The Office of General Counsel issued the following informal opinion on August 29, 2001, representing the position of the New York State Insurance Department.
Re: Theft deterrent discount program
Is the theft deterrent discount program offered by the inquirer in violation of the New York Insurance Law?
The inquirers enclosed program application did not provide enough detailed information to make a determination.
The inquirers company intends to register in New York pursuant to N. Y. Insurance Law Article 79 (McKinney 2000) as a service contract provider in connection with motor vehicles. In addition, the company desires to offer automobile dealers a theft deterrent discount program for dealers to sell to their customers.
The program is described as follows: The dealer will sell and install or etch the theft deterrent product in or on the new or used automobile and submit a predetermined amount to your company based on the customers selection of a discount among several choices offered between $1,000 to $5,500, with terms of 2 years from the sale date to as long as 5 years from sale date. If the vehicle is stolen, the dealer will provide a discount on the price of the replacement vehicle bought or leased from the dealer. A portion of the money will pay the inquirers companys fee as administrator for the program and another portion will be a reserve amount that your company will hold in escrow for the dealer. Claim payments will be made to the dealer from the escrow account. The dealer discount for the replacement vehicle will never totally eliminate all of the dealers profit on the replacement vehicle.
N.Y. Ins. Law § 1101 (a) (McKinney 2000) provides, in part, the following definitions:
"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.
"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 event.
N. Y. Ins. Law § 1101 (b)(1) (McKinney 2000) provides that with certain exceptions:
. . . any of the following acts in this state, effected by mail from outside this state or otherwise, by any person, firm, association, corporation or joint-stock company shall constitute doing an insurance business in this state. . . :
(A) making, or proposing to make, as insurer, any insurance contract, including either issuance or delivery of a policy or contract of insurance or delivery of a policy or contract of insurance to a resident of this state or to any firm, association, or corporation authorized to do business herein, or solicitation of applications for any such policies or contracts;. . .
(C) collecting any premium, membership fee, assessment or other consideration for any policy or contract of insurance; . . .
A motor vehicle dealer providing a discount on a replacement vehicle dependent upon the total loss of a prior purchase would not be doing an insurance business within the meaning of N. Y. Ins. Law § 1101 (b) (McKinney 2000) so long as the discount price of the new vehicle (including any other discounts that the dealer may provide) covers the cost of the vehicle to the dealer, any labor or material cost borne by the dealer, and reasonable overhead expense, thus avoiding assumption of a risk of loss. In other words, a dealer may agree in the discount to reduce its profit margin on the new vehicle but may not agree to sell the vehicle at a break-even or lower point. Under the inquirers proposed program, the enclosed contract specifically provides that the discount will be given only to the extent that it does not completely eliminate the dealers profit on the replacement vehicle.
It is unclear in the inquirers presentation about the ownership of the escrow monies. If the dealer does not retain ownership of the monies at all times, the company, the administrator, would be considered by the Department to be doing an insurance business without a license in violation of N. Y. Ins. Law § 1102 (a) (McKinney 2000). Based on the facts presented, it is unclear whether the company would be undertaking any obligation to the dealer or to the consumer to pay any amount, other than to return the dealers own monies to the dealer. If the companys duties involve any such obligation, then that activity would be considered doing an insurance business without a license in violation of N. Y. Ins. Law § 1102 (McKinney 2000). The Department was not provided with a copy of the agreement between the dealer and the administrator, which would be necessary to opine on whether the program conforms to the Insurance Law.
In this context, the application provided by the inquirer is confusing. Under the definitions noted in Section 1, "COMPANY" means the dealer. Yet on the reverse side of the application, the context surrounding the word "COMPANY" implies it means the company as Administrator, not the dealer. For example, it is the companys telephone number that is listed in Section 7 of the form as being the number for the COMPANY Claim Department. In addition, the form states "20% of the M.S.R.P. of the VEHICLE" in Section 4 of the form without defining the meaning of "M.S.R.P." in the form.
It must be noted that insurance that would indemnify the dealer or the administrator for the amount of the discount is not included among the kinds of insurance authorized in New York under N. Y. Ins. Law § 1113 (McKinney 2000).
For further information you may contact Associate attorney, Jeffrey A. Stonehill at the New York City Office.