The Office of General Counsel issued the following opinion on December 1, 2003, representing the position of the New York State Insurance Department.
Re: Automotive theft & road hazard programs
Question Presented
1. Does the sale of the "Automotive Theft Protection" program constitute the doing of an insurance business in New York?
2. Does the sale of the "Road Hazard Protection Tire & Wheel Guarantee" constitute the doing of an insurance business in New York?
Conclusion
1. The sale of the "Automotive Theft Protection" program does not constitute the doing of an insurance business in New York. However, as part of the program a New York authorized insurer issues a certificate of insurance under a group insurance policy to the purchaser of the program.
2. The sale of the "Road Hazard Protection Tire & Wheel Guarantee" constitutes the doing of an insurance business in New York.
Facts
The inquirer recently purchased a new automobile at DEF, an automobile dealership in New York State. As part of the sale, the inquirer purchased two programs, the "Road Hazard Protection Tire & Wheel Guarantee" ("Road Hazard program") and the "Automotive Theft Protection" ("ATP") program. On the invoice, there was one $2190 charge for both programs and there was no indication as to how much each program cost separately.
The Road Hazard program refers to its administrator as "Guarantee Administrator", but lists an address in Texas. Subsequently, the inquirer obtained information that the Guarantee Administrator is ABC, which, according to its website, is located in Texas, although according to the website of the Texas Department of Licensing and Regulation, ABC is located at the same Texas address as the "Guarantee Administrator." The inquirer states that the inquirer spoke to a person at ABC, who confirmed that the tire program was its program. The ATP program is administered by XYZ located in Texas.1 Although DEF charged one fee for the two programs, there is no indication that XYZ and ABC are related.
The inquirer expressed concern that DEF acted improperly when selling these programs to the inquirer. The inquirer stated that the inquirer did not plan to buy these programs but the inquirer was given only two choices when arranging financing with DEFs financial officer: Get a 4.44% interest rate and purchase the ATP, Road Hazard and an extended warranty; or get an 8.88% interest rate if the inquirer did not buy the programs. Due to the late hour (11:00 PM), the inquirer felt that she was pressured into the sale.
When the inquirer went back the next day to cancel the programs, DEF was willing only to cancel the extended warranty, and not the ATP or Road Hazard programs. When the inquirer contacted XYZ and ABC, neither was willing to cancel its program either. The inquirer stated that the DEFs general manager subsequently agreed to cancel the Road Hazard program, but did not indicate whether this has occurred. However, DEF refused to cancel the ATP program.
Although linked in the sale by the automobile dealer, the Department has no reason to believe that the ATP and the Road Hazard programs are connected. Accordingly, because the analyses for the two programs are different, the Department will discuss them separately.
Automotive Theft Protection program
The ATP program describes itself as a process that is installed on the automobile when it is purchased or leased to deter theft and assist authorities in the recovery of the stolen vehicle. Typically, the vehicle identification number ("VIN") is etched in various locations on the vehicle. As part of the program, the automobile purchaser/lessee is provided a certificate of insurance under a group insurance policy purchased by XYZ from an insurance company. The insurance provides that if the automobile is stolen and unrecovered or recovered and declared a total loss, the insurer will pay a "loss benefit" to be calculated as follows: Under both the Basic Protection Plan and the Preferred Protection Plan, an amount will be paid to the automobile dealer towards the purchase or lease of a replacement vehicle. Both plans also provide for the payment of a rental car reimbursement. The principal differences between the plans are the maximum amounts payable.
The only document in regard to the ATP program that the inquirer received was the "certificate of coverage" for the insurance benefits. The terms of the insuring agreement are contained on the back of the document. The document does not include a provision regarding cancellation by the consumer. The inquirer states that the inquirer was not given a choice between the Basic or Preferred programs, or as to the length of the term or the amount of coverage.
Road Hazard Protection Tire & Wheel Guarantee
The Road Hazard program provides as follows:
Subject to the following conditions, the tires and/or wheels of the vehicle described in the registration will be reimbursed up to a maximum of two thousand dollars ($2,000.00) per registered vehicle, provided that tires/wheels are damaged from a road hazard and are not repairable. Replacement tires and wheels must be of like quality, type, and cost as original tires and wheels. $500.00 per wheel per incident limitation.
The Road Hazard agreement provides coverage for three years, and is neither cancellable nor transferable. There are a number of exclusions, but the only relevant one is "B", which provides:
Tire and/or wheel damage resulting from off-road use and unpaved roads, racing, collision with curbs, storm drains or another vehicle, misuse, abuse, lack of proper maintenance, misalignment, suspension problems, vandalism or theft, fire, manufacturer defects, acts of God, flooding, recapped tires, dry-rot and driving on tires that are improperly inflated.
The Road Hazard agreement does not explicitly indicate whether it is the Guarantee Administrator or the automobile dealer that is the party that incurs the obligation under the agreement. While the dealer signs the contract, it is ambiguous as to whether the dealer does so in the capacity of the obligor or the agent of the Administrator.
Analysis
Automotive Theft Protection program
N.Y. Ins. Law § 3446 (McKinney 2000) was added to the Insurance Law by Chapter 187 of the Laws of 1999, to permit the issuance of a group insurance policy to a manufacturer, distributor, or installer of a product or system, or a trustee on behalf of more than one manufacturer, distributor or installer, where the policy insures persons who have purchased or own the product or system where the manufacturer, distributor, or installer has represented that the product or system is designed to prevent loss or damage to property from a specific cause. The policy shall cover the loss or damage to the property from such cause. The policy may not cover loss or damage resulting from a defect in materials or workmanship, or wear and tear and may not be duplicative of coverage under any other applicable insurance policy. The policy may provide coverage for unreimbursed incidental expenses that may be incurred as a result of the loss or damage to the property.
As noted in the preamble to N.Y. Comp. Codes R. & Regs. tit. 11 Part 310 (2000) (Regulation 167), which is the regulation that implements § 3446:
(b) Chapter 187 is the legislative response to agreements made by manufacturers, distributors, or installers of a product or system, or other persons, that provide a pecuniary benefit to the purchaser or user of that product or system, if damage results from the failure of the product or system to perform as represented. For example, sometimes in connection with a lock or other security device, or where a vehicle is etched with a unique identification code, an agreement is provided by the manufacturer, seller, installer, or other person that provides for the payment of a specified sum in the event the vehicle is stolen. These agreements are not truly warranties or guarantees, but rather are insurance contracts within the meaning of Insurance Law Section 1101 because there are intervening fortuitous events; in these examples, theft.
(c) Chapter 187 permits manufacturers, distributors, or installers of a product or system to make coverage available to consumers by purchasing newly authorized group insurance in connection with their products or systems. For example, a vehicle that is purchased with an applied or installed security product or system is subsequently stolen and not recovered. The manufacturer of the security product or system has obtained a product or system group insurance policy from an authorized insurer covering the owner of the vehicle. Under the owner's primary vehicle physical damage insurance policy, the owner receives the actual cash value of the vehicle less any deductible. In such a case, the product or system group insurance policy may cover the owner's deductible as well as the difference between the replacement cost of the vehicle and its actual cash value (e.g. the policy may cover the difference between the replacement cost of a new model year vehicle and the actual cash value of the stolen vehicle). In addition, there may be costs incurred to rent a temporary replacement vehicle and registration costs for a replacement vehicle. If not reimbursed under another insurance policy, these costs may be covered under the product or system group policy.
Under § 3446, the coverage must be provided by a New York authorized insurer and may not be provided directly by the manufacturer, seller, or distributor of the product or system, or other person, such as the program administrator. Moreover, § 3446 was structured so that insurance issued pursuant thereto would not to be sold directly to the consumer. Rather, under § 3446, insurance is included along with the sale of a product or system, under a group insurance policy purchased by the manufacturer, seller, or distributor of a product or system. In this case, ATOC purchased a group policy from Virginia Surety for its ATP program. Under § 3446, the premium for the insurance is to be paid directly by the group policyholder, and not by the consumer.
The group insurance policies, and certificates issued thereunder, are subject to approval by the Insurance Department, and the insurance company certificates have been so approved. However, the Insurance Law does not contain any provision that regulates the sale of the product or system itself and does not govern whether the purchaser may cancel the transaction. If the inquirer believes that DEF or XYZ acted improperly in the sale of the ATP, the inquirer should contact the New York Attorney General.
Road Hazard Protection Tire & Wheel Guarantee
N.Y. Ins. Law § 1101 (McKinney 2000), 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
Service contracts and warranties are similar in that both relate to the nature or efficiency of a product, but there are distinctions between them.
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). 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. 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).
Based on the facts as presented, it is the Departments view that the Road Hazard plan is insurance and is neither a warranty nor a service contract. The obligations under the Road Hazard plan are not based upon a defect in materials or workmanship; in fact, manufacturer defect is expressly excluded from coverage. Instead, the coverage is based upon the happening of fortuitous events that are outside the control of either the maker of the Plan or the consumer; namely, the coverage is conditioned upon damage resulting from a road hazard.
The Road Hazard contract covers loss from road hazards, but it does not define the term. Although the contract excludes "acts of God", which clearly are fortuitous, the contract does not exclude damage directly related to road conditions, such as glass, irregular surfacing, etc. Loss resulting from such road hazards is nonetheless just as fortuitous as loss resulting from an act of God".
Accordingly, while it is not clear from the Road Hazard agreement whether it is ABC or DEF that is assuming the obligations, it is the opinion of this Department that ABC and DEF are doing an insurance business without a license in violation of N.Y. Ins. Law § 1102 (McKinney 2000) and/or aiding an unauthorized insurer in violation of N.Y. Ins. Law § 2117(a) (McKinney 2000).
For further information one may contact Principal Attorney Paul A. Zuckerman at the New York City Office.
1 According to the website of the Texas Department of Licensing and Regulation, XYZ, is an assumed name for XYZ2, also of the same address.