The Office of General Counsel issued the following opinion on January 30, 2008 representing the position of the New York State Insurance Department.
RE: Home Equity Protection Plan Proposal
1. Does the Policy constitute insurance under New York law? If so, what kind of insurance is it?
2. What kind of license would sellers of the Policy be required to have in order to sell it?
3. What would be the minimum capital requirement for the company that wanted to market the Policy?
4. Would an actuarial analysis be required to sell the Policy?5. Will a captive be necessary for the safekeeping of capital reserves?
1. Yes, the Policy would constitute insurance under the New York Insurance Law, specifically, financial guaranty insurance. However, it would not constitute permissible financial guaranty insurance under the New York Insurance Law. Therefore, the product may not be written or marketed in New York.
2. – 5. The Department cannot answer these queries in light of the fact that the Policy does not constitute permissible financial guaranty insurance, and thus may not be written or marketed in New York.
A company proposes the marketing of a product called the Home Equity Protection Plan (the “Policy”). It reported that the Policy is intended to protect a homeowner from a decline in the value of her home over the life of the policy. The plan would operate as follows: A homeowner would purchase the Policy at the time the residence is acquired. The Policy would set forth a “protected value” of the home. In the event that the homeowner were to sell the home at a loss (i.e., at a price lower than the protected value) while covered by the Policy, the company would pay the homeowner the difference between the sale price and the protected value.
The coverage proposed by the Policy would constitute financial guaranty coverage under the New York Insurance Law. Financial guaranty insurance is defined by Section 6901(a) of the Insurance Law, in pertinent part, 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.
N.Y. Ins. Law § 6901(a) (McKinney Supp. 2008) (Emphasis added).
The Policy satisfies the definition of financial guaranty insurance under New York law, specifically as set forth in subparagraph (D) of the above-quoted Section 6901(a)(1), in that it purports to provide indemnification for financial loss resulting from the change in value of a specific asset (i.e., the insured’s home).
Although the Policy constitutes financial guaranty insurance1, our analysis does not end there. Under New York law, financial guaranty insurance may only be written with respect to permissible guarantees as set forth in Insurance Law § 6904(b). That statute provides, in pertinent part, as follows:
(b) Permissible guarantees. (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)obligations of corporations, trusts or other similar entities established under applicable law;
(E) partnership obligations;
(F) asset-backed securities, trust certificates and trust obligations other than mortgage-backed securities secured by first mortgages on real property which are insurable by a mortgage guaranty insurer authorized under paragraph twenty-three of subsection (a) of section one thousand one hundred thirteen of this chapter ... ;
(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
superintendent determines to be substantially similar to any of the
foregoing or shall otherwise be approved by the superintendent.
N. Y. Ins. Law § 6904(b).
In view of the plain terms of Insurance Law §§ 6901 and 6904, the proposed Policy, while constituting financial guaranty insurance, is not of the type that may be written and sold in New York. Accordingly, the company may not write or market the Home Equity Protection Plan in New York State.
For further information you may contact Supervising Attorney Michael Campanelli at the New York City office.
1 The inquiry referenced an earlier pronouncement of this office, which addressed another program aimed at protecting homeowners from a decline in real estate values, O.G.C. Opinion No. 02-05-02 (May 1, 2002) (available at http://www.ins.state.ny.us/ogco2002/rg205012.htm). The Office of General Counsel concluded that the program there did not constitute insurance within the meaning of the New York Insurance Law in that payments to covered homeowners were based solely upon the performance on an index, and were not predicated on the actual loss (if any) sustained by a particular homeowner.