The Office of General Counsel issued the following opinion on April 29, 2003, representing the position of the New York State Insurance Department.
Re: Jewelry companys Extended care plan and "guarantee"
Must a jewelry company register with the Superintendent as a service contract provider in order to offer its extended care plan and "guarantee"?
To the extent that the extended care plan and "guarantee" constitute a warranty, the jewelry company does not have to register as a service contract provider. However, to the extent that the "guarantee" provides coverage for other than repair, replacement or maintenance of property due to a defect in materials or workmanship or wear or tear, the company may not offer the coverage, as either a warranty or a service contract.
The inquirers client, a jewelry company, submitted an application to register with the Superintendent of Insurance as a service contract provider. Subsequently, after reviewing an opinion of this office dated June 3, 2002, the company requested an opinion as to whether it would have to register as a service contract provider in order to provide its extended service plan. The matter was referred by the Departments Licensing Bureau to the Office of General Counsel.
From reviewing the brochure that was submitted to us, it appears to us that the company agreement consists of two parts: first, a "guarantee", which is included for no additional fee with the sale of the jewelry; and second, an optional extended care plan, which is offered for a separate fee.
The relevant provisions of the "guarantee" state:
For twelve months from your date of purchase, we guarantee the mounting for your diamond, semi-precious gemstone, or lab created gemstone against all defects in material or workmanship. We will repair or replace your mounting without charge if any defects are found during this period.
Free replacement of your diamond, precious gemstone, semi-precious gemstone or lab-created gemstone for a lifetime if it chips, breaks, or is lost from its original mounting during normal wear. To ensure this protection, and for the Guarantee to remain valid, the company will be glad to check and inspect your jewelry every 6 months, and have it repaired by one of our representatives if necessary. All we require is that you bring in your inspection card along with your jewelry.
The extended care plan, when purchased by the consumer, is issued for a three-year period. The plan requires the consumer to bring the jewelry to the company for an inspection every six months. The plan provides:
WHAT REPAIRS AND SERVICES ARE COVERED: This Extended Care Plan covers all inspections, cleaning and Covered Repairs and Services to the jewelry covered by this Plan. Covered Repairs and Services to the jewelry include the parts and labor necessary to fix problems which occur during normal usage of the jewelry, consistent with the conditions for which it was designed. Depending on the type of jewelry for which the Plan coverage is purchased, it would include resizing or reshanking of rings, restringing of pearls, clasp replacement, repair of broken chains, repair of worn or broken prongs, repair of broken earring posts or other similar repairs.
WHAT IS NOT COVERED: Jewelry that is not brought in for its regular six-month check-up or that has been damaged as a result of excessive or abusive treatment, or that has been repaired by a store other than the company is not covered by this Extended Care Plan. This Plan also does not cover loss or theft of the jewelry, damage resulting to the jewelry from loss, theft or Act of God, or any consequential damages or loss of use resulting from the broken or damaged jewelry, or from any delay in our repairing the jewelry.
N.Y. Ins. Law § 1101 (McKinney 2000 & Supp. 2003), 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
As can be seen from the above definition, service contracts and warranties are similar in that both relate to the nature or efficiency of a product, but there are distinctions between them. Whether there is a separate fee or not has no bearing upon whether a particular agreement is a warranty or a service contract under the Insurance Law.
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).
Hence, to the extent that the "guarantee" and the extended care plan are warranties, the company would not be doing an insurance business nor would it be subject to regulation as a service contract provider. However, to the extent that either agreement goes beyond what may be the subject of a warranty, and constitutes an insurance contract, the company would be doing an insurance business. In reviewing the agreements, the Department is of the opinion that the extended service plan and the repair or replacement portion of the "guarantee" would constitute warranties and are not insurance since they are limited to repair or replacement of defective products.
However, the portion of the "guarantee" that provides for lifetime replacement of a diamond, precious gemstone, semi-precious gemstone or lab-created gemstone (if inspected every six months) if it "chips, breaks or is lost from its original mounting " is an insurance contract. Even though the obligation is limited by the phrase "during normal wear" and does not cover "loss or theft of the jewelry, damage resulting to the jewelry from loss, theft or Act of God, or any consequential damages or loss of use resulting from the broken or damaged jewelry," the gemstone may be damaged for reasons outside the control of the company and the company is undertaking an obligation dependent upon the happening of a fortuitous event.
In the inquirers letter, the inquirer states that the company has implemented certain controls to prevent the happening of events requiring it to replace chipped gemstones. The control measures include the careful selection of only the finest gemstones and the requirement that the inquirers client inspects the gem bi-annually. However, repeated inspections do not negate the element of fortuity in the chipping of a gemstone. Chipping or breaking of the gemstone arises from outside physical causes, which are beyond the control of the company.
The Department, however, has no objection to the "guarantee" providing for the replacement of a stone that is lost due to the defective setting so long as the stone is part of the jewelry that is being warranted.
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.