The Office of General Counsel issued the following opinion on February 19, 2004 representing the position of the New York State Insurance Department.
Re: Issuance of Surety Bonds Licensing Requirement
If a general contractor guarantees or indemnifies the owner of a construction project for work performed by a subcontractor, must the general contractor be licensed as an insurer by the New York State Insurance Department?
No, if the general contractor is simply acting as a co-guarantor with its subcontractors in a manner that is incident to its normal business activities, and is not providing guaranties on behalf of unrelated parties as a vocation, then the general contractor need not be licensed as an insurer.
The inquirer represents a construction management firm, which, acting as a general contractor, does business with a select few painting subcontractors. Surety bonds are required for many of the projects in which the inquirers client is involved. The inquirers client does not intend to issue any policies or surety bonds, but intends to act as a co-guarantor of work performed by the subcontractors on projects that would otherwise require the provision of a surety bond by the subcontractor.
N.Y. Ins. Law § 1102(a) (McKinney 2000) prohibits any person, firm, association, corporation or joint-stock company from doing an insurance business in this state, unless licensed as an insurer or exempted from licensing.
N.Y. Ins. Law § 1101(a)(3) (McKinney 2000 & Supp. 2004) provides as follows:
(a)(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. (Emphasis supplied).
N.Y. Ins. Law § 1101(b) (McKinney 2000 & Supp. 2004) provides as follows:
(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:
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(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. (Emphasis supplied)
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Thus, pursuant to the express language of N.Y. Ins. Law § 1101(a)(3) and 1101(b)(1)(B), the making of a surety contract or provision of guaranties constitutes an insurance contract and the doing of an insurance business only when done as a vocation and not as merely incidental to any other legitimate business or activity of the surety. Similarly, in a situation where a parent corporation is acting as a surety for the obligations of its subsidiary, the corporation would not be making contracts of surety as a vocation. These contracts would be made as merely incidental to any other legitimate business or activities that the corporation would be engaging in.
The situation described in this inquiry appears to constitute one in which the guaranties provided are merely incidental to and occasioned by the normal business operations of the general contractor. Accordingly, the general contractors activities in this area would not be subject to regulation by the Department.
For further information you may contact Principal Attorney Michael Campanelli at the New York City office.