The Office of General Counsel issued the following informal opinion on November 12, 2002, representing the position of the New York State Insurance Department.
Re: Excess Financial Guaranty Insurance
- What is the "New York Financial Guaranty" law?
- How would this law affect the writing of excess financial guaranty insurance in California?
- Why would this law affect a California licensed carrier?
- Why is excess financial guaranty insurance prohibited?
1. There is no "New York Financial Guaranty law". There is, however, a form of insurance classified as financial guaranty insurance. Such insurance is defined and governed by the provisions of Article 69 of the New York Insurance Law.
2. The New York Insurance Law does not govern insurance that is written in a state other than New York where there is no connection with New York. However, a New York licensed company that is not licensed to write financial guaranty insurance in New York would not be permitted to write such coverage elsewhere.
3. New York law would only affect a California licensee to the extent that such licensee is also licensed by New York.
4. Excess financial guaranty insurance is not prohibited. However, it is essentially a "monoline" type of coverage, and may only be written by a carrier licensed to write it.
An insurance broker states that one of his clients, a bank located in California, has expressed an interest in obtaining "excess FDIC insurance", i.e., deposit insurance for balances exceeding the $100,000 limit provided by the Federal Deposit Insurance Corporation.
The insurance broker has approached two insurers, ABC and XYZ (both of which are foreign insurers licensed in California and New York), and has been informed by these insurers that they are prohibited from writing such coverage. The insurance brokers inquiry seeks an explanation of the applicable laws containing such a prohibition.
Financial guaranty insurance is defined under the New York Insurance Law as follows:
"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;
(B) changes in the levels of interest rates, whether short or long term or the differential in interest rates between various markets or products;
(C) changes in the rate of exchange of currency;
(D) changes in the value of specific assets or commodities, financial or commodity indices, or price levels in general; or
(E) other events which the superintendent determines are substantially similar to any of the foregoing.
Although the above-quoted provision defines financial guaranty insurance, the types thereof that constitute permissible financial guaranty insurance are set forth in N.Y. Ins. Law § 6904 (McKinney 2000). That section provides in relevant part as follows:
Permissible guaranties. (1) The superintendent shall not permit the writing of financial guaranty insurance except as defined in subparagraph (A) of paragraph one of subsection (a) of section six thousand nine hundred one of this article, and a corporation may insure the timely payment of United States dollar debt instruments, or other monetary obligations, only in the following categories:
(A) municipal obligation bonds;
(B) special revenue bonds;
(C) industrial development bonds;
(D) corporate obligations;
(E) partnership obligations;
(F) asset-backed securities, trust certificates and trust obligations ;
(G) installment purchase agreements executed as a condition of sale;
(H) consumer debt obligations;
(I) utility first mortgage obligations; and
(J) any other debt instrument or financial obligation that the super- intendent determines to be substantially similar to any of the foregoing or shall otherwise be approved by the superintendent.
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The coverage that the insurance broker desires to obtain for his client would fall squarely within the scope of the definition in N. Y. ins. Law § 6901(a)(1)(A) and would be considered by this Department to constitute financial guaranty insurance.
Under the New York Insurance Law, financial guaranty insurance is considered a monoline type of coverage, and companies that offer such coverage may not write other types of business. See, N.Y. Ins. Law § 6092(a) (McKinney 2000). The rationale for this restriction was in part the public policy concern that property/casualty and other types of insurers would use most of their surplus to write financial guaranty business to the detriment of providing other types of coverage, particularly in personal lines. There was also concern about the potentially large losses to which an insurer could be exposed in connection with the writing of financial guaranty business.
As financial guaranty insurance is a monoline type of business, neither of the companies named in the inquiry, as property/casualty insurers, would be permitted to write such business in New York. Similarly, neither would be able to write such business outside of New York while maintaining a New York license. N.Y. Ins. Law § 1106(f) prevents a foreign insurer licensed in New York from doing outside of New York what it cannot do within New York. That section provides in pertinent part, as follows:
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.
Further, although the insurers in question may not write financial guaranty insurance directly, the New York Insurance Law permits property/casualty insurers that meet certain thresholds to reinsure financial guaranty risks. N. Y. Ins. Law § 6906(a) (McKinney 2000) provides, in pertinent part, as follows:
For financial guaranty insurance that takes effect on or after the effective date of this article, an insurer authorized to transact financial guaranty insurance shall receive credit for reinsurance provided that such reinsurance is:
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(2) placed with a property/casualty insurer or an accredited reinsurer licensed or accredited to reinsure risks of every kind or description (including municipal obligation bonds), as set forth in subsection (c) of section four thousand one hundred two of this chapter, if the reinsurance agreement with such insurer requires that such insurer:
(A) have and maintain surplus to policyholders of at least thirty-five million dollars;
(B) establish and maintain the reserves required in section six thousand nine hundred three of this article, except that if the reinsurance agreement is not pro rata the contribution to the contingency reserve shall be equal to fifty percent of the quarterly earned reinsurance premium. However, the assuming insurer need not establish and maintain such reserve to the extent that the ceding insurer has established and continues to maintain such reserve;
(C) comply with the provisions of subsection (c) of section six thousand nine hundred four of this article, except that the maximum total exposures reinsured net of retrocessions and collateral shall be one-half of that permitted for a financial guaranty insurance corporation .
For further information you may contact Supervising Attorney Michael Campanelli at the New York City Office.
1 This Office has previously ruled that excess deposit insurance constitutes financial guaranty insurance under New York law. See Office of General Counsel Opinion No. 90-54 (NILS, June 1, 1990) and Office of General Counsel Opinion No. 90-16 (NILS, February 15, 1990).
2 Arguably, financial guaranty companies are not strictly monoline insurers in that such companies may also offer residual value, surety and credit insurance. N.Y. Ins. Law § 6902(a)(1)(McKinney 2000). These products, however, are financial in nature and generally do not make up a significant part of most financial guaranty insurers business.