New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

The Office of General Counsel issued the following informal opinion on May 10, 2002, representing the position of the New York State Insurance Department.

RE: Service contracts and warranties for a fee and New York’s Lemon Laws.

Question Presented:

If a person purchases a service contract or a warranty for a separate fee when purchasing a new or used automobile from an automobile dealer, does the service contract or warranty relieve the manufacturer or dealer from its obligations under New York’s Lemon Laws?

Conclusion:

No, if a person purchases a service contract or warranty for a separate fee when purchasing a new or used automobile from an automobile dealer, the service contract or warranty does not relieve the manufacturer or dealer from its obligations under New York’s Lemon Laws.

Facts:

No specific facts are provided. This inquiry is general in nature.

Analysis:

Generally speaking, under the New York Insurance Law, a contract or agreement 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 and tear, when made by the seller or manufacturer of property, is considered to be a warranty whether or not a separate fee is charged for the contract. Such warranties, when made by a manufacturer or seller, generally do not constitute the doing of an insurance business in New York under N.Y. Ins. Law §§ 1101 and 1102 (McKinney 2000 & Supp. 2001-2002).1

If any other person makes a contract providing similar coverage, it would constitute the doing of an insurance business unless the person registered as a service contract provider and complies with N.Y. Ins. Law Art. 79 (McKinney 2000 & Supp. 2001-2002). A contract issued by a registered service contract provider is referred to as a "service contract."

N.Y. Gen. Bus. Law §§ 198-a and 198-b (McKinney 1996) are commonly referred to as New York’s automobile "Lemon Laws". Section 198-a applies to new "motor vehicles", as defined in subsection (a)(2) thereof, and § 198-b applies to "used motor vehicles", as such term is defined in subsection (a)(2) therein. These sections provide certain rights to purchasers and lessees of vehicles.

Under § 198-a, a motor vehicle manufacturer that provides a "manufacturer’s express warranty" or "warranty", to a purchaser or lessee of a motor vehicle manufactured by it is required to provide certain rights to the purchaser or lessee with respect to the vehicle. "Manufacturer’s express warranty" or "warranty" is defined in § 198-a(a)(3) as "the written warranty, so labeled, of the manufacturer of a new motor vehicle, including any terms or conditions precedent to the enforcement of obligations under that warranty." The obligations imposed by § 198-a include the right to have the vehicle repaired if it does not conform to the warranty; in other words, if the vehicle has a defect. The law further provides the right to have the vehicle replaced or the purchase price refunded if the vehicle cannot be repaired or if a reasonable number of attempts to repair the vehicle have been unsuccessful.

Section 198-b applies to used vehicles and requires the selling dealer to provide a minimum warranty as specified in the statute. "Warranty" is defined in subsection (a)(4) thereof as "any undertaking in connection with the sale or lease by a dealer of a used motor vehicle to refund, repair, replace, maintain or take other action with respect to such used motor vehicle and provided at no extra charge beyond the price of the used motor vehicle." Section 198-b provides the purchaser or lessee with similar rights to those afforded by the manufacturer in regard to a new vehicle under § 198-a. The purchaser or lessor of a used vehicle has the right to have the vehicle repaired or, if unable to be repaired, to receive a refund.

While the Lemon Laws apply to warranties, the usage of such term varies from the usage of that term in the Insurance Law. One principal reason is that the term as used in the Lemon Laws is limited to the manufacturer’s basic warranty that comes with a new vehicle and to the statutorily required dealer warranty for used vehicles, both of which are included with the purchase or lease without a separate fee, while the Insurance Law definition of warranty includes both those provided with and without a separate fee.

A repair that is covered by the included warranty, as defined in subsection (a)(4) of 198-a, is governed by the rights and protections afforded under the Lemon Laws. Section 198-a(i), for new vehicles, provides:

(i) Any agreement entered into by a consumer for the purchase of a new motor vehicle which waives, limits or disclaims the rights set forth in this section shall be void as contrary to public policy. Said rights shall inure to a subsequent transferee of such motor vehicle.

Any provision of any agreement entered into by a consumer for the purchase of a new motor vehicle which includes as an additional cost for such motor vehicle an expense identified as being for the purpose of affording such consumer his or her rights under this section, shall be void as contrary to public policy.

Section 198-b(d)(1), which pertains to the included warranty for used vehicles, provides:

(d)(1) Any agreement entered into by a consumer for the purchase or lease of a used motor vehicle which waives, limits or disclaims the rights set forth in this article shall be void as contrary to public policy. Further, if a dealer fails to give the written warranty required by this article, the dealer nevertheless shall be deemed to have given said warranty as a matter of law.

Warranties issued for a fee by the dealer or manufacturer and service contracts "wrap" around" the included warranty typically, in that they extend the period of coverage and often provide coverage for breakdowns or defects that may not be covered under the included warranty. Neither a service contract nor a dealer’s or manufacturer’s warranty for a fee may alter the dealer’s or the manufacturer’s obligations under the included warranty that is made, or is required to be made, pursuant to the Lemon Laws. A breakdown or defect that is covered by a Lemon Law warranty is not to be treated as a claim under a service contract or a warranty issued for a fee by a dealer or manufacturer. The consumer is not responsible for any deductible under such service contract or dealer’s or manufacturer’s warranty for a fee because the claim is covered under the Lemon Law warranty and not the service contract or dealer’s or manufacturer’s warranty for a fee.

For further information, you may contact Principal Attorney Paul A. Zuckerman at the New York City office.


1Although the inquirer asked about service contracts, the question is equally applicable to a warranty issued by a dealer or manufacturer for a separate fee. This analysis applies to both a warranty for a separate fee and a service contract, which are essentially equivalent.