The Office of General Counsel issued the following opinion on February 12, 2002, representing the position of the New York State Insurance Department.
RE: Extended Warranties and Home Warranties
Questions Presented:
1) Are "extended service contracts" or warranties sold in New York, regulated by New York Insurance Law?
2) Are home warranties sold in New York, regulated by New York Insurance Law?
Conclusions:
1) Whether New York Insurance Law regulates contracts characterized as extended service contracts, or warranties, turns on the facts underlying such contract, which must be analyzed to determine if it is a warranty pursuant to N.Y. Ins. Law § 1101 (McKinney 2000), or a "service contract" pursuant to N.Y. Ins. Law Art. 79 (McKinney 2000).
2) Home warranties are subject to the same analysis as any other extended service contract or warranty, and may also be subject to N.Y. Ins. Law Art. 79 (McKinney 2000) or N.Y. Ins. Law § 1101 (McKinney 2000).
Facts:
No specific facts were provided.
Analysis:
The inquirer neither provided a specific factual situation that precipitated this inquiry nor defined the phrase "extended service contracts," which the inquirer asserted are otherwise known as warranties. It is irrelevant what the contract is characterized by the maker. Whether a particular contract is regulated by the Insurance Law will depend on the nature of the agreement.
While the Insurance Law does not define "warranty," in general, a warranty relates in some way to the nature or efficiency of a product or service. Generally 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).
A "service contract" is defined, in pertinent part, in N.Y. Ins. Law § 7902(k) (McKinney 2000) 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 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. Service contracts may include towing, rental and emergency road service , . . .
"Maintenance agreement" is defined in N.Y. Ins. Law § 7902(d) (McKinney 2000) as follows:
. . . a contract of limited duration that provides for scheduled maintenance of property, other than contracts providing for the repair or replacement of such property due to a defect in materials or workmanship or wear and tear.
N.Y. Ins. Law § 1101 (McKinney 2000), provides, in pertinent part:
(a)(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.
(b)(1) Except as provided in paragraph two, three or three-a of this subsection, any of the following acts in this state, effected by mail from outside this state or otherwise, by any person, firm, association, corporation or joint-stock company shall constitute doing an insurance business in this state and shall constitute doing business in the state within the meaning of section three hundred two of the civil practice law and rules:
(A) making, or proposing to make, as 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;
. . . .
As can be seen from the above, 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). Where there is no relationship or act, the maker of the contract undertakes an obligation involving a fortuitous risk, and the agreement is an insurance contract and constitutes the doing of an insurance business; except that N.Y. Ins. Law § 1101(b)(3-a) (McKinney 2000) provides that the marketing, sale, offer for sale, issuance, making, proposing to make or administration of a service contract pursuant to Insurance Law, Art. 79 (McKinney 2000) or a warranty, service contract or maintenance agreement conditioned upon or otherwise associated with the sale or supply of heating fuel shall not constitute doing an insurance business in this state.
Prior to the enactment of Article 79, the Department concluded that the making of warranties by a manufacturer, seller, or other person in the chain of sale did not constitute the doing of an insurance business, regardless of whether a fee was charged for the warranty. After the enactment of Article 79, the Department opined that where the maker charges a fee for a warranty, as is the case with an "extended warranty," such an agreement is a service contract and the maker must be registered as a service contract provider.
Upon reconsideration in July 2001, the Department opined that the mere charging of a fee does not convert a warranty into a service contract. If the contract is a warranty, and the warrantor does not make warranties as a vocation but as merely incidental to any other legitimate business or activity of the warrantor, then, even though a fee is charged, the contract remains a warranty and is not 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.
A service contract must be in compliance with the requirements of N.Y. Ins. Law §§ 7901-7913 (McKinney 2000), which pertain to service contracts, as well as with the requirements of N.Y. Comp. Codes R. & Regs. tit. 11, §§ 390.0-390.13 (2001).
Although no facts were provided to explain under what conditions the "home warranty" would be provided, the above analysis would apply to whomever makes such warranty.
For further information you may contact Senior Attorney Susan A. Dess at the New York City Office.