OGC Opinion No. 06-09-06

The Office of General Counsel issued the following opinion on September 14, 2006, representing the position of the New York State Insurance Department.

Re: Statement of guarantee/doing an insurance business

Question Presented:

Would an insurer that is not authorized to do an insurance business in New York be doing an insurance business when it undertakes to guarantee the non-insurance obligations of its structured settlement company subsidiary where the structured settlement company has purchased an annuity, which is issued by another subsidiary that is an authorized insurer in New York, to fund its obligations under the structured settlement?

Conclusion:

Under the circumstances described in this opinion, such a guarantee by the unauthorized insurer would not constitute the doing of an insurance business in New York.

Facts:

A foreign life insurer (FLI) is not authorized to do business in New York. NYLI, a New York authorized insurer, is a wholly-owned subsidiary of FLI. FLI has another subsidiary (SSC), a non-insurer domiciled in State X. NYLI does not have any ownership interest in, or control of, SSC.

SSC acts as a structured settlement company in connection with settlements where a structured settlement annuity is purchased from FLI or NYLI. The structured settlement comes about when a property/casualty insurer and a claimant settle a liability claim by utilizing periodic payments. The property/casualty insurer assigns to SSC its obligations to make the periodic payments to the claimant, thereby discharging the property/casualty insurer from any further obligations under the settlement. SSC purchases a structured settlement annuity contract from NYLI for claims settled in the State of New York and from FLI in other states. The payments under the annuity are made directly to the settling claimant.

SSC remains liable to the settling claimant for the agreed-upon periodic payments, notwithstanding the purchase of the structured settlement annuity. If the insurer that issues the annuity were to default, SSC would continue to be obligated to make payments to the settling claimant.

FLI has made to SSC an irrevocable guaranty of SSC's payment obligations resulting from all qualified assignments to which SSC is a party. The guaranty extends to qualified assignments where an NYLI structured settlement annuity is purchased. The payment obligation guaranteed is that of SSC and not NYLI; NYLI is not a party to the guarantee. NYLI states that the guaranty was issued by FLI to SSC in State X.

FLI provides a Statement of Guarantee to individual settling claimants where SSC is the qualified assignee. Originally, the Statement contained a reference to the policy number of the structured settlement annuity purchased by SSC from NYLI. After discussion, it was agreed that FLI will modify its existing Statement and remove the policy number from it. It was also agreed that a disclaimer would be added to the Statement of Guarantee to the effect that the Guarantee is not an insurance contract and does not guarantee any obligation under an insurance contract.

As revised, the Statement of Guarantee will now provide, in pertinent part:

Whereas [SSC]...has established certain structured settlement arrangements and assumed third party payment obligations to injured parties ("Claimants") through Qualified Assignments, as defined in Internal Revenue Code Section 130; and

Whereas SSC has entered into a Qualified Assignment; and

Whereas [FLI] desires to facilitate such structured settlement arrangements; and

Whereas [FLI] guarantees all obligations of SSC to make payments to claimants under Qualified Assignments (This Guarantee is not an insurance contract and does not guarantee any obligation under an insurance contract). [sic]

Now, therefore, [FLI] guarantees that if SSC shall fail to make any payment to the Claimant or Beneficiary[ies] as required under said Qualified Assignments, then [FLI] shall make such payment(s) in accordance with the terms and conditions of the Qualified Assignment promptly after receipt of written notice of SSC’s default.

Said guarantee is irrevocable as to the above referenced Claimant.

The Statement of Guarantee does not identify the insurer that issues the annuity contract and in fact does not even mention the annuity contract.

Analysis:

Although the inquirer states that the guaranty was issued by FLI to SSC in State X, we disagree. The sole evidence of the guaranty is the Statement of Guarantee that is provided by FLI to the claimant in New York. Accordingly, the transaction occurs in New York. Hence, the question is whether FLI is doing an insurance business in making the guaranty in New York.

N.Y. Ins. Law § 1101 (McKinney 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 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.

Unless the parent guarantees insurance obligations of its subsidiary, this Department has generally considered a guaranty by a parent to its subsidiary to be incidental to the parent's legitimate business or activity. The mere fact that the guarantor is also an insurer does not preclude it from making such an incidental guaranty. The Department was initially concerned with the original guaranty because it specified the NYLI policy number on it, which gave the impression that FLI was guaranteeing the NYLI annuity contract. However, the removal of the policy number and the addition of the disclaimer make it clear that FLI is guaranteeing only SSC's non-insurance obligations under the structured settlement, and not NYLI’s obligations under the annuity, which is not mentioned or referred to. Accordingly, the making of the proposed guaranty would not violate § 11021.

However, the parenthetical sentence "This Guarantee is not an insurance contract and does not guarantee any obligation under an insurance contract" should be moved from the fourth "Whereas" clause to either the end of the "Now, therefore…" paragraph that contains the actual guarantee or to the end of the guaranty.

A second issue arises as to whether any of the parties would be calling attention to an unauthorized insurer in violation of N.Y. Ins. Law § 2122(b)(2) (McKinney 2006), which provides:

(2) No insurance agent, insurance broker or other person, [sic] shall by any advertisement or public announcement in this state, call attention to any unauthorized insurer or insurers.

FLI makes the guaranty solely in its legitimate capacity as SSC's parent and not as an insurer (a fact further clarified by the addition of the disclaimer that the Notice of Guarantee is not an insurance contract). FLI is also not seeking to advertise or hold itself out as an insurer or undertake any other activity in this State. Accordingly, under these circumstances, none of the parties are calling attention to an unauthorized insurer within the meaning of § 2102(b)(2).

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

1 Please note that this opinion does not address financial and other concerns that the Department might have were ALNY or another authorized New York insurer to engage in similar guarantees. Any obligations under such guarantees would be considered as part of the Department's overall financial regulation of the insurer.