The Office of General Counsel issued the following opinion on May 18, 2004, representing the position of the New York State Insurance Department.
Re: Debt Cancellation Contract or Debt Suspension Agreement Insurance
What kind of insurance under N.Y. Ins. Law § 1113(a) (McKinney 2000 & Supp. 2004) would an insurance policy come within where the policy insures a creditor under a debt cancellation contract or debt suspension agreement, in connection with extensions of credit to customers of such creditor, for the amount of the debt, including interest?
Upon reconsideration of our prior opinion dated June 27, 2002, an insurance policy that insures a creditor under a debt cancellation contract or debt suspension agreement, in connection with extensions of credit to customers of such creditor, where the reason for the cancellation or suspension of the obligation is not based upon the destruction of the property or financial insolvency or default, is deemed to be substantially similar to non-motor vehicle lessor/creditor gap insurance under § 1113(a)(26)(C).
A debt cancellation contract ("DCC") or a debt suspension agreement ("DSA") is an agreement between a lender and a borrower, usually for a fee, which is typically separate from and in addition to interest or other charges, under which the lender agrees to either cancel or suspend for a specified period of time the borrowers obligation incurred under the debt instrument upon the happening of a specified event. A specified event may include death, disability, or involuntary employment of the borrower or other event that may reasonably be expected to affect the ability of the borrower to repay the loan. The lender would typically be a bank, but may also include a credit union or finance company.
The inquirers company proposes to write DCC and DSA insurance in which the company would insure the lender. The DCC policy would cover the unpaid amount, including interest, remaining on the debt agreement. Since the repayment of the principal is merely postponed under a DSA, a DSA policy would presumably not cover the principal itself. For the balance of this opinion, when we refer to a DCC we also mean a DSA.
This opinion addresses only where the waiver or suspension in the DCC would be conditioned upon the happening of a fortuitous event other than the financial default or insolvency of the creditor or loss or damage to any property that may be the subject of the credit transaction.
On June 27, 2002, we issued an opinion concluding that DCC insurance would be deemed to be substantially similar to the kind of insurance for which the underlying obligation consists, i.e., where the DCC was dependent upon the death of the borrower, then insurance covering such agreement would be considered to be substantially similar to life insurance; where the contingency was unemployment, then the insurance would be substantially similar to credit unemployment insurance; etc.
The Department has received a request to reconsider the June 27, 2002 opinion.
Both the June 27, 2002 opinion and an earlier April 2, 2002 opinion reaffirmed the Departments position that the making of a DCC constitutes the doing of an insurance business. The opinion applies to the making of a DSA as well. The maker of the agreement would have to be appropriately licensed as an insurer, unless specifically exempted under state or federal law. The Department concluded that a national bank, in connection with extensions of credit to customers of such bank, was so exempt. This opinion does not alter the Departments opinion as expressed in those letters, and your attention is directed to them for a full analysis of our position. We expect to be issuing a supplementary opinion regarding this issue shortly in regard to other kinds of entities. For the purposes of this opinion, we will assume that DCC insurance would be written covering only DCCs entered into by entities that are not required to be licensed as insurers in the jurisdiction where the DCCs are made.
The inquirer suggested to the Department that DCC insurance could be written as credit insurance, financial guaranty insurance, surety insurance or contractual liability insurance. However, we do not agree that DCC insurance comes within, or is substantially similar to, any of the above.
Credit insurance (§ 1113(a)(17)) is defined, in pertinent part, to mean:
(A) Indemnifying merchants or other persons extending credit against loss or damage resulting from non-payment of debts owed to them, for goods and services provided in the normal course of their business, including the incidental power to acquire and dispose of debts so insured, and to collect any debts owed to such insurer or to the insured, but no insurance may be written as credit insurance if it 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;
(B) Indemnifying any person for expenses disbursed or to be disbursed under a contract in connection with the cancellation of a catered affair;
(C) Indemnifying any person for tuition expenses disbursed or to be disbursed under a contract in connection with his dismissal or withdrawal from an educational institution; or indemnifying elementary or secondary schools, whether public, private, profit or non-profit, providing education in consideration of a tuition charge or fee against loss or damage in the event of non-payment of the tuition charges or fees of a student or pupil dismissed, withdrawn or leaving before the end of the school year for which the insurance is written. An educational institution may not require any person responsible for the payment of a student's or pupil's tuition charge or fee to pay for tuition refund insurance;
(D) Indemnifying an adoptive parent for verifiable expenses not prohibited under the law paid to or on behalf of the birth mother when either one or both of the birth parents of the child withdraw or withhold their consent to adoption. Such expenses may include maternity-connected medical or hospital expenses of the birth mother, necessary living expenses of the birth mother preceding and during confinement, travel expenses of the birth mother to arrange for the adoption of the child, legal fees of the birth mother, and any other expenses which an adoptive parent may lawfully pay to or on behalf of the birth mother. For the purposes of this section "adoptive parent" means the parent or his or her spouse seeking to adopt a child, "birth mother" means the biological mother of the child, "birth parent" means the biological mother or biological father of the child; or
(E) Indemnifying professional sports participants (including any person who participates or expects to participate as a player, coach, manager, trainer, physician or other person directly associated with a player or a team) under contract or the teams with which the contract is made, entertainers under contract to perform or the entities with which the contract is made, or business executives under an employment contract or the entities with which the contract is made, where contracts between such persons and teams or entities cannot be fulfilled due to a sports participant's, entertainer's or business executive's death, personal injury by accident, sickness, ailment or bodily injury that causes disability, where such indemnification is for the amount of financial loss that is sustained by the insured party or parties due to the inability to fulfill the terms of the contract.
As shown by the statutory language cited, credit insurance does not provide coverage to an insured that has waived a financial obligation owed to it. Subparagraphs (B), (C), and (D) are clearly dissimilar to DCC and DSA insurance. While subparagraph (E) insures against financial loss resulting from death, personal injury by accident, sickness, or other ailment or bodily injury causing disability, and in that regard is similar to at least some forms of DCC or DSA insurance, subparagraph (E) applies only in the context of professional sports participants, entertainers, or business executives and is intended to make the parties whole when certain kinds of employment contracts requiring specific performance cannot be performed. It does not involve the voluntary waiver of financial obligations. Although death or injury may make it impossible for an athlete or entertainer to perform, it does not discharge any existing financial debt or obligation.
In the remaining form of credit insurance, under subparagraph (A), like financial guaranty insurance (§ 1113(a)(25)), the policy insures against the borrowers financial default. In both credit insurance and financial guaranty insurance, the creditor sustains loss or damage only when the borrower defaults on the financial obligation. Under a DCC or DSA, however, the financial obligation is waived or suspended by the lender when a specified event other than default occurs. Therefore, the subsequent nonpayment cannot be considered to be default.
Also, under credit insurance pursuant to subparagraph (A), the insurer has the right to pursue the borrower for the debt. Therefore, writing the coverage as credit insurance would not accomplish the intended purpose of the DCC, which is to insulate the borrower from having to respond to the debt. Finally, DCC insurance does not come within subparagraph (A) because credit insurance is limited to indemnifying "merchants or other persons...for non-payment of debts owed to them, for goods and services provided in the normal course of their business..." For these reasons, DCC insurance cannot be considered to be substantially similar to credit insurance.
As noted, financial guaranty insurance is similar to credit insurance in that it covers losses resulting from the failure of an obligor on any debt instrument or other monetary obligation when the failure is the result of a financial default or insolvency. It does not cover losses upon the happening of fortuitous physical events. Since the DCC insurance at issue covers fortuitous events other than financial default or insolvency, it may not be written as financial guaranty insurance. However, the result would be different if the DCC was conditioned upon a financial default or insolvency.
Nor can DCC insurance be written as liability insurance pursuant to § 1113(a)(13) and (14) because there is no liability exposure. It is the Departments position that a "contractual liability" insurance policy that insures voluntarily assumed contractual obligations, and not a legal liability imposed by law, may not be written as liability insurance in New York.
However, the Department does believe that the DCC insurance at issue may be written as substantially similar to the type of gap insurance authorized under § 1113(a)(26)(c).
While § 1113(a)(26) defines four types of gap insurance, only the two types issued to a lessor or creditor are germane. Section 1113(a)(26) provides, in pertinent part:
(26) "Gap insurance" means insurance covering the gap amount which is payable upon the total loss of personal property, which is the subject of a lease or loan or other credit transaction occasioned by its theft or physical damage. The kinds of gap insurance are:
(A) "Motor vehicle lessor/creditor gap insurance" which insures the lessor, creditor, or the lessor's or creditor's assignee, under a motor vehicle lease or loan or other credit transaction pursuant to which the lessor, creditor, or, in the absence of a waiver by the lessor or creditor, the assignee has waived the obligation of the lessee or debtor for the gap amount;
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(C) "Non-motor vehicle lessor/creditor gap insurance" which insures the lessor, creditor, or the lessor's or creditor's assignee, under a lease or loan or other credit transaction covering personal property other than a motor vehicle pursuant to which the lessor, creditor, or, in the absence of a waiver by the lessor or creditor, the assignee, has waived the obligation of the lessee or debtor for the gap amount
While DCC insurance is similar to gap insurance in that they both insure the inchoate loss to those making waivers, there are two principal distinctions. First, gap insurance is triggered upon the total loss to personal property that is the subject of the lease or credit transaction. The triggering event under DCC insurance does not include loss to the property itself. Second, gap insurance only covers the gap amount, as defined in N.Y. Ins. Law § 107(a)(52) (McKinney 2000), which essentially is the difference between the amount of the lease or credit transaction and the actual cash value of the property. Under DCC insurance, the whole amount of the lease or credit transaction is waived. DCC insurance, therefore, does not come strictly within the definition of gap insurance.
However, § 1113(a)(30) provides:
(30) "Substantially similar kind of insurance," means such insurance which in the opinion of the superintendent is determined to be substantially similar to one of the foregoing kinds of insurance and thereupon for the purposes of this chapter shall be deemed to be included in that kind of insurance.
Under § 1113(a)(30), the Superintendent may determine that a particular kind of insurance that is not otherwise specified under § 1113 is substantially similar to one of the specified kinds, and it shall be deemed to be included in that kind of insurance. This provision affords the Superintendent flexibility to permit the writing of a kind of insurance that may not fall precisely within one or more of the specified kinds of insurance under § 1113 but are so similar to a specified kind that it is appropriate to deem it to be included as part of that kind of insurance.
Here, as noted above, both gap insurance and DCC insurance involve the same kind of inchoate exposure. Although the Legislature limited gap insurance to gap waivers, there was no legislative intent expressed to preclude covering the same kind of exposure under other types of legal waivers. In 1994, the legislation that authorized gap insurance also exempted gap waivers from the definition of doing of an insurance business (N.Y. Ins. Law § 1101(b)(3) (McKinney 2000 & Supp. 2004)).
Although the Legislature has still not seen fit to exempt any other waiver from the Insurance Law, for the reasons expressed in our April 2, 2002 opinion, certain entities may now make DCCs without being considered to be in violation of the Insurance Law, a circumstance clearly not envisioned by the Legislature in 1994. Consequently, by this letter, the Superintendent determines that DCC insurance is substantially similar to non-motor vehicle lessor/creditor gap insurance.
While there are two types of lessor/creditor gap insurance--motor vehicle and non-motor vehiclethe distinction was made because, under gap insurance, the loss to the collateral itself is what triggers the coverage. It was discerned that risk of loss to motor vehicles was significantly different than the risk for other kinds of personal property that would be the subject of gap waivers. Hence, there was need for two different types of insurance, with different capital and surplus requirements. This is not the case here, because the triggering events do not involve loss to the collateral. Therefore, the coverage is deemed to be non-motor vehicle lessor/creditor gap insurance, regardless of whether the underlying collateral is a motor vehicle.
Although under the definition of gap insurance, the amount of the insurance is limited to the difference between the actual cash value of the property and the amount of the lease or loan, the coverage afforded under DCC insurance need not be limited to the amount of the loan. That limitation for gap insurance was added to prevent unjust enrichment to the lessor or creditor who would typically be the loss payee under an insurance policy required by it, covering the actual cash value of the property in the event of loss. Since the DCC is not conditioned upon a loss to the property itself, this requirement does not apply.
Finally, while gap insurance is limited to personal property and may not be written in connection with real property, that distinction is not relevant here, also for the reason that the loss to the underlying property is not the trigger of the loss. Hence, DCC insurance may be written in connection with a DCC of a real estate mortgage.
In summary, DCC insurance may be written in New York as substantially similar to non-motor vehicle gap insurance. We reiterate that this opinion authorizes DCC insurance only where the waiver is dependent upon the happening of a fortuitous event other than loss to the collateral or a financial default or insolvency. Please also note that should proposed legislation be enacted authorizing DCC insurance, we would consider this opinion superseded by such legislation.
An insurer must first be properly licensed to write such type of gap insurance, in accordance with the provisions of Insurance Law Article 41. Please note that gap insurance is considered a non-basic kind of insurance under N.Y. Ins. Law § 4101 (McKinney 2000 & Supp. 2004). An insurer must therefore qualify under N.Y. Ins. Law § 4102(b)(1) (McKinney 2000 & Supp. 2004); and meet the corresponding capital and surplus requirements of Article 41. In accordance with Insurance Law Article 23, both the rates and forms for DCC insurance are subject to the prior approval of the Superintendent. All policies must also comply with the cancellation and nonrenewal requirements for creditor gap insurance, as specified in N.Y. Ins. Law § 3427 (McKinney 2000).
Accordingly, to the extent that it is inconsistent with this letter, our June 27, 2002 letter is expressly superseded.
For further information you may contact Deputy Superintendent and General Counsel Audrey M. Samers at the New York City Office.