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 June 3, 2002, representing the position of the New York State Insurance Department.

Re: Licensing/Registration Requirements for Service Contract Providers

Questions Presented:

1. Must a person who is obligated under an agreement to perform 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, and who is not the manufacturer or seller of the property or product to be serviced, obtain a license or certification from the Department?

2. Must a service contract provider file rates and forms for service contracts with the Department?

3. Must a person be licensed or certified by or registered with the Department to adjust claims and perform other customer services on behalf of service contract providers?

4. Must a service contract provider purchase service contract reimbursement insurance coverage to insure its obligations arising from the service contracts it sells?

5. After a service contract provider satisfies all of its obligations under a service contract, may such provider receive from the service contract reimbursement insurer a return of some of the premiums paid?

Conclusions:

1. Pursuant to Article 79 of the Insurance Law, a person who is obligated under an agreement to perform 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, and who is not the manufacturer or seller of the property, is required to register with the Department as a service contract provider pursuant to Article 79 of the Insurance Law.

2. The Insurance Law does not require a service contract provider to file rates and forms for service contracts with the Department.

3. A person who adjusts claims and performs other customer services on behalf of service contract providers is not required to register with or obtain a license or certification unless it actually obligates itself to make repairs and maintenance under a service contract, in which case it would have to register as a service contract provider.

4. Pursuant to Article 79 of the Insurance Law, a service contract provider must register with the superintendent and demonstrate financial responsibility to assure the faithful performance of its obligations to its contract holders. The financial responsibility requirement may be satisfied in a number of ways, including the purchase of service contract reimbursement insurance.

5. Pursuant to N. Y. Ins. Law § 2324 (McKinney 2000), a service contract reimbursement insurer may not pay to a service contract provider a rebate of the premium.

Facts:

The inquiry is general in nature. No specific facts were supplied.

Analysis:

The inquirer used the terms "third party extended warranty provider" and "warranty coverage obligor." However, these terms are not used in the Insurance Law. Whether a contract to perform 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 constitutes a warranty, insurance or a service contract depends on the relationship of the obligor to the product being serviced. Because the questions appear to relate to third party obligors who are not the manufacturers or sellers of the product being serviced, we assume that the contracts the inquirer requests information on are service contracts. Such obligors are exempt from having to become licensed as insurers if they register with the Department as service contract providers.

N.Y. Ins. Law § 7902(k) (McKinney 2000) defines a "service contract" as:

(k) " Service contract" means 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 and 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….

Under N.Y. Ins. Law § 1101(b)(3-a) (McKinney 2000), the making of a service contract does not constitute the doing of an insurance business where the service contract complies with Article 79 of the Insurance Law and the obligor thereunder has registered as a service contract provider.1

N. Y. Ins. Law § 7902(h) (McKinney 2000) defines a service contract provider as a person who "markets, sells, offers for sale, issues, makes or proposes to make or administer a service contract, and who is contractually obligated to provide service under a service contract." The inquirer questions whether service contract providers are required to obtain licenses or certifications to engage in such business. Pursuant to Article 79 of the Insurance Law, a service contract provider may not sell service contracts in New York until it registers with and receives approval from the Superintendent.

In response to the inquirer’s third question, a person or entity that only performs claim adjustments and/or customer services for service contract providers and who does not obligate itself to make repairs and maintenance under service contracts does not have to register as a provider.

The inquirer also asks whether service contract providers are required to file rates and forms for their service contracts with the Department. The Insurance Law does not require service contract providers to file rates or forms. However, such providers must comply with Article 79 of the Insurance Law and N.Y. Comp. Codes R. & Regs. tit. 11, §§ 390.0 – 390.13 (Regulation 155) (2001).

Further, the inquirer asks whether a service contract provider must purchase insurance coverage to insure its obligations arising from the sale of its service contracts. Before a service contract provider may sell service contracts in New York State, as part of the registration with the Superintendent it must provide proof of financial responsibility, which can be satisfied in several ways including obtaining insurance. N.Y. Ins. Law § 7903(c) (Interim Pocket Part 2001-2002) provides in pertinent part:

(c) In order to assure the faithful performance of a provider’s 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 insurance2 policy issued by an insurer authorized to issue service contract reimbursement insurance in this state or procured by an excess line licensee…;

(2)(A) maintain a funded reserve account for its obligations under its service contracts issued and outstanding in this state … and

    (B) place in trust with the superintendent a financial security deposit….

(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 consolidate affiliates….

The inquirer’s last question addressed the issue of whether a service contract provider that is insured under a service contract reimbursement insurance policy, may receive from the insurer a return on the premium paid. N.Y. Ins. Law § 2324(a) (McKinney 2000) prohibits an authorized insurer from, directly or indirectly, "giving or sharing a commission or … pay or allow or offer to pay or allow to the insured … after insurance has been effected, any rebate from the premium." This section prohibits insurers, such as a service contract reimbursement insurer, from rebating premiums to its insured.

While Article 23 of the Insurance Law generally does not apply to service contract reimbursement insurance (See, N. Y. Ins. Law § 2302(a)(7) (McKinney 2000)), Section 2324 has its own applicability section that expressly excludes certain kinds of insurance from that section. Service contract reimbursement insurance is not among the list of expressly excluded kinds of insurance found in Section 2324(e). As a result, since Section 2324(e) does not expressly exclude service contract reimbursement insurance, such insurance is subject to the limitations therein.

The inquirer was advised to obtain the appropriate applications for service contract provider registrations from the Department’s Licensing Bureau at Agency Building 1, Empire State Plaza, Albany, NY 12257 or call (518) 474-7159.

For further information you may contact Senior Attorney D. Monica Marsh at the New York City Office.


1 The Department has concluded that contracts to repair, etc., that are issued by the manufacturer or seller of the product are warranties and therefore exempt from the service contract law. This opinion will not address such contracts since the inquirer did not inquire about them.

2 See, N.Y. Ins. Law 1113(a)(28) (McKinney 2000) for the definition of service contract reimbursement insurance.