New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

George E. Pataki
Governor

Gregory V. Serio
Superintendent

The Office of General Counsel issued the following opinion on May 21, 2003, representing the position of the New York State Insurance Department.

Re: Insurance Law Article 79 / Service Contracts

Questions Presented:

1. May a vehicle service contract restrict the conditions under which the service contract may be returned by the contract holder during the period specified in N.Y. Ins. Law § 7903(e) (McKinney 2000)?

2. May a vehicle service contract restrict the conditions under which the service contract may be returned by the contract holder after the end of the period specified in N.Y. Ins. Law § 7903(e) (McKinney 2000)?

3. May a vehicle service contract restrict the conditions under which the service contract may be cancelled as a result of the repossession of the insured vehicle?

4. If the contract holder returns the service contract during the period specified under the contract, and there has been a claim made under the contract, how much of the purchase price of the contract is the provider obligated to return?

Conclusions:

1. During the period specified in N.Y. Ins. Law § 7903(e), the contract may not restrict the conditions under which the service contract may be returned.

2. The statutes and regulation are silent as to the relative rights of the parties when a service contract is cancelled after the end of the period specified in N.Y. Ins. Law § 7903(e). Accordingly, the contract may establish the rights of the respective parties in such circumstances.

3. The statutes and regulation are silent as to the rights of the parties when the service contract is cancelled due to repossession of the insured vehicle. Accordingly, the contract may establish the rights of the respective parties in such circumstances.

4. The statutes and regulation are silent as to how much of the purchase price must be returned when a claim has already been made but it would be reasonable for the contract to permit the provider to deduct the amount of the claim.

Facts:

ABC Company is an administrator of vehicle service contracts marketed and sold in several states, including New York. The standard contract cancellation clause provides that where a contract holder elects to cancel the contract within thirty days of the purchase date, and no claim has been made, ABC Company will make a full refund of the purchase price, less a cancellation fee of fifty dollars. When cancellation occurs more than thirty days after the purchase date, and no claim has been made, ABC Company will make a pro rata refund calculated based upon a formula specified in the contract, less a cancellation fee of fifty dollars.

In written correspondence submitted by the inquirer two circumstances were posed that were not specifically covered by the standard contract. The inquirer asked whether (1) in instances where claim(s) have been paid and the contract is cancelled by the contract holder, ABC Company may reduce the amount returned to the contract holder by the amount of the claim payment; and (2) in instances where the contract is cancelled as a result of the repossession of the insured vehicle, may the contract establish the relative rights of the parties.

Analysis:

Service contracts in New York are governed by the provisions of N.Y. Ins. Law Article 79 (McKinney 2000) and N.Y. Comp. Codes R. & Regs. tit. 11 §§ 390.0 – 390.13 (1999), (Regulation 155).

N.Y. Ins. Law § 7903(e) (McKinney 2000) provides:

(e) Service contracts shall require every provider to permit the service contract holder to return the contract within at least twenty days of the date of mailing of the service contract or within at least ten days if the service contract is delivered at the time of the sale or within a longer time period permitted under the contract. If no claim has been made under the contract, the contract shall be void and the provider shall refund to the contract holder the full purchase price of the contract. A ten percent penalty per month shall be added to a refund that is not made within thirty days of return of the contract to the provider. The provisions of this subsection only apply to the original purchaser of the service contract.

N.Y. Comp. Codes R. & Regs. tit. 11, § 390.4(c) (1999) provides:

(c) The service contract shall 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 service contract, the contract shall be void and that the provider shall refund to the contract holder the full purchase price of the contract.

N.Y. Comp. Codes R. & Regs. tit. 11, § 390.5(a) (1999) provides:

(a) Every service contract marketed, issued, sold or offered for sale, made or offered to be made, or administered in this state shall specify any limitations on the right to terminate the service contract by the provider or contract holder and to receive a refund of the provider fee.

Based upon the above, a service contract provider may not limit the contract holder’s right to return the contract during the first 10 days after the issuance of the contract (20 days if the contract is mailed) or a longer time period permitted under the contract.

Pursuant to the statute and regulation, the contract holder is entitled to the refund of the full purchase price of the contract if the request is made during the time period specified in the contract (which period may not be less than 10 days, or 20 days in the case of mail) and where no claims have been made. No "cancellation fee" or other charges would be permissible.

Where the contract holder requests cancellation after expiration of the 10/20 day time period, the statutes and regulation do not "fix" the rights of the parties to the contract. The provisions of the contract would establish the rights of the parties.

Similarly, the statutes and regulation do not address an instance where the contract is cancelled due to repossession of the insured vehicle by a non-party to the contract. The statutes and regulation only address instances where the cancellation is initiated by the service contract holder. In the repossession situation the contract holder would no longer have an ownership interest in the vehicle. If the party taking possession were a loan company or a bank it is unlikely that it would want to continue the service contract, even if the contract provided for transfer to a subsequent vehicle "'owner". Again, the provisions of the contract would establish the rights of the parties to the contract.

Lastly, the statues and regulation do not establish standard provisions governing circumstances where a contract holder seeks to cancel a vehicle service contract after having filed a claim thereunder and having that claim paid. Accordingly, the relative rights of the parties would be established by the service contract. The contract should specify any limitations on the return of the purchase price if a claim has been made. It would not be unreasonable for the contract to provide that the refund may be offset by any claim that is paid.

For further information you may contact Associate Attorney Sam Wachtel at the New York City Office.