otherwise require. Under the proposed "rent deposit alternative program", the tenant will pay a fee of approximately 15-20% of the amount of rent security in consideration of the issuance of the bond by an authorized insurer. If a tenant fails to pay the rent or fails to pay for any damage to the premises, the insurer will pay the landlord an amount equal to the resulting damages, up to the penal sum of the bond, which is the same amount as the security deposit amount. The insurer will in turn seek to recover that amount from the tenant. The bond would be good for five years, after which a new premium would be required.
Analysis:
Fidelity and surety insurance is defined in N.Y. Ins. Law § 1113(a)(16) (McKinney 2000 & Supp. 2004), in relevant part, to mean:
(16) "Fidelity and surety insurance," means:
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(C) Any contract bond; including a bid, payment or maintenance bond or a performance bond where the bond is guaranteeing the execution of any contract other than a contract of indebtedness or other monetary obligation;
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(E) Becoming surety on, or guaranteeing the performance of, any lawful contract, not specifically provided for in this paragraph, except (i) mortgage guaranty insurance, which may only be written by an insurer authorized to write such insurance pursuant to article sixty-five of this chapter, (ii) a contract that falls within the definition of financial guaranty insurance as set forth in paragraph one of subsection (a) of section six thousand nine hundred one of this chapter, (iii) any insurance contract unless such guaranty is authorized pursuant to subsection (c) of section one thousand one hundred fourteen of this article; or (iv) service contract reimbursement insurance as specified in paragraph twenty-eight of this subsection…
Financial guaranty insurance is defined in N.Y. Ins. Law § 6901 (McKinney Supp. 2000), in relevant part, to mean:
As used in this article: (a)(1) '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:
(A) failure of any obligor on or issuer of any debt instrument or other monetary obligation (including equity securities guarantied under a surety bond, insurance policy or indemnity contract) to pay when due to be paid by the obligor or scheduled at the time insured to be received by the holder of the obligation, principal, interest, premium, dividend or purchase price of or on, or other amounts due or payable with respect to, such instrument or obligation, when such failure is the result of a financial default or insolvency or, provided that such payment source is investment grade, any other failure to make payment, regardless of whether such obligation is incurred directly or as guarantor by or on behalf of another obligor that has also defaulted;
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(2) Notwithstanding paragraph one of this subsection, "financial guaranty insurance" shall not include:
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(B) fidelity and surety insurance as defined in paragraph sixteen of subsection (a) of section one thousand one hundred thirteen of this chapter . . . .
The Department's opinions have generally considered as financial guaranty insurance any bond where the principal performance guaranteed is the payment of a debt obligation and as surety insurance any bond where the debt obligation is not the principal obligation, but may be incidental, except where the statute defines the debt obligation explicitly as surety insurance or contains an exclusion.
The failure of the tenant to pay the rent falls within the definition of financial guaranty insurance quoted above; specifically, the failure to pay a monetary obligation as the result of a financial default. A bond guaranteeing the tenant’s payment of the rent does not come within any of the specific provisions of § 1113(a)(16) and, by virtue of the exclusionary language of subparagraph (E), does not come within that provision either.
An attempt was made to distinguish several opinions of this Department, including OGC Opinion 92-117 (NILS)1, which concluded that bonds guaranteeing rental obligations under a lease were financial guaranty insurance. It was stated that those opinions differ from the present issue because the proposed bond would guarantee non-financial obligations in addition to the rental obligation, including inhabiting the rented premises in a specified manner and to return the premises in an undamaged condition. It was noted that a Property Bureau letter, dated May 1, 2003, stated that a surety bond that guarantees loss arising not only from the payment of rental payments under a lease agreement, but also from the failure to perform various other non-monetary lease obligations, is within the definition of fidelity and surety insurance.
A bond that guaranteed non-monetary lease obligations only, such as maintaining the premises in an undamaged condition, would constitute surety insurance. However, the proposed bond would not be so limited since it would also be a guaranty of the payment of the rent. The rental guaranty is not incidental to the non-monetary performance guaranty; rather, the bond would be guarantying separate and distinct obligations. An insurer’s writing authority is limited by the definitions of the kinds of insurance contained in § 1113 and other sections of the Insurance Law, including, in particular, § 6901(a). An insurer may not combine kinds of insurance that it is not licensed to write within a policy or contract covering insurance of the kinds that it is authorized to write.
Hence, the bond would go beyond the permissible parameters of surety insurance and involve financial guaranty insurance as well. Since a financial guaranty insurer may write surety insurance in addition to financial guaranty insurance, only a financial guaranty insurer may write the proposed policy.
Please note that to the extent that the Property Bureau’s May 1, 2003, letter states that a lease guaranty contract is surety insurance and not financial guaranty insurance, it is withdrawn.
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.
1 Please note that although the NILS opinion carries a November date, it was actually an opinion by the undersigned dated October 1, 1992. The November date reflects the opinion’s publication in Counsel’s Corner in the November 1992 issue of the Department’s Bulletin, not its issuance date.