The Office of General Counsel issued the following opinion on May 23, 2001 representing the position of the New York State Insurance Department.
RE: Monument "Warranty" Plan
Is the program proposed by ABC permissible under the New York Insurance Law?
The proposed program would constitute the doing of an insurance business without a license under the New York Insurance Law. Thus, it would not be permitted.
ABC is a trade association of persons and companies involved in the monument (i.e., headstones and memorial markers) industry. ABC offers to its members a program that it labels a "warranty program". Under the program, ABC members (the sellers of monuments) would offer to provide monument purchasers, for a fee, a "warranty" to cover loss arising due to the theft or vandalism of a monument. The documents submitted with your inquiry indicate that the "warranties" provided by ABC members are backed by an insurance policy issued to ABC as insured. The inquirers agency represents the XYZ Companies, the issuer of this policy.
Under New York law, generally no person or entity may carry on an insurance business without a license. N.Y. Ins. Law §1102(a) (McKinney 2000). The "doing of an insurance business" is defined, inter alia, as "making, or proposing to make, as insurer, any insurance contract." N.Y. Ins. Law § 1101(b)(1)(A) (McKinney 2000). "Insurance contract" is defined in N.Y. Ins. Law § 1101(a)(1) (McKinney 2000) as follows:
"Insurance contract" means any 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.
A "fortuitous event" is defined as "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 2000). The doing of an insurance business also includes "making, or proposing to make, as warrantor, guarantor, or surety, any contract of warranty, guaranty or suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the warrantor, guarantor or surety." N.Y. Ins. Law § 1101(b)(1)(B) (McKinney 2000).
In the inquiry, the inquirer referred to the program as a "warranty". In general, a warranty relates in some way to the nature or efficiency of a product or service. Commonly, the warrantor agrees to repair or replace a product that fails to perform properly, such as a contract covering a defect in materials or workmanship or a contract otherwise covering the breakdown of the product. Where the maker of a contract has a relationship to the product or service, or does some act that imparts knowledge of the product or service to the extent of minimizing, if not eliminating, the element of chance or risk contemplated by N.Y. Ins. Law § 1101(a), then the contract is a warranty. Where there is no relationship or act, the maker of the contract undertakes an obligation involving a fortuitous risk, and the agreement is an insurance contract and constitutes the doing of an insurance business. If the maker is not licensed as an insurer, the contract would be issued in violation of N.Y. Ins. Law §1102 (McKinney 2000).
In the instant case, the contracts are not warranties and their sale by the ABC members to their customers would, under the New York Insurance Law, constitute the conduct of an insurance business. The contracts actually provide insurance against theft or vandalism. The theft or vandalism of the covered monument would constitute the "fortuitous event" for which coverage is offered, and the replacement or repair of the monument constitutes the requisite "benefit of pecuniary value". See Ollendorff Watch Co. v. Pink, 279 N.Y. 32 (1938). Because ABC is not a licensed insurer (and, furthermore ABCs members are not licensed agents), the program as described would not be permitted under the New York Insurance Law.
For further information, you may contact Supervising Attorney Michael Campanelli at the New York City office.