The Office of General Counsel issued the following informal opinion on February 27, 2002, representing the position of the New York State Insurance Department.
RE: Conditional Gap Waiver Provision in a Lease Agreement.
Is the limitation in a gap waiver provision of a lease agreement, conditioning payment upon the lessees automobile physical damage insurers payment of the underlying physical damage claim, enforceable where the lessees insurer refused payment on the underlying theft claim?
No. Under N.Y. Ins. Law § 1101 (b)(3)(i) (McKinney 2000), the gap waiver may not be conditioned upon the happening of a fortuitous event such as payment on the underlying theft claim by the lessees automobile physical damage insurer. Since the conditional gap waiver provision abrogates the requirement of § 1101(b)(3), it may not be enforced and, the lessee is discharged from any obligation for the gap amount.
The inquirers client (lessee) leased a BMW automobile for a period of sixty months. The lease agreement had a gap waiver provision, under which the lessor agreed to waive the gap amount (that is generally the difference between the actual cash value of the vehicle under the physical damage insurance policy and the obligation remaining under the lease agreement) that the lessee would otherwise have been obligated to pay. However, the gap waiver specifically stated that the lessee was required to obtain automobile insurance for physical damage and theft loss and that in the event of a loss "the gap waiver will apply and be operative only if the insurance company makes the payment as required under the insurance policy."
Pursuant to the lease agreement, the lessee obtained an automobile physical damage insurance policy. The application for the insurance policy, signed by the lessee, contained the following non-business use clause: "I certify, by my signature below, that I do NOT use the previously listed vehicle(s) for business use (including farm, artisan, or any other use related to business) and that I will not use this vehicle for business use during the policy period. I will also NOT permit anyone else to use the listed vehicle(s) for business use during the policy period. The vehicle is currently used and will be used only in the future for commuting and/or personal purposes. I understand that if any claims result from the above vehicles use in business, that such claims may be denied and that I further may be charged additional premium, which I hereby agree to pay."
In September 2000, the lessee, who works for a general contractor, allowed a third party at his office to use the car for the purpose of picking up architectural plans for the firm. The car was stolen while in the possession of this third party. The third party was an employee at the lessees firm and also a friend of the lessees. In January 2001, the insurer notified the lessee that it was denying the claim due to the non-business use clause.
The gap waiver provision in the lease agreement is conditioned upon the lessees automobile physical damage insurer making payment on his underlying theft claim. It states in the lease agreement that the gap waiver provision will apply and be operative only if the automobile physical damage insurer makes the payment on the underlying claim.
This limitation in the gap insurance provision is not permissible under N.Y. Ins. Law § 1101(b)(3) (McKinney 2000). Under § 1101(b)(3), gap insurance provided by lessors must be unconditional in order for it not to constitute the, "doing of an insurance business". N.Y. Ins. Law § 1101(b)(3) states in pertinent part that:
(3) ..., the making of an agreement pursuant to which a lessor of personal property, a creditor making a loan or other credit transaction on personal property or, in the absence of a waiver by the lessor or creditor, the lessors or creditors assignee waives the obligation of the lessee or debtor for the gap amount, as such term is defined in paragraph fifty-two of subsection (a) of section one hundred seven of this chapter, shall not constitute or be deemed to constitute, the doing of an insurance business if:
(i) the lessor or creditor or, in the absence of a waiver by the lessor or creditor, the assignee waives any and all obligations of the lessee or debtor for the gap amount and the lessee or debtor is discharged from any and all further obligation to pay the gap amount;
N.Y. Ins. Law § 1101(b)(3) (McKinney 2000)
If the gap waiver provision in the lessees lease agreement, which is conditioned upon the making of a payment by the automobile physical damage insurer is enforced, the lessor would in effect be doing an insurance business without an insurance license, which is prohibited under N.Y. Ins. Law § 1102(a) (McKinney 2000), and the lessee would be making an illegal insurance contract.
The gap waiver must apply whenever there is a total loss because of theft or physical damage to the vehicle. A lessor cannot exclude total losses due to specified circumstances or condition the applicability of the waiver on the happening of a fortuitous event.
Accordingly, the conditional provision of the gap waiver in the lessees lease agreement cannot be enforced and, moreover, under N.Y. Ins. Law § 1101 (b)(3)(i) (McKinney 2000) the lessor must now waive any obligation of the lessee for the gap amount and the lessee is discharged from any further obligation to pay the gap amount. The lessee should not be held responsible for the gap amount.
For further information you may contact Senior Attorney Adiza Mohammed at the New York City Office.