OGC Op. No. 04-04-15
The Office of General Counsel issued the following opinion on April 20, 2004, representing the position of the New York State Insurance Department.
Re: Proposed Residual Value Policy
1. Does the proposed insurance policy as described herein constitute residual value insurance and not financial guaranty insurance?
2. Are residual value insurance policies subject to the cancellation and nonrenewal requirements of N.Y. Ins. Law § 3426 (McKinney 2000 & Supp. 2004)?
3. If another state determined that the proposed policy constituted a different kind of insurance, would that affect New Yorks determination that the insurance was residual value insurance?
1. The proposed policy will be treated as residual value insurance.
2. Residual value insurance policies are not subject to the cancellation and nonrenewal requirements of N.Y. Ins. Law § 3426.
3. No, the determination by another state as to the kind of insurance a particular policy comes within has no bearing on how New York treats the coverage.
On behalf of one of the ABC insurance companies ("ABC"), a proposed insurance contract that is to be issued to a landlord and which insures against loss of economic value of a leased apartment was submitted to the Department. A revised contract was re-submitted for the Departments consideration. It was inquired whether such a contract would constitute residual value insurance. If so, ABC would apply to become licensed to write residual value insurance. It was also inquired whether residual value insurance is subject to the cancellation and nonrenewal requirements of N.Y. Ins. Law § 3426 (McKinney 2000 & Supp. 2004).
1. Kind of insurance
Residual value insurance is defined in N.Y. Ins. Law § 1113(a)(22) (McKinney 2000) to mean:
"Residual value insurance" means insurance issued in connection with a lease or contract which sets forth a specific termination value at the end of the term of the lease or contract for the property covered by such lease or contract, and which insures against loss of economic value of tangible personal property or real property or improvements thereto except loss due to physical damage to property, excluding any lease or 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.
Although the above definition reads as if residual value insurance does not include a lease or contract that falls within the definition of financial guaranty insurance, since the lease or contract is not insurance, the Department construes the provision to mean that residual value insurance does not include insurance of such a lease or contract where the insurance constitutes financial guaranty insurance.
After reviewing the proposed policy, the Department has determined that it will be treated as residual value insurance.
2. Section 3426.
The other question is whether § 3426 applies to policies providing residual value insurance. Section 3426 establishes minimum cancellation and nonrenewal provisions for certain commercial property/casualty insurance policies. Section 3426(a)(1) defines a covered policy to mean:
(1) "Covered policy" means, for purposes of this section, a policy of commercial risk insurance, professional liability insurance or public entity insurance, and shall include any contract, certificate or other evidence of such insurance.
Section 3426(l)(2), which contains certain exceptions to the section, provides:
(2) This section shall not apply to policies issued pursuant to a plan established under article fifty-three, fifty-four or fifty-five of this chapter, surety policies, policies providing workers` compensation or employers` liability coverage, financial guaranty insurance, policies providing mortgage guaranty or credit insurance, policies principally marine insurance as defined by paragraph twenty of subsection (a) of section one thousand one hundred thirteen of this chapter, legal services insurance, reinsurance contracts, policies written on an excess line basis, or policies subject to section three thousand four hundred twenty-five of this chapter.
Notwithstanding that subsection (l)(2) does not specifically exclude residual value insurance from the scope of § 3426, it is the Departments opinion that a policy of residual value insurance would not come within § 3426 because it is not a policy of commercial risk insurance, professional liability insurance or public entity insurance, and therefore not a "covered policy."
N.Y. Ins. Law § 107(a)(47), (49), and (50) (McKinney 2000 & Supp. 2004) define respectively the terms "commercial risk insurance", "professional liability insurance" and public entity insurance, to mean:
(47) "Commercial risk insurance" means insurance not subject to section three thousand four hundred twenty-five of this chapter issued or issued for delivery in this state, on a risk located in this state, insuring any of the following contingencies:
(A) loss of or damage to real property;
(B) loss of or damage to personal property;
(C) losses or liabilities arising out of the ownership, operation or use of a motor vehicle;
(D) liabilities of persons acting as officers or directors; or
(E) other liabilities, including product liability, for loss of, damage to, or injury to persons or property.
* * *
(49) "Professional liability insurance" means insurance covering liability arising out of the practice of any profession for which a license is required by a governmental authority of this state or, with respect to treatment of patients, arising out of the operation of a duly certified hospital.
(50) "Public entity insurance" means commercial risk insurance issued to a public entity [as defined in § 107(a)(51).]
Since both public entity insurance and professional liability insurance are subsets of commercial risk insurance, they do not have to be separately analyzed for the purposes of this opinion.
A residual value policy covers loss of economic value of tangible personal property or real property. It does not insure against loss of or damage to such property or the liability of the insured to third persons. Nor does the Department think that the phrase "losses arising out of the ownership, operation or use of a motor vehicle" applies to the loss of economic value of a motor vehicle. Hence, a residual value policy is not a covered policy of commercial risk insurance, professional liability insurance or public entity insurance.
Although § 3426(l) appears to have been intended as a comprehensive list of the kinds of property/casualty insurance excluded from § 3426, the absence of residual value insurance from the provision does not mean that it was intended that residual value insurance be included within the section.
Accordingly, the Department concludes that § 3426 does not apply to residual value insurance.
3. Other states determination
Concern was all expressed that if another state determined that this policy did not come within residual value insurance under the other states law, that this would affect New Yorks treatment of the coverage.
New Yorks analysis of what kind of insurance a particular insurance policy or contract comes within is based solely on the definitions of the kinds of insurance contained in the New York Insurance Law and does not follow the treatment of the insurance in other jurisdictions. Hence, New Yorks conclusion that the coverage constitutes residual value insurance is unaffected by another states classification of the coverage.
Please note that to the extent that the Property Bureaus May 1, 2003, letter states that a lease guarantee contract is surety insurance and not financial guarantee insurance, it is withdrawn. Please also note that should proposed legislation be enacted regarding lease guarantee contracts, the Department would consider this opinion superseded by such legislation.
This opinion does not constitute an approval of the policy that was submitted. The review and ultimate approval, if acceptable, of the policy form, is within the purview of the Property bureau.
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.