The Office of General Counsel issued the following informal opinion on February 5, 2001, representing the position of the New York State Insurance Department.
Re: Service Contracts Cancellation Provisions
1. May a motor vehicle service contract restrict the conditions under which the service contract may be returned after the end of the period specified in N.Y. Ins. Law § 7903(e) (McKinney 2000)?
2. If the contract holder returns the service contract during the period provided under the contract for returning the contract, and there has been a claim made under the contract, how much of the purchase price of the contract is the provider obligated to return?
3. How is the penalty for late refunds calculated?
1. After the end of the period specified in N.Y. Ins. Law § 7903(e), the contract may restrict the conditions under which the service contract may be returned.
2. The law is silent as to how much of the purchase price must be returned when a claim has already been made but it would be reasonable for the contract to permit the provider to deduct the amount of the claim.
3. A ten-percent penalty per month shall be added to a refund that is not made within 30 days of return of the contract to the provider.
An entity that wishes to become a service contract provider in New York, and sell motor vehicle service contracts, inquired whether a motor vehicle service contract may provide that the contract holder may only return the contract within sixty days from the date of purchase where the refund amount would be 100% of the purchase price less any claims; and that after sixty days, the contract holder may cancel the contract only if the vehicle was declared a total loss.
Service contracts in New York are governed by the provisions of N.Y. Ins. Law Article 79 (McKinney 2000) and N.Y. Comp. Codes R. & Regs. tit. 11 §§ 390.0 390.13 (1999), (Regulation 155).
N.Y. Ins. Law § 7903(e) (McKinney 2000) provides:
(e) Service contracts shall require every provider to permit the service contract holder to return the contract within at least twenty days of the date of mailing of the service contract or within at least ten days if the service contract is delivered at the time of the sale or within a longer time period permitted under the contract. If no claim has been made under the contract, the contract shall be void and the provider shall refund to the contract holder the full purchase price of the contract. A ten percent penalty per month shall be added to a refund that is not made within thirty days of return of the contract to the provider. The provisions of this subsection only apply to the original purchaser of the service contract.
N.Y. Comp. Codes R. & Regs. tit. 11, § 390.4(c) (1999) provides:
(c) The service contract shall contain a statement that if no claim has been made under the contract, and the holder returns or terminates the contract within the time period specified in the service contract, the contract shall be void and that the provider shall refund to the contract holder the full purchase price of the contract.
N.Y. Comp. Codes R. & Regs. tit. 11, § 390.5(a) (1999) provides:
(a) Every service contract marketed, issued, sold or offered for sale, made or offered to be made, or administered in this state shall specify any limitations on the right to terminate the service contract by the provider or contract holder and to receive a refund of the provider fee.
Based upon the above, a service contract provider may limit the contract holders right to return the contract once 10 days from the issuance of the contract has elapsed (20 days in the case of mail), except that any such limit must be contained in the service contract. If the limitation is not contained in the contract, then the holder has the right to return the contract at any time.
The contract holder is entitled to the refund of the full purchase price of the contract if the request is made during the time period specified in the contract (which period may not be less than 10 days, or 20 days in the case of mail) and where no claims have been made. The contract may restrict the right of the holder to return the contract after the expiration of such period. If the contract is silent, then the holder continues to have the right to return the contract.
The contract should specify any limitations on the return of the purchase price if a claim has been made. It would not be unreasonable for the contract to provide that the refund may be offset by any claim that is paid.
If a refund is not made within 30 days of the return of the contract, the provider must pay the holder an additional ten percent of the amount of the refund. An additional ten percent penalty shall be added to the refund for each subsequent month that the refund is made.
Accordingly, the proposed provision of the contract would be permissible.
Supervising Attorney Paul A. Zuckerman