The Office of General Counsel issued the following opinion on December 23, 2004, representing the position of the New York State Insurance Department.
Re: Brokers Procuring Individual Sureties Through a "Risk Management" Company
May a licensed broker procure an unauthorized individual surety bond from a risk-management company for the benefit of a client who is bidding on a federal government construction job to be performed in New York?
No. The unlicensed individual sureties would be doing an insurance business as defined in N.Y. Ins. Law § 1101 (McKinney 2004).
Federal law allows individuals to act as sureties in bonding federal construction jobs by pledging assets into an escrow account held in the name of the contracting agent.1 A company located in Florida is in the business of obtaining bonds on federal construction jobs, specializing in individual sureties. The individual sureties set aside collateral for every bond issued, which is accounted for by this company. The company, in turn, issues a receipt from the account showing the amount of the bond, and the collateral that backs up the amount. The company claims it is the risk manager for the individual sureties, and not the bond agent. It also claims that it is not required to have authorization by each state since it is "writing on a federal level." The individual sureties and the bond company are not authorized to do a surety business in New York.
N.Y. Ins. Law § 1101 provides, in relevant part:
(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:
* * *
(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
The individual sureties would be doing an insurance business as defined in the New York Insurance Law insofar as their contracts of guaranty or suretyship are not incidental to any other legitimate business or activity. The individuals do not have a parent/subsidiary or other relationship with the contractor so as to come within the exception.
The company claims:
The only criteria we lack is authorization by each state which we are not required to have by federal law in order to write on a federal level . If a federal dollar is involved in the project you would fall under these guidelines and this bond would be acceptable.
This analysis is incorrect. The controlling federal law, 48 CFR 28.203 (2004), addresses the terms under which the federal government may accept bonds issued by an individual surety but it does not preempt the applicable state insurance laws, including licensing requirements.
With respect to whether a licensed broker may procure a contract from an unauthorized insurer, § 2117 provides:
(a) No person, firm, association or corporation shall in this state act as agent for any insurer or health maintenance organization which is not licensed or authorized to do an insurance or health maintenance organization business in this state, in the doing of any insurance or health maintenance organization business in this state or in soliciting, negotiating or effectuating any insurance, health maintenance organization or annuity contract or shall in this state act as insurance broker in soliciting, negotiating or in any way effectuating any insurance, health maintenance organization or annuity contract of, or in placing risks with, any such insurer or health maintenance organization, or shall in this state in any way or manner aid any such insurer or health maintenance organization in effecting any insurance, health maintenance organization or annuity contract.
§ 2117(c) further provides:
(c) Notwithstanding the provisions of subsection (a) hereof, any insurance broker licensed under subparagraph (B) of paragraph one of subsection (b) of section two thousand one hundred four of this article may negotiate a contract of insurance or place insurance in an unauthorized insurer as follows:
(2) fidelity bonds guaranteeing the fidelity of persons holding or exercising positions of public or private trust wholly outside of this state, and surety bonds guaranteeing or assuming the performance of any contract or other obligation of the kind included under subparagraphs (B) and (C) of paragraph sixteen of subsection (a) of section one thousand one hundred thirteen of this chapter, to be performed wholly outside of this state; but if such positions are held or exercised in another state or if such contract or other obligation is to be performed wholly or partly in another state, then only if such insurance is placed in an insurer authorized to do such business in such state, or in which a licensed broker of such state may lawfully place such insurance.
Thus, a licensed insurance broker may procure certain surety bonds from an unauthorized insurer if the contract or obligations under the surety bond are performed wholly outside of New York State, and if 1) the insurer is authorized to do such business in the other state, or 2) the broker may lawfully place such insurance in the other state.
Since the obligations under the bond to be procured will primarily be performed in New York, and the sureties involved are not authorized to do an insurance business in New York, the contract may not be procured in New York.
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.
1 See, 48 C.F.R. 28.203-1