The Office of General Counsel issued the following opinion on February 20, 2003, representing the position of the New York State Insurance Department.
RE: Road Hazard Protector Plan
Would the sale of the "The Plan" constitute the doing of an insurance business if offered in New York?
The sale of the "The Plan" would constitute the doing of an insurance business if offered in New York.
One of the inquirers dealer members would like to offer for sale in New York a program called "The Plan". "The Plan" has different options that may be purchased, including tire, tire and wheel, glass/battery, and roadside assistance. "The Plan" is offered for terms of one, three or five years, except for the roadside assistance option, which is offered for one year only with annual renewal.
The "New/Used Vehicle Tire and/or Wheel Guarantee" provides as follows:
REPLACEMENT POLICY: TIRE must be damaged beyond repair or blown-out, resulting from a road hazard and have at least 3/32 inch tread depth remaining. Wheels must be damaged so that it insurable to seal with the tire resulting in air loss. Notice: Registered owner will be reimbursed 100% of the cost of a new tire and/or wheel, including mounting, balancing, new valve stem and sales tax as shown on the sales invoice. EXCEPTIONS AND EXCLUSIONS: This does not apply to (a) Tire or wheel failure outside the Continental United States and Canada; (b) Destruction of tire or wheel due to impact with a curb or sidewall damage (does not qualify as a road hazard); (c) Replacement of tires due to normal wear, by misalignment or suspension problems; (d) Rim leaks, manufacturers [sic] defects, vandalism, fire, upset collision, theft, upset collision, theft [sic, as to repetition], or misuse occasioned by driving on tire(s) when flat; (e) Tires installed on trucks over 1 ton capacity and vehicles other than on-road passenger or recapped tires; (f) Failure occurring from operating on any surface other than Federal, State, County, City or Municipality paved roads or highways; (g) Tires or wheels transferred from vehicle on which they were originally installed or failure to file claim within 48 hours of the occurrence.
There is a $25 per repair limit with a maximum of two repairs per "policy term" and $150 limit on tire replacement, with a $600 limit per term and $250 limit on wheel replacement, with a $1,000 limit per term.
The "Auto Glass Protection Package" provides as follows:
If the members vehicle listed on the top of this form, is involved in an accident, or as a result of vandalism requiring auto glass replacement, the member will be reimbursed for the replacement of the auto glass that has been damaged as a result of the accident or the vandalism. EXCEPTIONS AND EXCLUSIONS: This policy does not protect you in the event that your auto glass has been damaged other than in an accident or by vandalism. This policy is excess to any other policy that may be in force during this policy. Should another policy be in force, and a claim occur, this policy will reimburse the individual named on this policy the amount of their primary insurance deductible up to $250.
In addition, there is a "Battery Recharge/Replacement" coverage. It provides as follows:
If the servicing dealer determines that the members vehicle listed on the top of this form requires a battery charge, the members will be reimbursed up to $15 per charge. The maximum number of recharges is limited to one per year. If the servicing dealer determines that the members vehicle listed on the top of this form requires replacement battery, the member will be reimbursed up to $60 per battery, with a $120 per term limit.
"The Plan" contract states that the Roadside Assistance Package will become activated once the membership kit is received, but an additional fee must be paid to activate the coverage. The terms of the Roadside package are not included.
"The Plan" contract does not specify who is the actual obligor under it. The signature line is captioned "Dealer Representative". An 800 number must be called to obtain claim authorization from the "Warranty Administrator", who is not otherwise identified. The Warranty Administrator has an address in Florida. The Department assumes that there would also be a separate agreement between the Administrator and the Dealer but none has been provided to the Department.
N.Y. Ins. Law § 1101 (McKinney 2000), provides, in pertinent part:
(a)(1) "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.
(2) "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 party.
(3) "Contract of warranty, guaranty or suretyship" means an insurance contract only if made by a warrantor, guarantor or surety who or which, as such, is doing an insurance business.
(b)(1) Except as provided in paragraph two, three or three-a of this subsection, 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 and shall constitute doing business in the state within the meaning of section three hundred two of the civil practice law and rules.
(A) making, or proposing to make, as insurer, any insurance contract, including either issuance 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
While the Insurance Law does not define "warranty", in general, a warranty relates in some way to the nature or efficiency of a product or service. Commonly, the warrantor agrees to repair or replace a product that fails to perform properly, such as a contract covering a defect in materials or workmanship, or a contract otherwise covering the breakdown of the product. Ollendorf Watch Co., Inc. v. Pink, 279 N.Y. 32, 17 N.E.2d 675 (1938).
A "service contract" is defined, in pertinent part, in N.Y. Ins. Law § 7902(k) (McKinney 2000) to mean:
a contract or agreement, for a separate or additional consideration, for a specific duration, to perform the repair, replacement or maintenance of property due to a defect in materials or workmanship or wear or 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. Service contracts may include towing, rental and emergency road service
Service contracts and warranties are similar in that both relate to the nature or efficiency of a product, but there are distinctions between them.
In order to be a warranty, the maker of the contract must have a relationship to the product or service, or do some act that imparts knowledge of the product or service to the extent of minimizing, if not eliminating, the element of chance or risk contemplated by N.Y. Ins. Law § 1101(a). The making of a warranty constitutes the doing of an insurance business if done as a vocation and not as merely incidental to any other legitimate business or activity of the warrantor, guarantor or surety.
Where there is no relationship to the product or service or act as described above, the maker of the contract undertakes an obligation involving a fortuitous risk, and the contract is an insurance contract and constitutes the doing of an insurance business unless the contract is a service contract issued in accordance with N.Y. Insurance Law Article 79 (McKinney 2000 & Supp. 2003). N.Y. Ins. Law § 1101(b)(3-a) (McKinney 2000) provides, in pertinent part, that the marketing, sale, offer for sale, issuance, making, proposing to make or administration of a service contract pursuant to Article 79 shall not constitute the doing of an insurance business in this state. No person or other entity who is obligated to provide service under a service contract may issue, sell or offer for sale a service contract in New York unless it first registers with the Superintendent of Insurance as a service contract provider, pursuant to N.Y. Insurance Law § 7907 (McKinney 2000).
Based on the facts as presented, it is the Departments view that "The Plan" is insurance and is neither a warranty nor a service contract. Most of the obligations under "The Plan" contract are not based upon a defect in materials or workmanship but are based upon the happening of fortuitous events that are outside the control of either the maker of "The Plan" or the consumer. In regard to the tire and wheel "guarantee", the coverage is conditioned upon damage from a road hazard. In regard to the auto glass protection package, the coverage is for damage resulting from an accident or vandalism.
The battery recharge/replacement program as written does not appear to be limited to a defect, so it appears to provide coverage when the battery becomes discharged as the result of a fortuitous event, and therefore also constitutes insurance. However, if the coverage were explicitly limited to defects and if the dealer that sold the motor vehicle were the obligor, then the coverage would constitute a warranty and would not be insurance. Any other person that offered such a program that was limited to defects would have to first register as a service contract provider and comply with Article 79.1
Accordingly, unless the "Warranty Administrator" became licensed as an insurer, it would be doing an insurance business without a license in violation of N.Y. Ins. Law § 1102 (McKinney 2000) and the auto dealer would be aiding an unauthorized insurer in violation of N.Y. Ins. Law § 2117(a) (McKinney 2000). However, as the Department noted, it is not clear from "The Plan" whether the dealer or the "Warranty Administrator" is the obligor. Because of the ambiguity in the contract, the Dealer may find itself obligated to perform under the contract even if the Dealer thought it had no such obligation and the dealer itself therefore could be in violation of § 1102.
No information was provided on the roadside assistance coverage. The Department refers the inquirer to Circular Letter No. 2 (1979) and the attached January 13, 2003, opinion, which may also be found on the Department's website at >http://www.ins.state.ny.us/ropi2003.htm, regarding benefits that may be provided by road clubs.
For further information one may contact Principal Attorney Paul A. Zuckerman at the New York City Office.
1The manufacturer of the battery or manufacturer of a vehicle in which the battery is included as part of the original equipment could also warrant the battery, but there is no indication that the "Warranty Administrator" is such a manufacturer.