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The Office of General Counsel issued the following informal opinion on November 16, 2001, representing the position of the New York State Insurance Department.

RE: Financial Guaranty Insurance

Questions Presented:

1) In the inquiry sent to the Department, a reference was made to a "surety deposit bond", which was described as a contract that would obligate an insurer to pay the deposit on a real estate purchase agreement in the event the builder-purchaser defaulted in making its payment. Does such a contract constitute fidelity and surety insurance under N.Y. Ins. Law § 1113(a)(16) (McKinney 2000)?

2) Is an authorized property/casualty insurer authorized to transact such insurance?


1) No. The contract that was described in the inquiry, and denominated a "surety deposit bond", is financial guaranty insurance, which is authorized by N.Y. Ins. Law § 1113(a)(25) (McKinney 2000) and defined by N.Y. Ins. Law § 6901(a) (McKinney 2000).

2) No. As provided by N.Y. Ins. § 6904(a) (McKinney 2000), only a corporation licensed pursuant to N.Y. Ins. Law § 6902 (McKinney 2000) to transact financial guaranty insurance may do so.


The chairman of a private equity investment firm ("firm") described in his inquiry the firm’s engagement in a land acquisition and development program whereby the firm will purchase residential real estate selected by a builder, which will develop the realty. The builder will then enter into an option-to-purchase agreement to buy the realty from the firm. The firm will require the builder to remit a deposit in an amount equal to twenty percent of the firm’s gross investment in the project. The deposit may be posted by cash, irrevocable letter of credit, or "surety deposit bond". The firm’s chairman described the "surety deposit bond" as a contract that obligates an insurer to pay the amount of the deposit in the event the builder defaults in making its payment. The firm plans to assign its interest in the "surety deposit bond" to the financial institution that finances the firm’s real estate purchase. The chairman’s inquiries were made with respect to the contract that he denominated a "surety deposit bond".


Fidelity and surety insurance is defined by N.Y. Ins. Law § 1113(a)(16) (McKinney 2000), which states in relevant part:

(16) "Fidelity and surety insurance," means:

* * *

(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;

* * *

(E) Becoming surety on, or guaranteeing the performance of, any lawful contract, not specifically provided for in this paragraph, except . . . 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 . . . .

Financial guaranty insurance is an authorized kind of insurance pursuant to N.Y. Ins. Law § 1113(a)(25) (McKinney 2000), which states: "’Financial guaranty insurance’, means the kind of insurance defined in paragraph one of subsection (a) of section six thousand nine hundred one of this chapter."

N.Y. Ins. Law § 6901(a) (McKinney 2000) states in relevant part:

(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[.] (emphasis added)

Thus, the principal distinction between financial guaranty insurance and surety insurance generally rests on whether the primary obligation guaranteed is a financial debt (such as payment of a deposit) or is some other type of performance (e.g., delivery of goods), unless it comes within one of the other provisions contained in N.Y. Ins. Law § 1113(a)(16) (McKinney 2000), such as subparagraph (D) or (E). Hence, the contract that was denominated a "surety deposit bond" in the firm’s inquiry is financial guaranty insurance under the New York Insurance Law.

Financial guaranty insurance may not be transacted by an authorized property/casualty insurer because N.Y. Ins. Law § 6904(a) (McKinney 2000) states that "[f]inancial guaranty insurance may be transacted in this state only by a corporation licensed for such purpose pursuant to section six thousand nine hundred two of this article." N.Y. Ins. Law § 6902 (McKinney 2000) states that "[a] financial guaranty insurance corporation may be organized and licensed in the manner prescribed in section one thousand two hundred one of this chapter and a foreign insurer may be licensed in the manner prescribed in section one thousand one hundred six of this chapter" subject to the additional organization and financial requirements that are contained in N.Y. Ins. Law § 6902. N.Y. Ins. Law § 6902(a)(1) (McKinney 2000) prohibits a financial guaranty insurer from transacting any other kind of insurance except for the following additional kinds of insurance:

(A) residual value insurance, as defined in paragraph twenty-two of subsection (a) of section one thousand one hundred thirteen of this chapter;

(B) surety insurance, as defined in subparagraphs (C), (D), (E) and (F) of paragraph sixteen of subsection (a) of section one thousand one hundred thirteen of this chapter; and

(C) credit insurance, as defined in subparagraph (A) of paragraph seventeen of subsection (a) of section one thousand one hundred thirteen of this chapter[.]

With reference to the inquiry as to whether the firm’s assignment of its interest in the contract constituted a financial guaranty, that inquiry is essentially moot since the transaction from its inception constituted financial guaranty insurance

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

Department of Financial Services


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