The Office of General Counsel issued the following informal opinion on July 26, 2000, representing the position of the New York State Insurance Department.
RE: Service Contract Program
Is the service contract program proposed by ABC, an automobile distributor, subject to New Yorks service contract law, and otherwise exempt from the Insurance Law?
ABCs proposed program is a service contract program and does not constitute doing an insurance business. However, ABC must register with the Department as a service contract provider pursuant to N.Y. Ins. Law Art. 79 (McKinney 2000).
ABC, a distributor of ABC vehicles sold throughout the United States, currently issues service contracts on new and used ABC vehicles. ABC proposed a program whereby it would sell service contracts through its dealers on non-ABC new and used vehicles that are sold by the dealers. ABC would be the obligor, not the dealer. A separate fee would be charged for the service contract.
Under the proposed service contract, ABC will agree to perform, for a specified period of time, the repair, replacement, or maintenance of the motor vehicle, or provide indemnification for the repair, replacement, or maintenance, for operational or structural failure due to a defect in materials or workmanship, or normal wear and tear. The service contract will also provide for incidental payments and indemnity for towing, rental car and emergency road service. It will not include ordinary maintenance, nor will it cover damage due to collision, improper use, theft, natural disaster, or other similar external perils.
A service contract is defined, in pertinent part, in N.Y. Ins. Law § 7902 (k) (McKinney Supp. 2000) 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 due to a defect in materials or workmanship or wear or 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
ABCs proposed agreement fits squarely within the above definition. Thus, ABC would be engaged in the business of selling service contracts and would not be subject to the Insurance Law as an insurer, although it would have to register as a service contract provider. Prior to the enactment of N. Y. Ins. Law Art. 79 (McKinney Supp. 2000) in 1997, the making of service contracts by a company on products not manufactured, sold, or distributed by that company were considered to be doing an insurance business. If the company had not exercised the requisite control over the product, the breakdown was fortuitous as to the company and, therefore, came within the definition of an "insurance contract" contained in N.Y. Ins. Law § 1101 (a) (1) (McKinney 1985). If the company had inspected the product so as to be considered to have exercised the requisite control necessary to eliminate the element of fortuity, and thereby making the agreement into a warranty, the company would be making such agreements as a vocation, and not incidentally to its other legitimate business or activity. In such a case, the making of the agreements was considered to be the doing of an insurance business under N.Y. Ins. Law § 1101 (b) (1) (B) (McKinney 1985).
However, with the enactment of Article 79, a new N.Y. Ins. Law § 1101 (b) (3-a) (McKinney Supp. 2000) was added, which provides that:
Notwithstanding the foregoing, the marketing, sale offer for sale, issuance, making, proposing to make or administration of a service contract pursuant to article seventy-nine of this chapter shall not constitute doing an insurance business in this state.
This provision exempts the maker of service contracts from the doing of an insurance business, even though those contracts would otherwise have been considered to be the doing of such a business. However, any person obligated to perform under a service contract must register as a service contract provider.
ABC further advised that it was currently making service contracts for additional compensation with respect to new and used ABC vehicles. Prior to the enactment of Article 79, the Department considered such an agreement made by a manufacturer, seller, or distributor to be a warranty, regardless whether a separate fee was charged. However, the Department construes Article 79 as applying to any agreements made by a manufacturer, seller, or distributor for a separate fee. Thus, ABC must register with the Department as respects such service contracts in accordance with the requirements of Article 79.
For further information you may contact Supervising Attorney Paul A. Zuckerman at the New York City Office.