The Office of General Counsel issued the following informal opinion on August 6, 2002, representing the position of the New York State Insurance Department.
Re: Service Contracts & Compliance With Article 79
Question Presented:
Does the sample service contract offered by The XYZ Warranty Corporation comply with New York Law?
Conclusion:
No, the contract needs to be revised in a number of ways to come into compliance with New York law.
Facts:
The XYZ Warranty Corporation ("XYZ") became registered as a service contract provider in New York on May 6, 2002. A sample contract was submitted for Department review to ensure that XYZ was in compliance with N.Y. Ins. Law Art. 79 (McKinney 2000 & Supp. 2001-2002). An inquirer stated that XYZ has several forms of standard contracts, distinguished only by the specific coverage provided. All other terms are identical. The sample contract was for motor vehicles, and the inquirer did not indicate whether service contracts for other kinds of products are issued.
Analysis:
Service contract providers are not required to obtain the Superintendents prior approval of service contract forms or to even file the forms with the Superintendent. However, if a provider submits a form to ensure compliance with the law, this Department will review it solely for the purposes of assuring compliance.
In addition to Article 79, service contract providers must comply with N.Y. Comp. Codes R. & Regs. tit. 11, Part 390 (2001) (Regulation 155). After reviewing XYZs service contract form, we offer the following comments:
1. Our review is limited to the coverage provided under the provided sample service contract. Since we have not seen XYZs other forms, we cannot opine whether the coverage afforded thereunder would be proper under a service contract. The coverage afforded under the form that was provided, however, does come within the scope of what a service contract may cover.
2. N.Y. Ins. Law § 7905(f) (McKinney 2000) requires that where prior approval of repair work is required, the service contract shall state the procedure for obtaining prior approval and for making a claim. However, there appears to be some confusion in XYZs contract regarding the claim process. In one paragraph, it states that the customer has a choice of repair center but then goes on to state that XYZ reserves the right to "request" that the repair should be done at "a lesser expense or by a more qualified repair center." It is not clear if XYZ makes such a "request", whether the contract holder must abide by such "request", or, if the holder does not do so, whether XYZ will limit its payment. Later on, the contract provides that "once your vehicle is at a qualified repair center, it is your responsibility to insure the repair center notifies The [XYZ] Warranty Corporation prior to beginning work". How does the consumer know whether the repair center is qualified until XYZ is notified?
3. Section 7905(f) also requires that a service contract include a toll free telephone number for claim service. While XYZs contract lists a toll free number at the top of the contract, the provision regarding the claims procedure does not refer to that number.
4. N.Y. Comp. Codes R. & Regs. tit. 11, § 390.5(b) (2001) requires that any provision regarding prior approval of repair work shall be set forth in a conspicuous manner. The contract contains the following statement in upper case letters: "No claim will be paid without a prior authorization number issued." However, since the contract contains other provisions that are in bold type, and some in both bold and upper case, and all are the same font size, this provision does not appear to sufficiently conspicuous.
5. N.Y. Ins. Law § 7905(i) requires that service contracts covering motor vehicles must specify whether the use of non-original equipment manufacturers (non OEM) parts may be allowed. While the contract refers to "like or equal value parts" and "used, rebuilt or new components", neither phrase indicates whether non-OEM parts may be used and hence the contract does not meet the statutory requirement.
6. N.Y. Ins. Law § 7905(n) requires that the service contract contain a statement of the service contract holders right to return the contract for a refund within at least 20 days of the date of mailing of the service contract or at least 10 days, if the contract is delivered at the time of the sale, unless a longer time period is permitted under the contract. XYZs contract merely repeats the statutory requirement without actually specifying how long the holder has to return the contract under this provision.
7. N.Y. Ins. Law § 7905(n) also provides that a 10% penalty per month shall be added to a refund that is not made within 30 days of the return of the contract to the provider. XYZs contract states that an additional 10% penalty will be provided if eligible refunds are not made within 30 days of the date requested. This does not comply with the statutory requirement.
8. N.Y. Comp. Codes R. & Regs. tit. 11, § 390.4(a) (2001) provides that the aforementioned statement regarding the right to return the contract must be set forth in a conspicuous manner. The statement on XYZs contract does not appear to us to be conspicuous, particularly since it is on the back of the form without a clear reference on the front and is in very light faced type.
9. N.Y. Ins. Law § 7905(k) requires that the service contract state the terms, restrictions, or conditions governing termination of the service contract by the parties. Other than the aforementioned provision regarding the right of the holder to return the contract, the contract is silent on termination rights.
10. N.Y. Comp. Codes R. & Regs. tit. 11, § 390.4(b) also requires that the service contract must clearly indicate the procedure for returning or terminating the contract, including, if physical return of the contract is required, the address to which the contract is to be returned. XYZs contract does not contain any such statements.
11. N.Y. Comp. Codes R. & Regs. tit. 11, § 390.4(c) also requires that the service contract must contain a statement that if no claim has been made under the contract, and the holder returns or terminates the contract within the time period specified in the contract, then the contract shall be void and that the provider shall refund to the contract holder the full purchase price of the contract. XYZs contract, while providing for the return of the full purchase price, does not state that the contract is void, and, as noted above, does not clearly indicate the period of time.
The Department requested XYZ to promptly revise its service contract forms to fully conform to the requirements contained in the Insurance Law and Regulation 155, and to submit its revised contract form so that the Department may verify compliance.
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.