The Office of General Counsel issued the following informal opinion on August 10, 2000, representing the position of the New York State Insurance Department.
Re: Motor Vehicle Repossession Insurance
Questions Presented:
1. Would the proposed insurance policy constitute residual value insurance or financial guaranty insurance?
2. Assuming that the policy contains financial guaranty coverages, may the insurer write the policy outside of New York?
Conclusions:
1. While most of the proposed policy constitutes residual value insurance, the coverage dependent upon a court bankruptcy order constitutes financial guaranty insurance.
2. Based upon the insurers affirmations, the Superintendent has determined that the writing of such coverage outside New York by this foreign insurer would not be prejudicial to the best interests of the people of this state.
Facts:
ABC is a foreign insurer licensed to do business in New York as a multi-line property/casualty insurer. One of the kinds of insurance it is licensed to write is residual value insurance pursuant to N.Y. Ins. Law § 1113 (a) (22) (McKinney 1985 & Supp. 2000). It is not licensed to write financial guaranty insurance, nor may it write such coverage as a multi-line property/casualty insurer.
ABC has requested that the Department review a proposed policy form that this insurer would like to sell outside of New York. ABC has no plans at this time to offer the coverage in New York.
Analysis:
ABCs policy would provide coverage to a motor vehicle lender, such as a bank. The policy would cover the lenders interest in the motor vehicle, which is the collateral pledged to secure a loan. An endorsement to the policy would insure the lender in the event the vehicle was repossessed and sold after the vehicle owner/borrower defaulted on the loan. The policy would cover the motor vehicle repossession loss, which is the insured lenders interest in the collateral (essentially, the balance due under the loan), computed as of the date of sale less the repossession sale proceeds. The policy would define repossession sale proceeds as the greater of (1) the gross sale price of the vehicle after sale and (2) the "trade-in" value of the appropriate regional edition of the National Auto Dealer Association (NADA) then in effect at the date of sale less $1,500.
In the event that a bankruptcy order was issued by a court prohibiting repossession by the lender, the policy would deem the bankruptcy order to be a "constructive sale". The repossession sale proceeds would mean the "trade-in" value of the NADA regional edition then in effect at the "date of sale" (i.e., the date of the bankruptcy order).
Residual value insurance is defined in N.Y. Ins. Law § 1113 (a) (22) (McKinney 1985 & Supp. 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
While the law 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 provision must be read to mean that residual value insurance does not include insurance of such a lease or contract where the insurance is financial guaranty insurance.
Financial guaranty insurance is defined in N.Y. Ins. Law § 6901 (McKinney Supp. 2000), in pertinent part, to mean:
As used in this article: (a)(1) "Financial guaranty insurance" means a surety bond, insurance policy or, when issued by an insurer or any person doing an insurance business as defined in paragraph one of subsection (b) of section one thousand one hundred one of this chapter, 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 any obligor on or issuer of any debt instrument or other monetary obligation (including equity securities guarantied under a surety bond, insurance policy or indemnity contract) 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;
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(2) Notwithstanding paragraph one of this subsection, "financial guaranty insurance" shall not include:
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(E) residual value insurance as defined in paragraph twenty-two of subsection (a) of section one thousand one hundred thirteen of this chapter.
In ABCs original proposal, the trigger for the coverage was the default of the borrower. As such, the coverage would have been financial guaranty insurance because it was conditioned upon a "financial default or insolvency". As revised, the trigger is now the sale of the vehicle, except in the case of a bankruptcy order.
Where there is no bankruptcy order, the coverage would be residual value insurance. This coverage under the policy is similar to another insurance product that was addressed in an October 24, 1996 opinion, in which the same conclusion was reached. The coverage insures against the loss of economic value of tangible personal property (the motor vehicle) since it excludes the greater of the amount realized after a sale of the vehicle or the trade-in value under the NADA book.
The loan agreement establishes a specific termination value at the end of the agreement for the vehicle. This is the motor vehicle repossession loss provided for in the policy. While the repossession loss will vary depending upon when the loan agreement terminates, at any given termination date of the agreement, the termination value is ascertainable, in accordance with the method described in the policy. It is not necessary for there to be a specific dollar amount or a specific termination date for the loan agreement.
A key element of financial guaranty insurance is not present in this part of the coverage since the coverage is not conditioned upon the default of the borrower. Even though the vehicle will typically be repossessed only after a default, the trigger for the coverage is the sale of the vehicle. If the vehicle is not sold, there is no coverage. For these reasons, the coverage is residual value insurance where there is no bankruptcy order.
However, where there is a bankruptcy order, the result is different. In such a case, there has been no sale of the vehicle and the loan has not been terminated. ABC surmised that the bankruptcy order should be treated as a constructive termination of the loan because the court may effectively rewrite the terms of the loan. Nonetheless, the obligation to the lender by the borrower remains even though the terms may change. The lender does not take possession of the vehicle nor can it sell the vehicle. The coverage remains based upon a "financial default or insolvency" and would constitute financial guaranty insurance.
ABC, as a multi-line property/casualty insurer is not, and may not, be licensed to write financial guaranty insurance in New York. N.Y. Ins. Law § 1106 (f) (McKinney 1985) provides:
No foreign insurer and no United States branch of an alien insurer which does outside of this state any kind or combination of kinds of insurance business not permitted to be done in this state by similar domestic insurers hereafter organized, shall be or continue to be authorized to do an insurance business in this state, unless in the judgment of the superintendent the doing of such kind or combination of kinds of insurance business will not be prejudicial to the best interests of the people of this state.
Under this section, the Superintendent has discretion to permit a foreign insurer to write a kind of insurance outside of New York that the insurer is not authorized to write in New York, upon a demonstration that writing such coverage would not be prejudicial to the best interests of the people of New York. Often, the concern is that writing the coverage could cause a financial drain upon the insurer that may adversely affect New York policy holders.
ABC asserted that the coverage upon a bankruptcy order would rarely be invoked. A letter from a financial and risk management firm was submitted which stated that out of 4,193 loans, only 57 claims were made, and not one was a claim made due to a Chapter 13 bankruptcy, although a total of three such claims was anticipated. ABC stated that it needed to provide such coverage, nonetheless, in order to compete in other states with other insurers that include the coverage.
The financial guaranty law prohibits multi-line property/casualty insurers from writing financial guaranty insurance because of the high degree of risk involved in writing large financial obligations. However, it appears that the actual financial guaranty risk under the proposed policy is minimal based upon both the anticipated number of claims and the potential size of the claims. In fact, the nature of the risk when there is a court order is really no different than when there is no court order. It is even perhaps less so since, as the borrower pays off the obligation to the lender under the court order, the lender would have to reimburse the insurer to prevent unjust enrichment.
Under these circumstances, and after consultation with the Property Bureau, ABC was advised that the Superintendent had determined that the doing of such kind or combination of kinds of insurance business outside of New York by issuing the proposed policy would not be prejudicial to the best interests of the people of this state. However, this determination was limited solely to the policy in question and was based upon ABCs assertions that successful claims will be few in number. Should it prove to be otherwise, the Property Bureau must be immediately advised.
For further information you may contact Supervising Attorney Paul A. Zuckerman at the New York City Office.