The Office of General Counsel issued the following opinion on July 7, 2003 representing the position of the New York State Insurance Department.
Re: Extended warranties issued by distributor of trucks and by manufacturer of truck engines
1. Is the distributor of commercial trucks required to comply with New Yorks service contract law or other provisions of the Insurance Law in regard to "extended warranties" issued on the trucks by the distributor?
2. Is the manufacturer of engines that are used in commercial trucks required to comply with New Yorks service contract law or other provisions of the Insurance Law in regard to "extended warranties" issued on the engines by the engine manufacturer?
1. Assuming that the "extended warranty" comes within the definition of a warranty as discussed herein, a distributor of trucks that makes such agreements on the trucks would not be doing an insurance business in New York and is not subject to New Yorks service contract law.
2. Assuming that the "extended warranty" comes within the definition of a warranty as discussed herein, an engine manufacturer that makes such agreements on the engines would not be doing an insurance business in New York and is not subject to New Yorks service contract law.
The inquirer represents a client who is a manufacturer of commercial trucks. Company A is an 80% owned distributor of the manufacturer and offers what the inquirer calls an "extended warranty" on the trucks. Company B manufactures commercial engines for trucks and is an affiliate of the manufacturer. The engines may be used in both trucks made by the manufacturer and trucks made by other manufacturers. Company B offers an "extended warranty" on the engines, regardless of which manufacturers trucks the engine is in.
The extended warranties are sold by the dealers that sell the trucks for a separately stated fee at the time of the commercial truck purchase or shortly thereafter. They are direct contracts between the respective Company and the commercial buyer. The dealer is not an obligor under the contracts but usually performs the services on behalf of the respective Company. The respective Company fully reimburses the dealer for any expenses incurred in repairing the vehicle or the engine.
The inquirer does not indicate what the "extended warranty" covers and the inquirer has not provided the Department with the actual extended warranties. Therefore the Department can not provide the inquirer with an opinion as to whether the actual agreements are subject to the Insurance Law and the Department can provide the inquirer only with a response that is general in nature. The Department notes that the term "extended warranty" is often used to refer to agreements for separate compensation, to distinguish them from the warranties on a product typically issued by a manufacturer or seller without charge.
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
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.
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, distributor 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, distributor, or seller have generally been considered by the Department to be incidental to other legitimate business or activity of the manufacturer, distributor, or seller and therefore would not constitute the doing of an insurance business in New York under N.Y. Ins. Law §§ 1101 and 1102 (McKinney 2000 & Supp. 2001-2002). In addition, the maker of such a warranty would not be subject to the requirements of Article 79 regarding service contracts.
Assuming that the "extended warranty" comes within the above definition of a warranty, the distributor of the trucks would be making its warranties on the trucks as incidental to its distribution business, regardless of the fee, and the maker of the engines would be making its warranties as incidental to its engine manufacturing business, regardless of the fee. Accordingly, neither would be doing an insurance business and neither would have to register as a service contract provider. However, as noted above, without reviewing the actual "extended warranties", the Department cannot opine as to whether they actually come within the warranty exception.
For further information one 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).