The Office of General Counsel issued the following opinion on June 11, 2002, representing the position of the New York State Insurance Department.
Re: Financial Responsibility Requirements Under N.Y. Ins. Law § 7903 (McKinney 2000) and Regulation 155.
May the Superintendent waive the requirement for audited financial statements, contained in N.Y. Comp. Codes R. & Regs. tit. 11, § 390.10 (2001) (Regulation 155), for service contract providers that elect to comply with N.Y. Ins. Law § 7903(c)(2) (McKinney 2000)?
No. Pursuant to N.Y. Comp. Codes R. & Regs. tit. 11, § 390.10 (2001)(Regulation 155) a service contract provider that elects to comply with section 7903(c)(2) must submit an audited financial statement, in addition to complying with the requirements for establishing and maintaining a funded reserve account, and placing a financial security deposit in trust with the Superintendent. There is no provision in the regulation that allows the Superintendent the discretion to waive this requirement.
The inquirer seeks a clarification of the requirements for a funded reserve account, financial security deposit and audited financial statement under section 390.10 of Regulation 155. The inquirer states that section 390.10(a) requires audited financial statements, in addition to the funded reserve account and financial security deposit. However, N.Y. Ins. Law § 7903(c)(2)(McKinney 2000) does not include a requirement for financial statements. The inquirer would like to know whether the Superintendent would consider waiving this requirement by accepting an unaudited financial statement.
The New York Service Contract Law was enacted by Chapter 614 of the Laws of 1997, effective January 15, 1998, which amended several sections of the Insurance law and added a new Article 79 to the Insurance Law. Article 79 exempts the business of service contracts from all other provisions of the Insurance Law and establishes a framework by which service contract providers must be registered with, and subject to the jurisdiction of the Superintendent. N.Y. Ins. Law § 7903(c) (McKinney 2000) provides alternative methods by which a service contract provider can demonstrate financial responsibility. Section 7903(c) provides, in pertinent part, as follows:
(c) In order to assure the faithful performance of a providers obligations to its contract holders, each provider who is contractually obligated to provide service under a service contract shall comply with one of the following three paragraphs of this subsection:
(1) insure the performance of all its obligations under all service contracts pursuant to a service contract reimbursement insurance policy issued by an insurer authorized to issue service contract reimbursement insurance in this state. . . .
(2) (A) maintain a funded reserve account for its obligations under its service contracts issued and outstanding in this state . . . and
(B) place in trust with the superintendent a financial security deposit . . .
(3) (A) maintain a net worth or stockholders equity of at least one hundred million dollars; and
(B) provide the superintendent with a copy of the financial statements of the provider, either on a stand alone basis or consolidated with its consolidated affiliates, included in its or its direct or indirect parent companys most recent annual report on form 10-K or form 20-F filed with the securities and exchange commission within the last calendar year, or if the provider or its direct or indirect parent is not required to file such reports with the securities and exchange commission, a copy of the audited financial statements of the provider. . . .
N.Y. Ins. Law § 7911(McKinney 2000) gives the Superintendent authority to promulgate regulations to effectuate the provisions of Article 79 of the Insurance Law. In accordance with section 7911, N.Y. Comp. Codes R. & Regs. tit. 11, §§ 390.0-390.13 (2001)(Regulation 155) was promulgated to implement, interpret and clarify Chapter 614 of the Laws of 1997. Section 390.10(a) provides, in relevant part, as follows:
(a) a service contract provider that elects to meet the requirements of section 7903(c)(2) of the Insurance Law as the means to assure the faithful performance of its obligations under service contracts outstanding in this State shall in accordance with the provisions of this section:
(1) establish and maintain a funded reserve account;
(2) place in trust a financial security deposit with the superintendent and
(3) file audited financial statements with the superintendent.
Thus, pursuant to section 390.10(a), a service contract provider must provide an audited financial statement, in addition to complying with the requirements for establishing and maintaining a funded reserve account, and placing a financial security deposit in trust with the superintendent, if it chooses section 7903(c)(2) as a method of demonstrating financial responsibility.1
Section 390.10(d) further requires annual submission of audited financial statements. The purpose of the audited financial statement is to show how the service contract provider meets the reserve and trust requirements set forth in section 7903(c)(2)(A) and how the assets in the account and trust meet the requirements set forth in subdivisions (b) and (c) of section 390.10. See N.Y. Comp. Codes R. & Regs. tit. 11, § 390.10(d)(2)(2001)(Regulation 155). There is no provision in the regulation that allows the Superintendent the discretion to waive the requirement for audited financial statements contained in section 390.10 of the Regulation.
Section 390.10 of the regulation is consistent with the legislative purposes of Chapter 614 of the Laws of 1997. In its memorandum in support of the bill, the New York State Senate stated, inter alia, that the bill would "enable consumers to procure service contracts from financially stable and qualified service contract providers, who would be required to register with the New York State Insurance Department and make fair disclosure of the rights and duties of providers and consumers under the service contracts." See Memorandum of the New York State Senate, Service Contracts--Requirements--Reimbursement Insurance, 220th Sess., at 2586 (N.Y. 1997). The audited financial statements are necessary for the Superintendent to evaluate whether the provider meets the financial responsibility requirements.
Accordingly, a service contract provider that elects to comply with section 7903(c)(2) must satisfy the requirements of section 390.10 of Regulation 155.
For further information, you may contact Attorney Pascale Joasil at the New York City office.
1 Please note that the inquirer may also have the option of demonstrating financial responsibility, without providing an audited financial statement, through electing to comply with section 7903(c)(1).