OGC Opinion No. 06-08-09

The Office of General Counsel issued the following opinion on August 15, 2006, representing the position of the New York State Insurance Department.

Guaranteeing a security deposit

Question Presented:

Would the guaranteeing of a renter's security deposits whereby the company will indemnify the landlord in the case of any breach by the renter constitute the doing of an insurance business in New York?

Conclusion:

Yes, the guaranteeing of a renter's security deposits in this situation constitutes the doing of an insurance business in New York and would require licensing as an insurer and may not be offered for sale in New York except by an authorized insurer.

Facts:

The inquirer stated that he wished to guaranty security deposits for renters. The inquirer specified that he would be entering into agreements with the renters as well as the landlords. The agreement would state that in the event that a renter misused the rental or breached his or her lease, the inquirer's company will indemnify the landlord and the renter would be required to reimburse the inquirer. The inquirer stated that he would receive some money from the renters in advance but not enough to cover the entire security deposit. The inquirer also stated that this agreement is the only relationship that he would have with the renters and landlords.

Analysis:

N.Y. Ins. Law § 1101 (McKinney Supp. 2006), provides, in pertinent part:

(a)(1) "Insurance contract" means any agreement or other transaction whereby one party, the "insurer", is obligated to confer benefit of pecuniary value upon another party, the "insured" or "beneficiary", dependent upon the happening of a fortuitous event in which the insured or beneficiary has, or is expected to have at the time of such happening, a material interest which will be adversely affected by the happening of such event.

(2) "Fortuitous event" means any occurrence or failure to occur which is, or is assumed by the parties to be, to a substantial extent beyond the control of either party.

(3) "Contract of warranty, guaranty or suretyship" means an insurance contract only if made by a warrantor, guarantor or surety who or which, as such, is doing an insurance business.

(b)(1) Except as provided in paragraph two, three or three-a of this subsection, any of the following acts in this state, effected by mail from outside this state or otherwise, by any person, firm, association, corporation or joint-stock company shall constitute doing an insurance business in this state and shall constitute doing business in the state within the meaning of section three hundred two of the civil practice law and rules.

(A) making, or proposing to make, as insurer, any insurance contract, including either issuance or delivery of a policy or contract of insurance to a resident of this state or to any firm, association, or corporation authorized to do business herein, or solicitation of applications for any such policies or contracts;

(B) making, or proposing to make, as warrantor, guarantor or surety, any contract of warranty, guaranty or suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the warrantor, guarantor or surety;

N.Y. Ins. Law § 1102(a) (McKinney Supp. 2006) prohibits any person, firm, association, corporation, or joint-stock corporation from doing an insurance business in New York unless authorized by a license in force pursuant to the Insurance Law, or exempted by the provisions of the Insurance Law from such requirement. Any person aiding an unauthorized insurer in doing an insurance business would be in violation of N.Y. Ins. Law § 2117(a) (McKinney Supp. 2006).

The making of a guaranty constitutes the doing of an insurance business if done as a vocation and not as merely incidental to any other legitimate business or activity of a guarantor or surety¹. While the Insurance Law does not define "guaranty", in general, a guaranty is "a promise for the payment of some debt, or the performance of some duty, in case of the failure of another who is liable in the first instance." Black's Law Dictionary 712 (8th ed. 1999). "A surety differs from a guarantor, who is liable to the creditor only if the debtor does not meet the duties owed to the creditor; the surety is directly liable." Black's Law Dictionary 712 (8th ed. 1999).

The inquirer stated that his company would only pay the landlord in the event that the renter misuses the rental or breaches his or her lease; hence the inquiry deals with a guarantor and not a surety. The inquirer also stated that this agreement is the only relationship that he would have with the renters and landlords. Therefore, it is not incidental to any other legitimate business or activity but is rather being done as a vocation. Accordingly, the agreement would constitute insurance, within the meaning of the Insurance Law. Under the proposed program, the company would be acting as an insurer without a license and would be in violation of Section 1102, unless it became licensed as an insurer.

For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.

¹ N.Y. Ins. Law § 1101(b)(3-b) (McKinney Supp. 2006)