The Office of General Counsel issued the following informal opinion on May 14, 2001, representing the position of the New York State Insurance Department.
Re: Service Fees by Repairers Under Service Contracts
May an automobile dealer charge a service fee when honoring a claim under a service contract?
If the automobile dealer is an administrator on behalf of the service contract provider, it may not charge the service contract holder any fee that is not specified in the service contract. If the dealer is not the providers administrator, then the dealer is not bound by the service contract and may charge a fee. However, such fee would be considered a cost of repair and, as such, the service contract would govern as to whether the service contract provider is obligated to pay the fee.
No fact pattern was specified since the question was of a general nature. The Inquirer stated that franchised new vehicle automobile dealers frequently honor service contracts from a variety of aftermarket providers other than the manufacturer. According to dealers, it often takes weeks of telephone calls and paperwork processing before a claim is paid. To defray the cost of the additional work necessary to process a claim, the inquirer wants to know whether a dealer would violate the Insurance Law or regulations if it charged a customer an administration fee to process a service contract claim with an aftermarket service contract company.
Article 79 of the Insurance Law (N.Y. Ins. Law § 7901 et seq. (McKinney 2000)) governs the sale of service contracts in New York and requires that service contract providers must be registered with the Insurance Department before they may issue such contracts.
Service contract providers often enter into agreements with dealers, repair shops, etc. to honor any claims that may be made by service contract holders under service contracts. Sometimes the provider will authorize repairs to be made to the property; in other circumstances the provider may authorize replacement of the property. When a dealer, etc. enters into such an arrangement with the provider, the dealer acts on behalf of the provider in handling claims. Essentially, the dealer becomes the providers agent.
When a dealer acts on behalf of the provider, the provisions of the service contract govern the dealer in the same manner as the service contract provider itself. Accordingly, any fee to be charged by the dealer to the service contract holder would be improper, unless it is specifically provided for in the service contract itself. The dealer would be entitled to compensation only in accordance with the agreement between it and the provider.
However, if the dealer is not acting on behalf of the provider, then the dealer is not bound by the service contract and is not obligated to perform under its terms. Any service fee that the dealer would charge is actually a cost of the repair or replacement. Whether the service contract provider will be obligated to cover the cost will depend upon the terms of the service contract. For example, if the service contract required that the provider must specifically authorize the dealer to perform a repair, the service contract provider would be responsible to cover the fee under the service contract, unless the service contract contained limitations or exclusions that would apply. The provider could withhold authorizing the repair by the dealer unless the dealer obligated itself not to charge a fee and to agree to accept the providers payment as payment in full. However, such refusal to authorize a repair cannot be unreasonable and the provider would have to provide the service contract holder with reasonable alternative means of performance.
For further information you may contact Supervising Attorney, Paul A. Zuckerman, at the New York City Office.