The Office of General Counsel issued the following informal opinion on March 25, 2002, representing the position of the New York State Insurance Department.
Re: Anti-theft program
Under the proposed etch program, a monetary benefit is provided by an etching program administrator to the owner of a motor vehicle in the event that the vehicle is stolen and not recovered. Is such a program permissible in New York?
No, as structured the program would violate N.Y. Ins. Law § 1102 (McKinney 2000).
The inquirer wanted to know whether the companys etch program would be permissible in New York. The company markets its program through automobile dealers. A dealer engraves the windows of a vehicle that it sold with a unique identification code and provides anti-theft warning decals that are applied in four places on the vehicle. If the vehicle is stolen and not recovered, or declared a constructive total loss from a collision as a result of the theft, the company issues a "limited warranty" that "guaranties" to pay the customer a monetary benefit. In the example that you provided the benefit was $3,000, and your brochure indicates that the benefit may be up to $5,000. The benefit is limited to the vehicles actual cash value at the time of loss. The benefit will be made as a credit to the dealership stated in the "guarantee" towards a replacement vehicle. If the customer has moved from the area where the vehicle was purchased, the company will arrange to make the credit to a dealership of the customers choice. The dealer agreement, between the company and the selling dealer, however merely states that the benefit will be paid to the customer, and does not mention that the customer has to return to the dealer and purchase a new vehicle.
Certain supplementary benefits are provided under the agreement as well, including reimbursement for an automobile rental, towing and storage reimbursement, trip interruption coverage, and payments to cover the deductible under a homeowners policy for valuables stolen from the vehicle and up to $500 to cover the comprehensive deductible under the comprehensive theft insurance policy insuring the vehicle.
Apparently, the company obtains some kind of insurance because the dealer agreement also provides that the company agrees "[t]o cause the insurer to issue to Dealer a Certificate naming the Dealer as an additional insured under the companys policy "
Although the agreement alternatively refers to itself as a limited warranty and a guarantee, the nomenclature used in the agreement is irrelevant in determining whether the contract is permissible under the Insurance Law. Rather, this Department analyzes the actual obligation under the contract to determine whether it constitutes insurance.
N.Y. Ins. Law § 1101(a) (McKinney 2000) provides, in part, the following definitions:
"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.
"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 event.
N. Y. Ins. Law § 1101 (b)(1) (McKinney 2000) provides that with certain exceptions:
. . . 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. . . :
(A) making, or proposing to make, as insurer, any insurance contract, including either issuance or delivery of a policy or contract of insurance 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.
Section 1102 provides that, unless specifically exempted, no one shall do an insurance business in this state unless authorized by a license in force pursuant to the Insurance Law.
A warranty relates in some way to the nature or efficiency of the product. In other words, it is a representation that the product is of a certain make and fitness or that the product will work properly. A warranty does not cover a hazard that has nothing to do with the make or quality of the product. A guaranty is an undertaking that the amount contracted to be paid will be paid, or the services guaranteed will be performed. A guaranty relates directly to the substance and purpose of the transaction. See Ollendorf Watch Co. v. Pink, 279 N.Y. 32, 17 N.E.2d 676 (1938).
The companys "guarantee" or "warranty" is neither a warranty nor a guaranty, but is insurance, within the meaning of the Insurance Law. Whether the vehicle will be stolen is the triggering event under the agreement and the theft is to a substantial extent beyond the control of either the company or the consumer. By promising to provide a monetary benefit to the consumer upon the unrecovered theft or constructive total loss of the vehicle, the company would be providing to the consumer a benefit of pecuniary value upon the happening of a fortuitous event, and such agreement would constitute a contract of insurance. Accordingly, under the proposed program, the company would be acting as an insurer without a license and would be in violation of Section 1102.
No information was provided about the insurance that would be obtained by the company or the certificates that the company would provide to the dealers. Such program may constitute an illegal group insurance policy. In addition, the dealers would be aiding an unauthorized insurer in violation of N. Y. Ins. Law § 2117 (McKinney 2000). See Circular Letter No. 2 (1991), attached, for a fuller discussion regarding these issues.
N. Y. Ins. Law § 3446 (McKinney 2000) was enacted in 1999 to authorize companies such as yours to obtain a policy of group insurance from an authorized insurer. Under the policy, coverage would be provided directly from the insurer to consumers that purchased a product such as yours. See also N.Y. Comp. Codes R. & Regs. tit. 11, Part 310 (2000) (Regulation 167), which establishes minimum provisions for such product or system group insurance policies. The Regulation is available on the Insurance Departments website, http://www.ins.state.ny.us.
It should also be noted that a motor vehicle dealer that itself provides a discount to a consumer on a replacement vehicle dependent upon the total loss of a prior purchase would not be doing an insurance business within the meaning of N. Y. Ins. Law § 1101 (b) (McKinney 2000) so long as the discount price of the new vehicle (including any other discounts that the dealer may provide) covers the cost of the vehicle to the dealer, any labor or material cost borne by the dealer, and reasonable overhead expense, thus avoiding assumption of a risk of loss. In other words, a dealer may agree in the discount to reduce its profit margin on the new vehicle but may not agree to sell the vehicle at a break-even or lower point. The administrator may not compensate the dealer nor is there insurance available in New York that can reimburse the dealer for its waiver of the full purchase price. A more extended discussion may be found in an August 29, 2001, opinion that may be found on the Departments website as opinion 01-08-18.
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.