The Office of General Counsel issued the following opinion on October 6, 2005, representing the position of the New York State Insurance Department.
Re: ABC Vacations - ABCV Put Option
Does the below-described "ABCV Put Option" proposed by ABC Vacations, Inc. ("ABCV") constitute insurance or an insurance contract under the New York Insurance Law?
No, the below-described "ABCV Put Option" proposed by ABC Vacations, Inc. ("ABCV") does not constitute insurance or an insurance contract under the New York Insurance Law.
The inquirers client, ABCV has developed an affinity program (the "ABCVProgram") that it intends to market to timeshare resort developers in the United States. Developers who have a contractual relationship with ABCV would market the ABCV Program to potential purchasers of timeshare interests from the developers. Persons who purchase timeshare interests ("Timeshare Purchasers") from such developers would receive, as part of their purchase, membership in the ABCV Program and would become members of the ABCV Program ("ABCV Members"). As part of such membership, ABCV Members and ABCV would enter into an ABCV membership agreement (the "ABCV Membership Agreement").
Pursuant to the ABCV Membership Agreement, an ABCV Member would have the contractual right to cause, at the ABCV Member's option, ABCV to purchase the ABCV Member's timeshare interest at 100% of such Members original purchase price, exclusive of the ABCV membership fee (the "ABCV Buy-Back Price"), at the end of the tenth year of membership in the ABCV Program (the "ABCV Put Option"). The ABCV Buy-Back Price would be equivalent to approximately 96% of the total purchase price originally paid by the ABCV Member. The ABCV Put Option would not be transferable except to certain family members.
ABCV program and membership fees are imbedded in the purchase price paid by the Timeshare Purchasers for their timeshare interests. With each timeshare interest sold, the developer would pay ABCV a program fee of 25% of the purchase price of the timeshare interest (excluding program and membership fees) for the ABCV Put Option and a membership fee of 5% of the purchase price of the timeshare interest (excluding program and membership fees) for the Timeshare Purchaser's membership in the ABCV Program.
In order for an ABCV Member to exercise such Member's ABCV Put Option, the ABCV Member would be required to give ABCV, or its designee, written notice during the Members seventh year of membership in the ABCV Program. If notice is appropriately given, then ABCV would complete the purchase of the ABCV Members timeshare interest, including payment of the applicable ABCV Buy-Back Price, no later than 160 days after the tenth year anniversary of such Members enrollment date, subject to the ABCV Member being able to transfer his or her timeshare interest free and clear of all liens, encumbrances, and mortgages and unpaid taxes and maintenance and association fees. Membership in the ABCV Program, along with associated fees, and the exercise of the ABCV Put Option can be illustrated as follows:
A developer sells a timeshare interest, assumed to have a value of $10,000 without the inclusion of the ABCV Program, to a Timeshare Purchaser for a total purchase price of $13,000. The developer then pays a program fee of $2,500 and a membership fee (for the benefit of the Timeshare Purchaser) of $500 to ABCV. The Timeshare Purchaser automatically receives membership in the ABCV Program at the time of purchase and enters into a Membership Agreement. If, during the seventh year of membership, the ABCV member elects to exercise his or her ABCV Put Option and gives proper notice thereof (and otherwise complies with the terms and conditions of closing), the ABCV will purchase such ABCV Member's timeshare interest at the ABCV Buy-Back Price of $12,500 no later than 160 days after the ten-year anniversary of purchase.
The ABCV Put Option will be explained to prospective Timeshare Purchasers as a real estate option. The ABCV Put Option will not be represented or marketed as insurance. Potential members will not be told that they have insurance or that their option is secure because it is guaranteed by an insurance policy. ABCV will obtain insurance to indemnify itself for amounts it becomes obligated to pay to satisfy its buy-back obligations.
New York Insurance Law § 1101(a) defines the term "insurance contract" as follows:
§ 1101. Definitions; doing an insurance business. (a) In this article:
(1) "Insurance contract" means any agreement or other transaction whereby one party, the "insurer", is obligated to confer benefit of pecuniary value upon another party, the "insured" or "beneficiary", dependent upon the happening of a fortuitous event in which the insured or beneficiary has, or is expected to have at the time of such happening, a material interest which will be adversely affected by the happening of such event.
N.Y. Ins. Law § 1101(a) (1)(McKinney Supp. 2005).
The term "fortuitous event" is in turn defined as follows:
(2) "Fortuitous event" means any occurrence or failure to occur which is, or is assumed by the parties to be, to a substantial extent beyond the control of either party.
N.Y. Ins. Law § 1101(a) (2)(McKinney Supp. 2005).
The inquirer contends that the ABCV Put Option does not constitute an insurance contract in that, while it does purport to confer a pecuniary benefit, the trigger for the provision of such benefit is not a "fortuitous event" beyond the control of either party to the agreement. This appears to be an accurate description of the relevant elements of the proposed arrangement.
Analogous proposals reviewed by this Office have been characterized as not constituting contracts of insurance. See O.G.C. Opinions 02-05-02 (May 1, 2002), 02-10-02 (October 1, 2002), and 02-12-14 (December 17, 2002). Opinion 02-05-02 involved a proposal called a "Home Equity Protection Plan." Under the plan, a participating homeowner, in exchange for a fee paid at the time of purchase, would be entitled to receive a reduction in the outstanding mortgage balance or a cash payment at the time of any future refinancing or sale of the property in the event that there was a decline in an index based on property values in the homeowner's area. Payments under the plan would be made even if the actual value of the homeowner's own property increased or remained unchanged. This Office concluded that the plan did not constitute insurance in that the purported "insured" would receive payment solely on the basis of the standing of the relevant index and irrespective of any actual loss.
Opinion 02-10-02 involved a guaranteed price refund agreement. Under that plan, if no mechanical breakdown of the item purchased occurred (and covered by the service contract or warranty) prior to the expiration of the warranty of service contract, the purchaser of the item warranted/insured could request a cash refund for the purchase price of the service contract/warranty. This Office held that such an arrangement was not an insurance contract in that the "fortuitous event" (the fact that no breakdown occurred) was not one which would adversely affect the material interest of the purchaser. Furthermore, it was noted that the payment of the benefit under this arrangement occurred when no adverse event occurred.
Finally, OGC Opinion 02-12-14 involved a proposal whereby an entity ("DEF") entered into advance agreements with lenders of car loans whereby at the end of the loan term, if the buyer chose to turn in the vehicle rather than make a balloon payment or refinance and keep the vehicle, DEF would repurchase the vehicle from the lender at a predetermined residual value (subject to adjustments for mileage and/or condition). This Office held that the arrangement did not constitute an insurance contract in that performance under the agreement (the future purchase of the vehicles in question) occurs independently of outside, fortuitous events.
The proposed ABCV Put Option, similar to the arrangements described in the above-described OGC Opinions, involves an advance agreement whereby a future payment will be made irrespective of the occurrence of any loss to the party to be paid and without the occurrence of any "fortuitous event" that affects any material interest. Accordingly, the Department is of the view that the proposed ABCV Put Option does not constitute an insurance contract.
For further information please contact Supervising Attorney Michael Campanelli at the New York City office.