Certificates of Bond Insurance Are Insurance Policies to Be Interpreted Under Insurance and Contract Law—Restructuring in Bankruptcy and Reduction of Value of the Bonds Did Not Affect the Insurer’s Obligation to Cover the Bond Payments

In a full-fledged opinion by Justice Gische, the First Department determined the defendant, which issued certificates of bond insurance (CBI’s) insuring bonds against nonpayment, was obligated to cover payment on the bonds even after a bankruptcy restructuring in which the bonds were revalued:

Defendant acknowledges that it would have been contractually obligated to pay for any loss suffered by plaintiffs under the original bonds when they matured, in the event of the issuer’s bankruptcy, but it claims that as a result of the Restructuring Plan that was adopted, the original bonds were cancelled, completely relieving it of any obligation to pay under the CBIs. The court rejects this position because it is inconsistent with the terms of the policies and contrary to law.

The CBIs are financial guaranty insurance policies, which defendant is specially licensed to sell throughout the United States, including New York. …The policies are primarily governed by Article 69 of the Insurance Law. While they have some unique characteristics, they are generally subject to the same laws and principles underlying insurance policies in general (see Insurance Law § 6908). Thus, CBIs are policies of insurance that should be analyzed in accordance with general principles of contract interpretation and insurance law … .

Insurance policies are to be afforded their plain and ordinary meaning and interpreted in accordance with the reasonable expectations of the insured party… . Exclusions from policy obligations must be in clear and unmistakable language …, and if the terms of a policy are ambiguous, any ambiguity must be construed in favor of the insured and against the insurer … . …

The plain meaning of the contractual language contained in the CBI requires defendant to absolutely and unconditionally guarantee payment on the individual bonds in the event of the issuer’s nonpayment. Issuer insolvency is clearly a covered risk, as is bankruptcy, which is a societal hallmark of insolvency. These are the very risks for which defendant received payment of premiums. The CBIs were noncancellable, with a narrow exception not applicable here, and did not provide for any exclusion in the event of bankruptcy. … The restructuring occurred only after the default under the trust agreement had occurred. Confirmation of the restructuring plan made it a certainty that the issuer would not make any future payments to plaintiffs on the original bonds at their respective maturity dates. It is the restructuring of the bonds and their reissuance in a lower principal amount with a longer payment period that concretely represents that plaintiffs have sustained a loss. Neither the restructuring plan, nor the issuer’s discharge of debt in the bankruptcy proceeding, changed the obligations under the parties’ contracts of insurance. Oppenheimeer AMT-Free Municipals v ACA Fin. Guar. Corp., 2013 NY Slip Op 05768, 1st Dept 9-3-13