|George E. Pataki
Gregory V. Serio
The Office of General Counsel issued the following opinion on March 14, 2003, representing the position of the New York State Insurance Department.
Re: Vehicle service contract
May the "Extended Vehicle Service Contract" (the "contract"), which is marketed by X, be offered or sold in New York under the New York Insurance Law?
It depends on who is the obligor under the contract since the contract contains a check-off for either the dealer that sells the contract or X to be the obligor. If X is the obligor under the contract, then the contract may not be offered or sold in New York because it is not registered in this state as a service contract provider. If the automobile dealer that sells the vehicle is the obligor under the contract, then the contract would be a warranty, and the dealer may sell such a contract. However, several provisions of the dealer agreement between the dealer and X indicate that X would be in violation of a number of New York insurance laws.
An automobile dealer would like to offer for sale in New York a "vehicle service contract" program offered through X in connection with the sale of a new or used motor vehicle. The contract provides coverage for a "covered breakdown", which is defined under Provisions & Definitions to mean "failure of any Covered Part to work as it was designed to work in normal service". The contract lists the specific parts of the vehicle that are covered under the contract. The contract has a list of exclusions, including exclusions as the result of misuse of the vehicle; improper maintenance; "collision, fire, electrical fire or meltdown, theft or for any hazard insurable under standard physical damage insurance policies whether or not such insurance is in force "
The contract has options for coverage both with or without a deductible, and additional coverage may be purchased for four wheel drive, V-10 engines, turbo/supercharger, seals and gaskets, and other parts, as well as if the vehicle is used for commercial use.
The contract also provides for "roadside assistance", including: towing if the vehicle is disabled for any reason; battery jump start service if a battery failure occurs; replacement of a flat tire with its spare; delivery of an emergency supply of gasoline, oil, fluid or water, subject to the customer paying for the supply; and lock-out coverage when the keys are accidentally locked in the vehicle.
The contract contains a check-off that provides for either X or the selling dealer to be the obligor. "Contract Obligor" is defined in the contract to mean, "the party named as Contract Obligor on the first page of this Contract." Presumably, this is to accommodate the requirements of different states, since in some states the obligor will be the dealer and in other states X may be the obligor. It is unclear, even after reviewing the Dealer Agreement discussed below, how it is determined who will be the obligor.
The inquirer also provided the Department with the Dealer Agreement that would be entered into between X and the dealer. The agreement spells out the respective obligations and duties of X and the dealer, but again is not explicit as to whether X or the dealer will be the obligor. The agreement provides, for example, "For the Vehicle Service Contracts, X shall secure on behalf of the dealer, or where X is the obligor under the Contract, on behalf of X, a policy of insurance issued by a state approved insurance company (the "Insurance Company") indemnifying the Dealer or X, according to the terms and provisions of said insurance policy, against all sums which Dealer or X shall become obligated to pay for repairs according to the terms of the Contract sold by Dealer."
The agreement further provides that the dealer shall provide services on vehicles covered by contracts administered by X, whether or not the dealer sells the contract. The dealer is required to obtain authorization to perform any repair from X prior to performing the repair. X establishes the payment schedule for all repairs. "X shall file for, and administer, reimbursement to the Dealer (or the repairing facility if other than the Dealer) from the Dealers or Xs Insurance company for the cost of valid repairs or replacements ." If the dealer is no longer in business, X shall administer any claim properly presented by the purchaser under a contract sold by the dealer in accordance with the agreement.
The contract states that "[o]ur obligations under this contact are insured under an insurance policy [policy number omitted] issued by Y, and reinsured by Z."
X is not presently registered as a service contract provider in New York or licensed under any other capacity under the New York Insurance Law.
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). However, generally speaking, a contract that relates to the nature or efficiency of a product is a warranty if made by the manufacturer, seller, or other person in the chain of sale of that product and would not constitute the doing of an insurance business, regardless of whether a fee is charged for the contract. 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. However, 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).
The obligations imposed under the contract at issue are limited to breakdown of the vehicle from causes that relate to a defect in materials or workmanship and exclude damage from other causes, such as theft, fire, collision, etc.
The Department will address the two alternatives separately: the first, where X is obligor, and the second, where the dealer is the obligor.
X as the obligor
Where X is the obligor, the contract would not be a warranty because X does not have the relationship to the product or service, or has done 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). Even if did have such a relationship or did such an act, X would still not come within the warranty exception contained in § 1101(b) because it would be making the contracts as a vocation. Accordingly, in order to offer the contract as the obligor, X would have to become registered as a service contract provider in accordance with Article 79 and the regulation thereunder. N.Y. Comp. Codes R. & Regs. tit. 11 Part 390 (2001) (Regulation 155).
Although X has applied to become registered as a service contract provider in New York, the Department has not yet taken action on the application. Accordingly, until such time, X may not become the obligor under any of these contracts.
Inasmuch as X is not presently registered as a service contract provider and may not offer the contract in New York as such, the Department makes no comment herein regarding whether the contract itself complies with Article 79 and Regulation 155.
The dealer as the obligor
As stated above, a contract that relates to the nature or efficiency of a product is generally considered to be a warranty under § 1101 when made by the manufacturer, seller, or other person in the chain of sale of that product, and does not constitute the doing of an insurance business in this state, regardless of whether a fee is charged for the contract. The maker of such an incidental warranty would not have to register in New York as a service contract provider. Since the contract in question is limited to breakdown coverage, the dealer, whether selling or leasing the vehicle, would come within the § 1101 exception and would not be doing an insurance business. Accordingly, the dealer may issue the contract as the obligor without having to register as a service contract provider.
However, additional problems are presented because of Xs obligations under the dealer agreement.
Under such circumstances, the Dealer Agreement provides that X is to obtain insurance for the dealer. X would thereby be acting as an insurance agent or broker inasmuch as it would be negotiating and procuring insurance to insure the dealer.1 X, however, is not licensed as either an agent or broker. Accordingly, X would be acting as an insurance agent or broker without a license, in violation of N.Y. Insurance Law § 2102(a)(1) (McKinney 2000), which provides:
(a)(1) No person, firm, association or corporation shall act as an insurance agent, insurance broker, reinsurance intermediary or insurance adjuster in this state without having authority to do so by virtue of a license issued and in force pursuant to the provisions of this chapter.
In addition, X establishes the reimbursement schedules and makes all decisions regarding whether or not a claim under the contract should be paid, and the amount of the claim to be paid. Accordingly, when the dealer is the obligor, X would be acting as an insurance adjuster, specifically, an independent adjuster, because it would be adjusting claims on behalf of the insurer.2 However, X is not licensed as an insurance adjuster. Accordingly, X would be acting as an insurance adjuster without a license, which is also in violation of § 2102.
In addition, in regard to the road service coverages, we refer you to Circular Letter No. 2 (1979) and a December 13, 2003, opinion, which were previously provided to you, regarding benefits that may be provided by motor clubs. The opinion may also be found on the Department's website at http://www.ins.state.ny.us/ropi2003.htm. The Department has not objected to programs that conform to the parameters expressed in the Circular Letter and has repeatedly stated that motor clubs may not provide other kinds of benefits.
For further information one may contact Principal Attorney Paul A. Zuckerman at the New York City Office.
1 Section 2101(a) states: "In this article, insurance agent means any authorized or acknowledged agent of an insurer, fraternal benefit society or health maintenance organization issued a certificate of authority pursuant to article forty-four of the public health law, and any sub-agent or other representative of such an agent, who acts as such in the solicitation of, negotiation for, or procurement or making of, an insurance, health maintenance organization or annuity contract, other than as a licensed insurance broker " [exceptions omitted].
Section 2101(c) states: "In this article, insurance broker means any person, firm, association or corporation who or which for any compensation, commission or other thing of value acts or aids in any manner in soliciting, negotiating or procuring the making of any insurance or annuity contract or in placing risks or taking out insurance, on behalf of an insured other than himself or itself or on behalf of any licensed insurance broker " [exceptions omitted].2 Section 2101(g)(1) states: "The term independent adjuster means any person, firm, association or corporation who, or which, for money, commission or any other thing of value, acts in this state on behalf of an insurer in the work of investigating and adjusting claims arising under insurance contracts issued by such insurer and who performs such duties required by such insurer as are incidental to such claims and also includes any person who for compensation or anything of value investigates and adjusts claims on behalf of any independent adjuster " [exceptions omitted].