The Office of General Counsel issued the following informal opinion on October 12, 2001, representing the position of the New York State Insurance Department.
Re: Warranty required by DOT
Is the warranty agreement provided to the Department considered an insurance contract?
No. The warranty agreement provided to the Department is restricted to the replacement or repair of parts of an imported automobile to conform said automobile to federal standards of safety, and the obligations thereunder do not constitute doing an insurance business.
A brokerage firm in Arizona has an automobile dealer as a client that intends to import cars from Canada. The Federal Department of Transportation ("DOT") requires that a warranty be attached to an imported vehicle to ensure that such vehicle meets federal standards of safety for use in the United States. There is no fee to the automobile purchaser for this warranty, which guarantees that a maximum total of $2,000 may be paid towards remedying any safety-related defect related to DOT requirements. The contract in question refers to itself as a "service insurance policy." The obligations of the registered importer are insured by a Third Party Administrator ("TPA"). No information about this Administrator has been provided.
N. Y. Ins. Law § 1101 (a) (McKinney 2000) states in pertinent part:
(a) In the article: (1) 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.
(2) 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 party.
(3) Contract of warranty, guaranty or suretyship means an insurance contract only if made by a warrantor, guarantor or surety who or which, as such, is doing an insurance business.
While the Insurance Law does not define the term "warranty", a warranty generally relates in some way to the nature or efficiency of a product or service. Commonly, the warrantor agrees to repair or replace a poorly performing product. Ollendorf Watch Co., Inc. v. Pink, 279 N.Y. 32, 17 N.E. 2d 675 (1938).
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 exercises control over the product or service to the extent of minimizing, if not eliminating, the element of chance contemplated by New York Ins. Law §1101 (a) (McKinney 2000). The making of this warranty by the registered importer, as the seller in the chain of sale, does not constitute the doing of an insurance business and is merely incidental to its other legitimate business or activity.
The warranty is not an insurance contract although the agreement refers to the registered importer as an insurer, and makes references therein to its being a service insurance policy. Such choice of words is misleading and should be rephrased. Additionally, the warranty states that the obligations are insured under a "contractual liability policy" by the TPA. However, the TPA is not an authorized insurer in New York, and therefore may not do an insurance business in this State.
The Department would object to the use of this warranty in New York because the TPA is not licensed in New York as an insurer, and there is a misleading choice of words in the warranty indicating it to be insurance when it is not.
For further information you may contact Associate Attorney Jeffrey A. Stonehill at the New York City Office.