New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

The Office of General Counsel issued the following informal opinion on August 30, 2001, representing the position of the New York State Insurance Department.

RE: Gap Insurance and Gap Waiver Programs.

Questions Presented:

1. May a creditor under a motor vehicle retail instalment contract waive, pursuant to a gap waiver provision of the retail instalment contract, the amount of the deductible under the motor vehicle’s physical damage insurance policy insuring the vehicle that is the subject of the retail instalment contract?

2. May a creditor charge a debtor a $10 administrative fee for a gap waiver under a motor vehicle retail instalment contract?

Conclusions:

1. No, the gap waiver made by the creditor may not include the amount of the deductible.

2. No, a creditor under a motor vehicle retail instalment contract may not charge for the gap waiver an amount that exceeds the cost of motor vehicle creditor gap insurance covering the retail instalment contract.

Facts:

The inquirer’s company "sells ABC Fire Insurance Company’s Residual Value and GAP insurance products in New York. Both contracts are an integral part of [the inquirer’s] Payment Shaver lease-like lending program." The inquirer further noted that one of its competitors announced that it would reimburse the vehicle owner’s primary insurance deductible, up to $1,000, on its GAP Total Loss program in New York. The inquirer wished to know whether such reimbursement is permissible in New York.

The inquirer also stated that its company will "soon be offering XYZ Home Insurance Company’s Guaranteed Auto Protection Plus program in New York." The inquier questioned whether "the $10.00 administrative fee permitted on lease transactions under New York Personal Property Law 335" could also be offered under a retail installment contract.

Analysis:

The inquirer’s letter indicated some confusion as to what a creditor sells in regard to gap insurance in connection with its loans. A brief explanation of New York’s gap insurance and waiver laws is necessary before responding to the inquirer’s questions. Because the inquiry relates solely to motor vehicles, we will address the gap laws principally in that context.

Under a lease or a loan or other credit transaction, a lessee or debtor is typically obligated to the lessor or creditor for the full outstanding amount under the lease or credit transaction, in the event that the lease or credit transaction is terminated early due to the total loss of the property that is the subject to the lease or credit transaction. As a matter of course, the lessor or creditor will require the lessee or debtor to purchase physical damage insurance to protect such lessor’s or creditor’s interest in the event that the property sustains damage or is stolen. Most motor vehicle physical damage insurance policies provide coverage for "actual cash value" (ACV) only, which takes into account the depreciation of the vehicle. Over the life of the lease or the credit transaction, the ACV of the property may at times be significantly less than the amount owed by the lessee or debtor. This meant that, after the lessee or debtor collected under the physical damage insurance policy and used those proceeds to pay the lessor or creditor, the lessee or debtor still owed often substantial amounts under the lease or credit transaction. Lessors and creditors began to sell what was commonly termed a "gap waiver." Under these agreements, the lessor or the creditor agrees to waive the lessee or debtor’s obligation for the "gap;" that is, the difference between the amount owed under the lease or credit transaction, and the ACV. However, the Insurance Department had opined that such gap waivers constituted the doing of an insurance business by the lessor or creditor, and, since the lessors or creditors were not licensed as insurers, they were acting in violation of N.Y. Ins. Law § 1102 (McKinney 2000).

However, in 1994, the Legislature enacted sweeping banking reform legislation, which included the retail lease and credit businesses. (Chapter 1 of the Laws of 1994, as amended by Chapter 2 of the Laws of 1994, and further amended by Chapters 111 and 140 of the Laws of 1995.) One of the provisions of the legislation created a gap waiver exemption from the doing of an insurance business, but only under certain narrow circumstances in regard to personal property, including motor vehicles. N.Y. Ins. Law § 1101(b)(3) (McKinney 2000) provides:

(3) Notwithstanding the foregoing, the making of an agreement pursuant to which a lessor of personal property, a creditor making a loan or other credit transaction on personal property or, in the absence of a waiver by the lessor or creditor, the lessor's or creditor's assignee waives the obligation of the lessee or debtor for the gap amount, as such term is defined in paragraph fifty-two of subsection (a) of section one hundred seven of this chapter, shall not constitute, or be deemed to constitute, the doing of an insurance business if:

(i) the lessor or creditor or, in the absence of a waiver by the lessor or creditor, the assignee waives any and all obligations of the lessee or debtor for the gap amount and the lessee or debtor is discharged from any and all further obligation to pay the gap amount;

(ii) the waiver applies only in the event of a total loss of the personal property occasioned by its theft or physical damage;

(iii) in the event the lessor, creditor or assignee purchases lessor or creditor gap insurance, the charge to the lessee or debtor for the waiver does not exceed the cost of the lessor or creditor gap insurance coverage; provided, however, that nothing contained herein shall be construed to prohibit the lessor from including the charge for the waiver in the capitalized cost as that term is defined in subdivision eleven of section three hundred thirty-one of the personal property law.

Hence, a lessor or a creditor (or an assignee thereof) may waive only the "gap amount", which is defined in N.Y. Ins. Law § 107(a)(52) (McKinney 2000) to mean:

(52) "Gap amount" means:

(A) in the case of a lease of personal property, the difference, if any, between:

(i) the amount owed by the lessee, under the early termination provision of the lease, as of the date of a total loss of the leased property caused by its theft or physical damage, or the amount which would have been owed by the lessee had the lessor not waived such obligations; and

(ii) the sum of: (I) any unpaid rental payments and other unpaid charges, arising from the failure of the lessee to fulfill the lessee's obligations under the lease, that had accrued prior to the date of the loss; and (II) the actual cash value of the personal property as of the date of the loss. If the lessee is required under the lease agreement to maintain a physical damage insurance policy on the personal property which is the subject of the lease agreement, and that policy is in effect on the date of the loss, then "actual cash value" shall have the same meaning as under the physical damage insurance policy.

(B) In the case of a loan or other credit transaction on the purchase of personal property, the difference, if any, between:

(i) the amount owed by the debtor under the loan or other credit transaction as of the date of a total loss of the personal property which is the subject of the loan or other credit transaction agreement caused by its theft or physical damage, or the amount that would have been owed by the debtor had the creditor not waived such obligation; and

(ii) the sum of: (I) any unpaid payments and other unpaid charges, arising from the failure of the debtor to fulfill the obligations under the loan or other credit transaction agreement, that had accrued prior to the date of the loss; and (II) the actual cash value of the personal property as of the date of the loss. If the debtor is required under the loan or other credit transaction agreement to maintain a physical damage insurance policy on the personal property which is the subject of the loan or other credit transaction agreement, and that policy is in effect on the date of the loss, then "actual cash value" shall have the same meaning as under the physical damage insurance policy.

The law was also amended to permit the sale of "gap insurance." Gap insurance may be issued either to the lessor or the creditor, or assignee thereof, for the purposes of compensating the lessee, creditor, or assignee for the amount waived. This is known as lessor/creditor gap insurance. Alternatively, the lessee or the debtor may purchase what is known as lessee/debtor gap insurance, which covers the lessee’s or debtor’s obligation where the gap amount has not been waived. See N.Y. Ins. Law § 1113(a)(24) (McKinney 2000).

In the inquiry the inquirer spoke of offering an insurer’s gap insurance program in New York and reimbursing the debtor for the amount of the deductible under the motor vehicle physical damage policy. Based upon the inquirer’s description of its program, and our knowledge of ABC Fire’s and XYZ Home’s gap insurance products we assume that, as a lender, the inquirer is selling the gap waiver in connection with the making of motor vehicle retail instalment contracts, as such term is used under

N. Y. Pers. Prop. Law Article 9 (McKinney 1992 & Supp. 2001); and that the inquirer has purchased lessor/creditor gap insurance to cover the gap amount waived under the contract. This coverage cannot insure or be sold to the inquirer’s debtors, nor reimburse them. Rather, as noted, the policy compensates the inquirer as the creditor for the amount so waived. If, in lieu of making a gap waiver, the inquirer were to sell lessee/debtor gap insurance, which does provide coverage directly to the lessee or debtor where there is no waiver and the lessee or debtor remains obligated for the gap amount, the inquirer would have to be licensed as an insurance agent or broker in this state.

The lessor or creditor may not waive any obligation other than the gap amount, as defined above. If the lessor or creditor waived an obligation other than the gap amount, then the lessor or creditor would be doing an insurance business and would have to be licensed in this state as an insurer. Since the amount of the deductible is included within the ACV of a motor vehicle or other property (even though the underlying physical damage policy does not provide coverage for the deductible) it cannot be part of the gap amount. Accordingly, a lessor or creditor not licensed as an insurer that waives (or reimburses to the debtor) an amount representing the deductible under the physical damage policy would be doing an insurance business without a license, in violation of N.Y. Ins. Law § 1102 (McKinney 2000).

In regard to the inquirer’s second question, the Insurance Law limits the amount that may be charged by the lessor, creditor or assignee for the gap waiver. As cited above, § 1101(b)(3)(iii) provides that the charge may not exceed the cost of the lessor or creditor gap insurance coverage. Notwithstanding the language of § 1101, N. Y. both Pers. Prop. § 335 McKinney 1992 & Supp. 2001) (which governs motor vehicle retail lease agreements) and N. Y. Gen. Bus. §339-w (1996 & Supp. 2001) (which governs non-motor vehicle retail lease agreements) specifically provide that the gap waiver offer may be made contingent upon the payment by the lessee of a separate charge that shall not exceed the cost of lessor gap insurance covering the retail lease transaction plus an administrative fee not to exceed ten dollars. Inasmuch as these provisions were enacted within the same bills, the Department construes the ten dollar fee provisions for retail lease transactions as an implicit exception from the Insurance Law provision. Accordingly, in those limited circumstances regarding retail lease transactions, a lessor or its assignee may charge an amount that exceeds the cost of its lessor gap insurance, but limited to ten dollars, without doing an insurance business.

In all other cases, the lessor or creditor may not charge more than the amount of the gap insurance. In fact, N. Y. Pers. Prop. § 302A (McKinney 1992 & Supp. 2001) (which governs motor vehicle retail instalment contracts) and N. Y. Pers. Prop. § 402A (McKinney 1992 & Supp. 2001) (which governs non-motor vehicle retail instalment contracts) both specifically provide that the gap waiver may be made contingent upon the payment by the buyer of a separate charge that shall not exceed the cost of the creditor gap insurance covering the retail instalment contract. Hence, unlike in the case of retail leases, the cost of the gap waiver for retail instalment contracts may not exceed the cost of the gap insurance that is purchased by the creditor.

It should also be pointed out that the Insurance Law does not require that a lessor, creditor, or assignee must purchase lessor or creditor gap insurance. However, each of the four aforementioned statutes in the Personal Property Law and General Business Law regarding retail leases and instalment contracts do provide that if the retail lease or instalment contract holds the lessee or buyer responsible for the gap amount, then a gap waiver must be offered but only if lessor or creditor gap insurance is available from a New York authorized insurer to the lessor, creditor or assignee. The lessor, creditor or assignee is not required to offer to waive the gap amount only if it has obtained declinations or other evidence of unavailability of insurance from every insurer authorized to write the gap insurance in this state. In other words, as a practical matter, the lessor, creditor or assignee under a retail lease or instalment contract may not hold the lessee or debtor liable for the gap amount without offering the gap waiver, and may not offer the gap waiver unless there is gap insurance behind it, with the corresponding limitations on the fee that may be charged for the gap waiver.

For further information, you may contact Principal Attorney Paul A. Zuckerman at the New York City office.

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