The Office of General Counsel issued the following opinion on October 1, 2002, representing the position of the New York State Insurance Department.
RE: Guaranteed Price Refund Agreements.
1. Pursuant to the New York Insurance Law, does the making of a guaranteed price refund agreement by a service contract provider or warrantor constitute the doing of an insurance business that requires licensing as an insurer?
2. Is a guaranteed price refund agreement a warranty or a service contract?
1. No. The issuance of a guaranteed price refund agreement by a warrantor or service contract provider, in connection with a warranty or service contract, does not constitute the doing of an insurance business under N.Y. Ins. Law § 1101 (McKinney 2000 & Supp. 2002).
2. No. The guaranteed price refund agreement is neither a warranty nor a service contract since it is not an agreement to repair, replace or maintain a product that fails to perform due to a defect in materials or workmanship or wear and tear.
A guaranteed price refund is an agreement between the obligor under a service contract issued pursuant to Article 79 of the Insurance Law or an extended warranty and the consumer. If no mechanical breakdown claim or benefit is paid under the service contract or extended warranty, a claim may be made under the guaranteed price refund program for reimbursement of the amount of the service contract or extended warranty price, up to a maximum of $2,500 provided that the following conditions are met: 1) the consumer must personally request the refund in writing within 180 days after the service contract or extended warranty expires, and submit the original or copy of the guaranteed price refund application; 2) the consumer must still own the vehicle/unit referenced by the service contract or extended warranty and guaranteed price refund agreement, and proof of ownership must be produced upon request; and 3) the service contract or extended warranty must have remained in force for its entire duration, and expired due to time or mileage and must not have been transferred.
Additionally, the consumer may cancel the guaranteed price refund of the service contract or extended warranty price within 60 days of the purchase date of the service contract or extended warranty for a full refund. However, no refunds will be made after 60 days or if a claim has been filed. The guaranteed price refund will be sold in conjunction with extended warranties or service contracts that cover automobiles, watercraft, personal watercraft, motorcycles, snowmobiles, motor homes or travel trailers and must be sold on the same day that the service contract or extended warranty is sold. A separate fee is charged for the agreement, and the consumer is given notice that the agreement is optional and does not constitute insurance.
N.Y. Ins. Law § 1102(a) (McKinney 2000) prohibits any person, firm, association, corporation or joint-stock company from doing an insurance business in this state, unless licensed as an insurer or exempted from licensing.
N.Y. Ins. Law § 1101(b)(1) (McKinney 2000 & Supp. 2002) defines the term "doing an insurance business", in pertinent part, as follows:
(A) making, or proposing to make, as an insurer, any insurance contract, including either issuance 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;
B) 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; . . .
Subparagraphs (C), (D) and (E) are not relevant to this discussion.
N.Y. Ins. Law § 1101(a)(1) (McKinney 2000 & Supp. 2002) defines "insurance contract" as follows:
(a)(1) [A]ny 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. (emphasis supplied)
In the present case, pursuant to the inquirers description of what constitutes a guaranteed price refund agreement, the consumer receives a refund of the price of the service contract or extended warranty, up to $2,500, if there is no mechanical breakdown during the life of the service contract or warranty and the other conditions set forth in the agreement are met. The failure of the mechanical breakdown to occur is a fortuitous event but its happening does not adversely affect a material interest of the consumer. The benefit (the refund) is provided when no adverse event occurs. Consequently, a crucial element in the formation of an insurance contract is missing and the guaranteed price refund agreement is not an insurance contract. Therefore, the issuance of a guaranteed price refund agreement by a warrantor or service contract provider does not constitute the doing of an insurance business under section 1101 of the New York Insurance Law.
Warranties and Service Contracts
While the Insurance Law does not define the term "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. Ollendorf Watch Co., Inc. v. Pink, 279 N.Y. 32, 17 N.E.2d 676 (1938).
Pursuant to N.Y. Ins. Law § 7902(k) (McKinney 2000), a service contract is defined as:
(k) [A] contract or agreement, for a separate or additional consideration, for a specific duration, to perform the repair, replacement or maintenance of property due to a defect in materials or workmanship or wear or tear, with or without additional provision for indemnity payments for incidental damages, provided any such indemnity payment per incident shall not exceed the purchase price of the property serviced. . . .
Generally speaking, a warranty made by the manufacturer, seller or other person in the distribution of sale or lease does not constitute the doing of an insurance business or the making of a service contract. However, such contracts made by other persons would require that person to register as a service contract provider.
In the present case, the guaranteed price refund agreement is neither a warranty, nor a service contract since it is not an agreement to repair, replace or maintain a product that fails to perform due to a defect in materials or workmanship or wear and tear. Assuming the facts provided, it is an agreement that is designed to supplement the extended warranty or service contract.
Please note that the New York Service Contract Law was enacted by Chapter 614 of the Laws of 1997, effective January 15, 1998, which amended several sections of the Insurance law and added a new Article 79 to the Insurance Law. Article 79 exempts the business of service contracts from all other provisions of the Insurance Law and establishes a framework by which service contract providers must be registered with, and subject to the jurisdiction of the Superintendent. N.Y. Ins. Law § 7903(c) (McKinney 2000) provides alternative methods by which a service contract provider can demonstrate financial responsibility. To the extent that the program that the inquirer described is being offered by a service contract provider, the Department would be concerned with the providers financial ability to offer a product that may refund to the consumer all or a significant portion of the service contract price.
This opinion is limited to an interpretation of the New York Insurance Law. No opinion is rendered regarding any other law.
For further information, you may contact Attorney Pascale Joasil at the New York City office.
1 We understand the term "extended warranty" to refer to a warranty as discussed below for which a separate fee is charged.