The Office of General Counsel issued the following opinion on June 5, 2003, representing the position of the New York State Insurance Department.
Re: Automobile Lessor Charging a Fee to Lessee to Cover Physical Damage to the Automobile
A motor vehicle black car leasing and finance company enters into long-term leases or finance agreements on black cars. It requires the lessee/debtor to maintain physical damage insurance on the vehicle. It proposes to charge each lessee or debtor a fee if the lessee/debtors physical damage insurance is canceled. In the event the vehicle is damaged, the fees so collected from the lessee/debtor would be used to pay for the cost of repairs. The lessee/debtor will remain responsible for any expenses that exceed the amount collected as of the date of the damage. Does such arrangement constitute the doing of an insurance business by the lessor/creditor for which a license as an insurer is required?
Under the facts as specified below, the proposal would not constitute the doing of an insurance business by the lessor/creditor.
An independent motor vehicle black car leasing and finance company (the "company") enters into long-term leases or finance agreements on the vehicles. Black cars are non-medallion public livery vehicles that are operated out of a radio group and which cannot pick up passengers on the street. Black cars are luxury sedans, which are typically defined as four-door sedans with a manufacturers suggested retail price of at least $30,000 when new. A long-term lease is an agreement for a period greater than 30 days, and is distinguishable from a rental agreement, which is for a period of 30 days or less.
The inquiry concerns a proposal regarding physical damage to black cars under long-term leases or finance agreements. It was stated that the leases provide that the lessee will take title to the vehicle at the termination of the lease.
Under the lease or finance agreement, the lessee/debtor is responsible for maintaining the vehicle and for repairing it in the event the vehicle is damaged. The company requires the lessee/debtor to maintain physical damage insurance on the vehicle. If the insurance is canceled for non-payment of premium or other reason, the company is exposed to the risk that the lessee/debtor may not repair the vehicle if it is damaged, thereby impairing the companys interest in the vehicle, which it owns under the lease and which is the collateral under the finance agreement. If the company undertakes repairs to the vehicle, it may have to pursue the lessee/debtor for any repair costs.
Under the proposal, when the company receives notice that the lessee/debtors physical damage insurance is canceled, the company would like to charge the lessee/debtor a flat monthly fee, which could be characterized as a penalty. It was indicated that the amount charged would be in the range of $250 to $350 per month, depending upon the value of the vehicle at the time of the lease or finance agreement. The company could purchase insurance covering its own risk (vendor single interest insurance); however, it was indicated that such coverage has not met the companys needs in the past. Hence, it is proposed that the company retain the money collected from the lessee/debtor and, in the event that the vehicle sustained physical damage, the company would apply the sums to the repair of the vehicle. The company would not, however, assume the financial responsibility for repairing the vehicle and the lessee/debtors obligation to repair the vehicle under the lease or loan agreement would not be waived. The lessee/debtor would remain liable for the total cost of repairs that exceeded the amount so collected. The company would not use the fees collected from one lessee/debtor for repairs of other lessees/debtors vehicles.
The issue presented involves physical damage coverage only, and not liability for injury to person or damage to other property.
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.
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(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;
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(E) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this chapter.
N.Y. Ins. Law § 1102(a) (McKinney 2000) makes it a violation of the Insurance Law for any person to do an insurance business in this state unless licensed as an insurer or exempt from such licensing.
The companys proposal does not constitute the doing of an insurance business. The fee is collected by the company as a means of ensuring that there are funds to pay for the repairs when the lessee/debtor allows the physical damage insurance to terminate. Since the fees are obtained from the lessee/debtor, the lessee/debtor is essentially paying for the repairs itself. Most significantly, the company does not waive the lessee/debtors obligation to pay for the repairs and the costs of the repairs that exceed the amount so collected remain the lessee/debtors obligation. Hence, the company is not obligating itself to provide a benefit of pecuniary value to the lessee/debtor.
Accordingly, it is our opinion that the proposed plan does not violate the Insurance Law. This opinion, however, is limited to the facts contained herein and to an interpretation of the Insurance Law. No opinion regarding any other law is expressed herein.
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.