The Office of General Counsel issued the following opinion on October 15, 2002, representing the position of the New York State Insurance Department.
RE: Applicability of Article 79 of the New York Insurance Law and Regulation 155 to Home Warranties.
1. Does N.Y. Ins. Law Article 79 (McKinney 2000) and N.Y. Comp. Codes R. & Regs. tit. 11, §§ 390.0-390.13 (2001) (Regulation 155) apply to home warranties?
2. May a surety bond, issued in a state other than New York, be used by a service contract provider to fund its financial security deposit under N.Y. Ins. Law § 7903(c)(2)(B) (McKinney 2000) and N.Y. Comp. Codes R. & Regs. tit. 11, § 390.10(c)(1) (2001)?
3. What are the requirements for the submission of a default contingency plan agreement with a service contract provider registration application?
1. It may, depending upon the specific facts as to the issuance of and obligations under the home warranty. Each home warranty must be analyzed as to whether it constitutes a warranty or a service contract under the New York Insurance Law.
2. Yes, provided that the insurer that issued the surety bond is licensed in New York to write fidelity and surety insurance.
3. Pursuant to N.Y. Comp. Codes R. & Regs. tit. 11, § 390.12 (2001), a service contract provider that elects to demonstrate financial responsibility by means of a funded reserve account and financial security deposit, or by the net worth qualification, must include a "default contingency plan" in its registration application. Section 390.12 of Regulation 155 provides that a default contingency plan agreement must contain eight undertakings and designations of authority to the future claims trustee. The agreement must be dated, signed and notarized by the service contract provider.
No specific facts were provided.
Question No. 1
How the maker of a contract characterizes the contract is irrelevant when determining whether such contract constitutes a warranty or a service contract under the New York Insurance Law. Generally, whether a particular contract constitutes a warranty or a service contract depends on the relationship that the obligor has to the product. Where there is a relationship to the product, such as one that a manufacturer or seller would have, the contract constitutes a warranty and is not a service contract. However, if the contract is issued by a third party, who is not in the chain of sale, the obligor thereunder must register with the Superintendent as a service contract provider pursuant to Article 79 of the Insurance Law and in accordance with N.Y. Comp. Codes R. & Regs. tit. 11, §§ 390.0-390.13 (2001). Home warranties are subject to the foregoing analysis under the New York Insurance Law and the determination as to whether a home warranty constitutes a warranty or service contract under the Insurance Law is dependent upon the facts surrounding the transaction and the terms and undertakings under the contract. A specific home warranty may constitute a service contract under the New York Insurance Law. Since the inquirer did not provide us with such specific information about a particular home warranty, we could not provide the inquirer with an analysis.
Question No. 2
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. Section 7903(c) provides, in pertinent part, as follows:
(c) In order to assure the faithful performance of a providers obligations to its contract holders, each provider who is contractually obligated to provide service under a service contract shall comply with one of the following three paragraphs of this subsection:
(1) insure the performance of all its obligations under all service contracts pursuant to a service contract reimbursement insurance policy issued by an insurer authorized to issue service contract reimbursement insurance in this state. . . .
(2)(A) maintain a funded reserve account for its obligations under its service contracts issued and outstanding in this state, which reserve account (i) contains reserves in an amount not less than forty percent of the gross consideration received upon the sale of, less claims paid under, all its service contracts then in force, but not less than zero, and (ii) shall be subject to examination and review by the superintendent; and
(B) place in trust with the superintendent a financial security deposit, having a value of not less than five percent of the gross consideration received upon the sale of, less claims paid under, all service contracts issued and then in force, but not less than fifty thousand dollars, consisting of one or more of the following:
(i) a surety bond issued by an authorized surety;
(ii) securities of the type eligible for deposit by authorized insurers in this state;
(iii) cash; or
(iv) a letter of credit issued by a qualified United States financial institution; or
(3)(A) maintain a net worth or stockholders equity of at least one hundred million dollars; and
(B) provide the superintendent with a copy of the financial statements of the provider, either on a stand alone basis or consolidated with its consolidated affiliates, included in its or its direct or indirect parent companys most recent annual report on form 10-K or form 20-F filed with the securities and exchange commission within the last calendar year, or if the provider or its direct or indirect parent is not required to file such reports with the securities and exchange commission, a copy of the audited financial statements of the provider. . . . (emphasis supplied)
Thus, if a service contract provider elects to comply with Section 7903(c)(2) as a method of demonstrating financial responsibility, it must maintain a funded reserve account in the amount specified as well as a financial security deposit of the value as specified in the statute. The financial security deposit must be funded with one or more of the types of cash or financial instruments enumerated in Section 7903(c)(2)(B). If the service contract provider chooses to include a surety bond in its financial security deposit, the surety bond must be issued by an insurer that is licensed to write fidelity and surety insurance under § 1113(a)(16) of the Insurance Law. See also Section 390.10(c)(1) of Regulation 155.
Question No. 3
N.Y. Ins. Law § 7911(McKinney 2000) gives the Superintendent authority to promulgate regulations to effectuate Article 79 (McKinney 2000). In accordance with this authority, the superintendent promulgated Regulation 155.
Under section 390.12 of Regulation 155, a service contract provider that elects to demonstrate financial responsibility by means of a funded reserve account and financial security deposit, or by the net worth qualification, must include a default contingency plan agreement in its registration application.
Section 390.12 of Regulation 155 states that the default contingency plan agreement shall provide as follows:
(a) for the appointment of a claims trustee that is acceptable to the superintendent and who is registered as a provider, in the event of a providers default in performance as specified in sections 390.10(e) and 390.11(c) of this Part;
(b) that the appointment shall be made within 15 days of the providers default;
(c) that the superintendent may make the appointment in the event the provider fails to make an appointment within the time specified by subdivision (b) of this section or if the appointed trustee fails to serve or resigns;
(d) for the trustee to administer all claims outstanding and which may arise after the providers default;
(e) for the trustee to receive from the superintendent the funded reserve account, any securities deposited with the superintendent as financial security, and, in the case of a provider that met the net worth qualification, all funds that said provider shall have allocated upon its books of account to obligations to contract holders arising from service contracts marketed, issued, sold or offered for sale, made or offered to be made, or administered in this State on and after January 15, 1998.
(f) for the trustee to apply all funds received pursuant to subdivision (e) of this section exclusively to the payment of claims arising from service contracts issued by the provider;
(g) for the trustee to have the power to bring actions or proceedings against the provider to obtain the funds provided for by subdivision (e) of this section and any additional funds that may be necessary for the payment of claims and expenses arising from service contracts issued by the provider; and
(h) that all funds received by the trustee pursuant to the default contingency plan shall be treated as trust funds and shall not be used for any purpose except as specified in subdivision (f) of this section.
A default contingency plan agreement is a document prepared by the service contract provider applicant and under which the provider specifies the foregoing eight undertakings and designations of authority to the future claims trustee. The agreement must be dated, signed and notarized by the service contract provider. Pursuant to section 390.12 of Regulation 155 a service contract provider that elects to demonstrate financial responsibility by means of a funded reserve account and financial security deposit, or by the net worth qualification, must include a "default contingency plan" in its registration application.
The current service contract provider registration application being used by the Department may not specifically refer to the default contingency plan agreement requirement but nevertheless the applicant is required to include such an agreement with its application. The registration application will be amended to explicitly refer to this regulatory requirement.
For further information, you may contact Attorney Pascale Joasil at the New York City office.
1 Please note that the submission of a default contingency plan is not required if the service contract provider elects to demonstrate financial responsibility through obtaining service contract reimbursement insurance.