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 14, 2002, representing the position of the New York State Insurance Department.

Re: Gap Waivers and "Direct Loans"

Question Presented:

Does the opinion dated August 30, 2001, regarding gap waivers made by creditors, apply to both "direct" and "indirect" loans?

Conclusion:

The provisions of the New York Insurance Law relating to gap waivers, as addressed in the aforementioned opinion, apply equally to "direct" and "indirect" loans. However, the provisions of the Personal Property Law do not.

Facts:

No specific facts are provided. This inquiry concerns an August 30, 2001, opinion letter by the undersigned, which concluded that: 1. A creditor may not waive the amount of the deductible under a motor vehicle physical damage policy insuring the vehicle that is the subject of a retail instalment contract1; and 2. A creditor may not charge a debtor a $10 administrative fee for a gap waiver under a motor vehicle retail instalmen contract.

Analysis:

The making of a gap waiver constitutes the doing of an insurance business in New York, within the meaning of N.Y. Ins. Law § 1101 (McKinney 2000) for which licensing is required pursuant to N.Y. Ins. Law § 1102 (McKinney 2000), except as provided in § 1101(b)(3), which states:

(3) Notwithstanding the foregoing, 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 lessor's or creditor's assignee waives the obligation of the lessee or debtor for the gap amount2, 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;

(ii) the waiver applies only in the event of a total loss of the personal property occasioned by its theft or physical damage;

(iii) in the event the lessor, creditor or assignee purchases lessor or creditor gap insurance, the charge to the lessee or debtor for the waiver does not exceed the cost of the lessor or creditor gap insurance coverage; provided, however, that nothing contained herein shall be construed to prohibit the lessor from including the charge for the waiver in the capitalized cost as that term is defined in subdivision eleven of section three hundred thirty-one of the personal property law.

The above exemption applies to any lessor or creditor, or assignee thereof, and hence would apply to both "direct" and "indirect" transactions. Consequently, any waiver of the gap amount by a "direct" lender that does not come within the exemption would violate the Insurance Law.

In addition to the Insurance Law provisions, there are requirements in N. Y. Pers. Prop. Article 9 (§ § 301, et seq.) (McKinney 1992 & Supp. 2002) that apply to motor vehicle retail instalment contracts and N. Y. Pers. Prop. 10 (§ § 401, et seq.) (McKinney 1992 & Supp. 2002) that apply to non-motor vehicle retail instalment contracts3These include the requirement that the gap waiver may be made contingent upon the payment by the buyer of a separate charge that shall not exceed the cost of the creditor gap insurance covering the retail instalment contract (N. Y. Pers. Prop. § 302A (McKinney Supp. 2002) and N. Y. Pers. Prop. § 402A (McKinney Supp. 2002). A motor vehicle or non-motor vehicle retail instalment contract is one in which the retail seller who sells the property is one of the parties. It is our understanding that a direct loan initiated by the financial institution would not be a retail instalment contract but Article 9 and 10 would apply if the financial institution purchased a retail instalment contract from the retail seller. However, this Department does not enforce the provisions of the Personal Property Law.

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


1 Sic, the spelling used in the Personal Property Law.

2 "Gap amount" is defined in N.Y. Ins. Law § 107(a)(52) (McKinney 2000) as follows:

(52) "Gap amount" means:

(A) in the case of a lease of personal property, the difference, if any, between:

(i) the amount owed by the lessee, under the early termination provision of the lease, as of the date of a total loss of the leased property caused by its theft or physical damage, or the amount which would have been owed by the lessee had the lessor not waived such obligations; and

(ii) the sum of: (I) any unpaid rental payments and other unpaid charges, arising from the failure of the lessee to fulfill the lessee's obligations under the lease, that had accrued prior to the date of the loss; and (II) the actual cash value of the personal property as of the date of the loss. If the lessee is required under the lease agreement to maintain a physical damage insurance policy on the personal property which is the subject of the lease agreement, and that policy is in effect on the date of the loss, then "actual cash value" shall have the same meaning as under the physical damage insurance policy.

(B) In the case of a loan or other credit transaction on the purchase of personal property, the difference, if any, between:

(i) the amount owed by the debtor under the loan or other credit transaction as of the date of a total loss of the personal property which is the subject of the loan or other credit transaction agreement caused by its theft or physical damage, or the amount that would have been owed by the debtor had the creditor not waived such obligation; and

(ii) the sum of: (I) any unpaid payments and other unpaid charges, arising from the failure of the debtor to fulfill the obligations under the loan or other credit transaction agreement, that had accrued prior to the date of the loss; and (II) the actual cash value of the personal property as of the date of the loss. If the debtor is required under the loan or other credit transaction agreement to maintain a physical damage insurance policy on the personal property which is the subject of the loan or other credit transaction agreement, and that policy is in effect on the date of the loss, then "actual cash value" shall have the same meaning as under the physical damage insurance policy.

3 Additionally, Pers. Prop. Article 9-A (§§ 330 et seq.) (McKinney Supp. 2001) governs motor vehicle retail lease agr.