The Office of General Counsel issued the following informal opinion on October 10, 2001, representing the position of the New York State Insurance Department.

Re:  Service Contracts/Warranties

Questions Presented:

1. Are there any statutes or regulations pertaining to service contracts covering personal watercrafts?

2. Must a service contract provider be licensed or file registration forms?

3. Is there a difference in characterizing the nature of the contract when the service contract provider is the manufacturer, distributor or dealer as opposed to a third party provider?

Conclusions:

1. Yes. 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 Part 390 (2001) (Regulation 155).

2. A service contract provider is not licensed by the Insurance Department but must register with the Department and demonstrate proof of financial responsibility.

3. Yes. Where there is a relationship to the product, such as one that a manufacturer, distributor, or dealer would have, and the contract is sold as incidental to other business of the obligor, the contract constitutes a warranty and is not a service contract requiring registration.

Facts:

Ms. A, a research assistant at Company B, is assisting service contract providers to develop programs on personal watercrafts such as jet skis, waverunners, and waterbikes.

The contracts would provide for the repair or replacement of parts that fail due to a defect in material and/or workmanship. The obligor on the contract would be either the manufacturer, distributor, the dealer, or a third party. Such contracts would be sold by personal watercrafts dealers to their customers.

Analysis:

N. Y. Ins. Law § 7902 (k) (McKinney 2000) defines service contract, in pertinent part, to mean ". . . a contract or agreement, for a separate or additional consideration, for a specific duration to perform the repair, replacement or maintenance of property, or indemnification for repair, replacement or maintenance, due to a defect in materials or workmanship or wear and tear. . . "

N. Y. Ins. Law § 7902 (h) (McKinney 2000) defines a service contract provider to mean ". . . a person who markets, sells, offers for sale, issues, makes or proposes to make or administers a service contract, and who is contractually obligated to provide service under a service contract."

No person may act as a service contract provider unless it registers as a provider. N. Y. Ins. Law § 7907 (a) (McKinney 2000).

Registration applications may be obtained from the Insurance Department’s Licensing Bureau at:

The Office of General Counsel is sending a copy of this letter to the Licensing Bureau to request on Ms. A’s behalf that it send the registration application directly to Ms. A.

As for Ms. A’s question regarding how a contract may be categorized based on the identity of the provider, service contracts and warranties are similar in that both relate to the nature or efficiency of a product, but there are distinctions between them. In order to be a warranty, the maker of the contract must have a relationship to the product or service, or do 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) (McKinney 2000). The making of a warranty does not constitute the doing of an insurance business so long as it is not done as a vocation but as merely incidental to any other legitimate business or activity of the warrantor. N.Y. Ins. Law § 1101(b)(1)(B) (McKinney 2000). If the contract is a warranty, it remains one even though a fee is charged. This would be the case for someone in the chain of sale, such as the manufacturer, distributor or dealer. The mere charging of a fee does not convert a warranty into a service contract. However, where the contract is not a warranty, because the maker has not exercised the requisite control over the property, or if the maker would be doing an insurance business in making the warranties (as would be the case with a person that is not in the chain of sale), then the maker of the agreement would have to register as a service contract provider.

For further information you may contact Associate Attorney Jeffrey A. Stonehill at the New York City Office.