New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

The Office of General Counsel has issued the following informal opinion on May 31, 2000 representing the position of the New York State Insurance Department.

New York State Gap Law, Maintenance and Similar Contracts, and Vendors Single Interest Insurance.

Questions Presented

1) Is the "Multi-State Survey of Sale & Financing of GAP Products In Connection With Retail Installment Sales of Motor Vehicles" ("Survey") an accurate restatement of the New York State Gap Law (Chapters 1 & 2 of the Laws of 1994)?

2) Do maintenance and similar contracts constitute "insurance contracts" under N.Y. Ins. Law § 1101 (McKinney 1985 and Supp. 1999-2000)?

3) Has the Department imposed any limitations on the sale of Vendors Single Interest ("VSI") insurance?

Conclusions

1) The Survey is not an accurate restatement of the New York State Gap Law (Chapters 1 & 2 of the Laws of 1994) because it contains some over-generalizations and mischaracterizations.

2) A maintenance or similar contract may or may not constitute an "insurance contract" under N.Y. Ins. Law Section 1101 (McKinney 1985 and Supp. 1999-2000) depending upon the particular terms of the contract.

3) The Department has imposed certain limitations on the sale of Vendors Single Interest ("VSI") insurance pursuant to New York Insurance Department Regulation 27-B (11 NYCRR Part 186).

Facts

An organization ("CC") represents automobile finance and leasing companies and companies that provide related services. CC compiles the Survey for these industries, outlining the treatment of various insurance and similar contracts by the insurance department of each state. You have asked this Department to provide its position as to gap insurance, gap waivers, maintenance and similar contracts, and Vendors Single Interest insurance. More specifically, you have asking this Department to advise if the Survey produced by CC is an accurate restatement of the New York State Gap Law.

Analysis

Gap Coverage

The Survey contains some over-generalizations and basic mischaracterizations of New York’s Gap Law including, but not limited to, the use of terminology that does not comport with statutory language. For example, the Survey uses the terms "3-Party GAP" and "2-Party GAP", which are not used in New York’s Insurance Law.

The Survey also confuses two separate articles of New York’s Personal Property Law. While the Survey’s title refers to "Retail Installment Sales of Motor Vehicles", the Survey itself relates to both buyers and borrowers. N.Y. Pers. Prop. Law Art. 9 (McKinney 1992 & Supp. 2000), which is commonly known as the "Motor Vehicle Retail Instalment Sales Act", relates to lenders and buyers of motor vehicle gap insurance. N.Y. Pers. Prop. Law Art. 9-A (McKinney 1992 & Supp. 2000), the "Motor Vehicle Retail Leasing Act", relates to lessors and lessees of motor vehicle gap insurance. These laws are similar but there are some appreciable differences. It should also be noted that these two Acts generally relate to vehicles primarily used for non-business purposes, although the specific definitions in the Acts are different.

The Survey’s statement that "[f]inancing a 3-Party GAP premium would not require licensing since it is incidental and part of the sale of goods" is inaccurate. The financing of gap insurance premiums is subject to all the laws in the state regarding insurance premium financing.

The Survey contains additional errors, which a review of New York’s Gap Law will make apparent. N.Y. Ins. Law §§ 107(a)(52), 1101(b)(3), 1113(a)(26), 3427 (McKinney 1985 & Supp. 2000) and N.Y. Pers. Prop. Law Arts. 9 and 9-A (McKinney 1992 & Supp. 2000), are the gap insurance and gap waiver provisions that relate to the financed sale and leasing of motor vehicles.

Maintenance and Similar Contracts

Whether a contract is an "insurance contract" subject to New York’s Insurance Law depends upon various factors including the nature of the agreement, the scope of obligations undertaken, the maker of the contract and the nature of the maker’s business activities.

N.Y. Ins. Law § 1101 (a)(1) (McKinney 1985) defines an insurance contract as:

[A]ny 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.

"’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 1985).

The making of, or proposal to make, an insurance contract constitutes "doing an insurance business" in New York State for which a license is required. N.Y. Ins. Law §§ 1101, 1102 (McKinney 1985 & Supp. 2000). The insurance contract must be a kind authorized by N.Y. Ins. Law § 1113 (McKinney 1985 & Supp. 2000). Mechanical breakdown insurance, which covers a vehicle owner for loss resulting from the breakdown of his or her vehicle, is considered to be an authorized kind of insurance under N.Y. Ins. Law § 1113 (a)(19) (McKinney 1985 & Supp. 2000).

Unlike mechanical breakdown insurance, the making of, or proposal to make, a "service contract" does not constitute doing an insurance business. N.Y. Ins. Law § 1101 (b) (3-a) (McKinney 1985 & Supp. 2000). N.Y. Ins. Law § 7902 (k) (McKinney 1985 & Supp. 2000) defines a service contract to mean:

[A] contract or agreement, for a separate or additional consideration, for a specific duration to perform the repair, replacement or maintenance of property, or indemnification for repair, replacement or maintenance, due to a defect in materials or workmanship or wear and tear, with or without additional provision for indemnity payments for incidental damages, provided any such indemnity payment per incident shall not exceed the purchase price of the property serviced. Service contracts may include towing, rental and emergency road service, and may also provide for the repair, replacement or maintenance of property for damage resulting from power surges and accidental damage from handling. Service contracts may also include contracts to repair, replace or maintain appliances and systems.

Service contracts are, however, subject to and regulated by N.Y. Ins. Law §§ 7901-7913 (McKinney Supp. 2000) and New York Insurance Department Regulation 155, N.Y. Comp. Codes R. & Regs. tit. 11 §§ 390.0 – 390.13 (1999).

A ‘maintenance agreement’ is defined by N.Y. Ins. Law § 7902 (d) (McKinney Supp. 2000) as "a contract of limited duration that provides for scheduled maintenance of property, other than contracts providing for the repair or replacement of such property due to a defect in materials or workmanship or wear and tear". Maintenance agreements are neither insurance contracts nor service agreements and are not subject to New York’s Insurance Law. See N.Y. Ins. Law §§ 1101, 1102, 7901 (b) (McKinney 1985 & Supp. 2000).

A warranty, on the other hand, may or may not be considered an insurance contract. A warranty has been defined by the Department as an undertaking to cover a defect in the materials or workmanship of a product. The making of, or proposal to make, a warranty constitutes "doing an insurance business" unless this activity is not the vocation of the warrantor and is merely incidental to a legitimate business or activity. N.Y. Ins. Law § 1101 (b) (1) (B) (McKinney 1985 & Supp. 2000). Issuance of a warranty by a manufacturer, distributor or seller of a product does not constitute doing an insurance business because it is merely incidental to the manufacture, distribution or sale of the product. However, the issuance of such an agreement by a manufacturer, distributor or seller for a fee would be considered to be a service contract and not a warranty.

Vendors Single Interest

Under N.Y. Ins. Law § 2340 (b) (McKinney 1985), "credit property insurance means insurance against loss of or damage to personal property covering a creditor’s security interest in such property when insurance is written as part of a credit transaction." Vendor’s Single Interest ("VSI") insurance is a kind of "credit property insurance". Therefore, it is subject to New York Insurance Department Regulation 27-B (11 N.Y.C.R.R. 186), a copy of which is enclosed. As an authorized kind of insurance product, VSI insurance is subject to all the applicable Insurance Laws of New York.

For further information, you may contact Attorney Sally Geisel at the Department’s New York office.