The office of General Counsel issued the following informal opinion on June 16, 2000, representing the position of the New York State Insurance Department.
Re: Credit Insurance Policy Issued to Financial Institution
Question Presented:
May a credit insurance policy be issued to a financial institution to whom a merchant has assigned ownership interests in trade receivables from sales effectuated under debt instruments, or would such insurance constitute financial guaranty insurance?
Conclusion:
Yes, a credit insurance policy may be issued to a financial institution, which is the assignee of the trade receivables of a merchant. Such insurance does not constitute financial guaranty insurance.
Facts:
There is an insurance company (the "Company") that is not licensed in New York but which does an insurance business in New York on an excess lines basis. The Company ordinarily issues credit insurance policies to merchants to cover the risk of default by the merchant's customers on trade receivables upon goods or services sold them by the merchant on credit. However in many instances the merchant assigns ownership interests in the trade receivables to a financial institution (the "Assignee") and, in such instances, the Company may be asked to issue the credit insurance policy directly to the Assignee rather than the merchant.
Attached to the inquiry is a sample credit insurance policy that would be issued to a financial institution under the foregoing circumstances and described the salient features of such a policy. Re-stated here are some of those features which are most relevant to the analysis which follows. The Assignee is the sole insured under the policy. It has purchased from a merchant an undivided ownership interest in a pool of trade receivables, which represent debts arising from the merchant's sale of goods and services to its customers. Under the purchase agreement, the Assignee, without recourse to the merchant, assumes the credit and political risk that the merchant's customers will fail to pay their debts in full due to financial difficulties and/or political events. The insurance policy protects the Assignee against debt collection shortfalls resulting from the aforementioned risks. It is our understanding that the "pool" is just a way of referring, as a group, to all of the trade receivables purchased by the Assignee under the purchase agreement and that the sample insurance policy would not guarantee a securitized financial instrument backed by the trade receivables.
The insurance company asked for confirmation that such an insurance policy issued to a financial institution is credit insurance and not financial guaranty insurance under the New York Insurance Law.
Analysis:
If the coverage afforded under the sample insurance policy presented to us constitutes financial guaranty insurance it could not be written on an excess line basis by the Company in New York. Under §2105(a) of the New York Insurance Law (McKinney Supp. 2000) a New York excess line broker is not authorized to procure financial guaranty policies. However, a New York excess line broker is authorized to procure credit insurance policies from insurers, which are not authorized to transact business in New York.
The term "credit insurance" is defined in New York Insurance Law §1113(a)(17) (McKinney Supp. 2000), in pertinent part, as follows:
(17) "Credit insurance", means:
(A) Indemnifying merchants or other persons extending credit against loss or damage resulting from non-payment of debts owed to them, for goods and services provided in the normal course of their business, including the incidental power to acquire and dispose of debts so insured, and to collect any debts owed to such insurer or to the insured, but in no instance may be written as credit insurance if it 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; [Emphasis added]
"Financial guaranty insurance" is defined in N.Y. Insurance Law §6901(a)(1) (McKinney Supp. 2000), in pertinent part, as follows:
(a)(1) "Financial guaranty insurance" means a surety bond, insurance policy or, when issued by an insurer or any person doing an insurance business , 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 an obligor on or issuer of any debt instrument or other monetary obligation . 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;
(2) Notwithstanding paragraph one of this subsection, "financial guaranty insurance" shall not include:
(C) Credit insurance as defined in [§1113(a)(17)]
In 1989, financial guaranty was added as a new kind of insurance to the Insurance Law in Chapter 48 of the Laws of 1989. The new law, among other things, amended the definition of "credit insurance" contained in N.Y. Insurance Law §1113(a)(17) by adding the words "for goods and services provided in the normal course of their business" and adding language to the clause at the end of the definition which eliminates from credit insurance that which became financial guaranty insurance subject to Article 69. The Memorandum of the State Executive Department in describing the 1989 amendment to the definition of "credit insurance," states that it:
Amends paragraph 17 of subsection (a) of Section 1113 to clarify that credit insurance is limited to debts involving goods and services and to provide that any coverage which may be written as financial guaranty insurance under paragraph 25 of subsection (a) of Section 1113 of the Insurance Law cannot be written as credit insurance.
An assignment is, "A transfer or making over to another of the whole of any property, real or personal, in possession or in action, or of any estate or right therein." see, BLACK'S LAW DICTIONARY109 (5th Ed. 1979). In the instant matter the financial institution, as assignee, has through an assignment acquired property rights in trade receivables (credit payments) owed to the merchant by its customers in connection with the sale of goods or services. The financial institution_assignee has thereby succeeded to the property rights of the merchant in such trade receivables and stands in the merchant's shoes as to the credit transaction. As a result, the financial institution_assignee is entitled to receive payments of the trade receivables from the merchant's customers. Although the financial institution in this instance did not itself directly extend credit to the customers, by taking the assignment of the debt, it has stepped into the shoes of the merchant as regards the extension of credit. The customers' payments upon their debts (trade receivables) to the merchant are, following the assignment, made to the financial institution as assignee.
The financial institution has, by the assignment, also acceded to the same credit risk as the merchant had prior to the assignment which is based upon the sale of goods or services by the merchant, with all of the rights of the merchant. The credit risk for the financial institution is that the customers may not re-pay their debt. An insurance policy issued to a merchant or other person in regard to the non-payment of debts owed to them, for goods and services provided in the normal course of the merchant's business, constitutes credit insurance.
Thus, a policy of insurance issued to a person, including a financial institution that has, by assignment from a merchant, acquired the right to receive re-payment of debts owed initially to the merchant upon extensions of credit in connection with the sale of goods and services by the merchant, which insurance covers the re-payment of those debts, constitutes credit insurance.
For further information you may contact Associate Attorney Barbara Kluger at the New York City Office.