The Office of General Counsel issued the following opinion on November 19, 2003, representing the position of the New York State Insurance Department.
Re: Automobile Distributors Vehicle Service Contract
Must an automobile distributor register with the Superintendent as a service contract provider in order to offer its vehicle service contract?
The vehicle service contract constitutes a warranty. Therefore, the automobile distributor does not have to register as a service contract provider.
An automobile distributor wishes to market an extended service contract to its consumers through its authorized auto dealers. The automobile distributor is the sole authorized importer and distributor of the vehicles, parts, and accessories sold in North America. It is wholly owned by the European-based manufacturer of the vehicles.
It was stated that the contract will be sold only through authorized dealers to customers and that no third party vendor/insurer/broker will be involved or permitted to sell the contract. Once the contract is purchased, covered repairs may be performed at any authorized auto dealer, at no additional cost to the customer. All claims will be processed through the distributors existing system for the warranties that are included with the vehicle when sold. The distributor will reimburse authorized dealers in the same manner as they are reimbursed for claims under new automobile warranties.
The proposed vehicle service contract states, in material part:
During the Term of this Agreement, at no charge to You for parts or labor, an Authorized . . . Dealer will repair or replace parts of the Covered Vehicle that become defective in material or workmanship under normal use. [Our] obligation to repair or replace parts is limited to repairs performed by an Authorized . . . Dealer and is limited to the parts listed below under the coverage.
The contract excludes coverage for a number of items, including, in pertinent part:
Loss of time, inconvenience, loss of use of the vehicle or other incidental or consequential damages.
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Parts with malfunctions caused by misuse, improper adjustments, modification, alteration, tampering, and improper or inadequate maintenance.
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Damage resulting from accidents, acts of god [sic] or other events beyond the control of You or [Us].
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Faults not due to material or construction defects but due to incorrect use, negligence, accidents, incorrect or inadequate maintenance, use in competition or not conforming to the instructions provided by [Us].
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).
Under the proposed vehicle service contract, coverage will be limited to repair or replacement of defective products; the vehicle distributor is within the chain of sale; and the contracts will be made as incidental to its primary business. Accordingly, the Department is of the opinion that the proposed agreement would constitute a warranty within the meaning of the Insurance Law, the automobile distributor would not be doing an insurance business, and it does not need to register as a service contract provider.
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.