The Office of General Counsel issued the following opinion on May 9, 2003, representing the position of the New York State Insurance Department.
Re: Service Contracts and the Applicability of the McCarran-Ferguson Act
1. Are service contracts considered to be insurance under New York law?
2. Does the Insurance Department in New York regulate service contracts?
3. Is the sale of service contracts in New York exempt pursuant to the McCarran-Ferguson Act from Federal Trade Commission supervision?
1. The doing of a service contract business is specifically exempted from the definition of doing an insurance business under N.Y. Ins. Law § 1101 (McKinney 2000 & Supp. 2003).
2. Service contracts are regulated by the New York Insurance Department pursuant to Article 79 of the New York Insurance Law.
3. The question of whether the sale of service contracts in New York is exempt from Federal Trade Commission (FTC) supervision should be addressed to the FTC.
No specific facts were provided. The inquirer presented general questions, regarding the regulation of service contract business in New York. The inquirer states that a client sells "automobile extended warranties", which the inquirer believes come within the definition of "service contract" under N.Y. Ins. Law Art. 79 (McKinney 2000 & Supp. 2003).
Service contracts are regulated in New York under N.Y. Ins. Law Art. 79 (McKinney 2000 & Supp. 2003). N.Y. Ins. Law § 7902(k) (McKinney 2000) defines "service contract" 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, or indemnification for repair, replacement or maintenance, 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, and may also provide for the repair, replacement or maintenance of property for damage resulting from power surges and accidental damage from handling. Service contracts may also include contracts to repair, replace or maintain residential appliances and systems.
N.Y. Ins. Law § 7901(b) (McKinney 2000) specifies that Article 79 shall not apply to:
(1) Express or implied warranties;
(2) Maintenance agreements;1
(3) Warranties, service contracts and maintenance agreements offered by public utilities on their transmission devices to the extent that they are regulated by the public service commission; and
(4) Warranties, service contracts and maintenance agreements that are conditioned upon or otherwise associated with the sale or supply of heating fuel.
Although the term "warranty" is not defined in the Insurance Law, generally speaking, a contract or agreement to perform the repair, replacement or maintenance of property, or indemnification for repair, replacement or maintenance, due to a defect in materials or workmanship or wear and tear, when made by the seller or manufacturer of property, is considered to be a warranty under the New York Insurance Law, whether or not a separate fee is charged for the contract.2 Such warranties, when made by a manufacturer or seller, generally do not constitute the doing of an insurance business in New York under N.Y. Ins. Law §§ 1101 and 1102 (McKinney 2000 & Supp. 2001-2002).
Prior to the enactment of Article 79 in 1997,3 if any other person entered into such an agreement, such person would have been doing an insurance business within the meaning of N.Y. Ins. Law § 1101 (McKinney 2000 & Supp. 2003), which 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
Prior to the enactment of Article 79, the making of such agreements without a license issued by this Department was considered to be a violation of N.Y. Ins. Law § 1102(a) (McKinney 2000). However, in authorizing the sale of service contracts in New York, the Legislature explicitly exempted such business from the doing of an insurance business. N.Y. Ins. Law § 1101(b)(3-a) (McKinney 2000 & Supp. 2003), which was added in conjunction with Article 79, provides, as amended:
Notwithstanding the foregoing, the marketing, sale, offer for sale, issuance, making, proposing to make or administration of a service contract pursuant to article seventy-nine of this chapter or warranty, service contract or maintenance agreement conditioned upon or otherwise associated with the sale of supply of heating fuel shall not constitute doing an insurance business in this state.
Accordingly, the making of a service contract does not constitute doing an insurance business in New York where the service contract complies with Article 79 of the Insurance Law and the obligor thereunder has registered as a service contract provider with the Insurance Department in accordance with the provisions of Article 79.
Although the making of a service contract does not constitute doing an insurance business in New York, service contract providers and their contracts are subject to the regulatory oversight of the Superintendent of Insurance. Service contract providers must register with the Superintendent, and the Superintendent may take appropriate disciplinary action against providers, including monetary penalties, suspension of registration, and prohibiting the provider from entering into new service contracts. The Superintendent has promulgated N.Y. Comp. Codes R. & Regs. tit. 11, Part 390 (2001) (Regulation 155) to implement Article 79.
The inquirers final question relates to the McCarran Ferguson Act and regulation of service contracts by the Federal Trade Commission (FTC). 15 U.S.C. § 1012(b) provides:
No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance
Whether or not the FTC is preempted is a question that should be addressed directly to the FTC.
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.
1 "Maintenance agreement" is defined in N.Y. Ins. Law § 7902(d) (McKinney 2000) to mean "a contract of limited duration that provides for scheduled maintenance of property, other than contracts providing for the repair or replacement of such property due to a defect in materials or workmanship or wear and tear." Maintenance agreements are not considered to be insurance contracts under New York law.
2 See Ollendorf Watch Co., Inc. v. Pink, 279 N.Y. 32, 17 N.E.2d 675 (1938).
3 The effective date of Article 79 was January 1, 1998.