The Office of General Counsel issued the following opinion on March 31, 2004, representing the position of the New York State Insurance Department.
Re: Proposed Automobile Glass Replacement Program
Would the sale of the proposed "Auto Glass Maintenance Agreement" constitute the doing of an insurance business in New York?
The sale of the proposed "Auto Glass Maintenance Agreement" would constitute the doing of an insurance business in New York.
The inquirer requested the Departments opinion regarding a proposed program that the inquirers company, ABC Co., would like to offer in New York. An owner of an automobile would purchase an "Auto Glass Maintenance Agreement" (the "agreement"), for a fee, currently $105.00 per year. ABC Co. would inspect the window glass when the contract is first purchased and then there would be regular inspection at least once every 90 days during the term of the agreement. The intent is to determine whether any chips, cracks or breaks have occurred since the last inspection because ABC Co. would be able to determine if there has been any compromising of the integrity to the glass by pits, dings, cracks or breaks. ABC Co. is able to catch many such pits and dings before they turn into cracks and breaks, thereby allowing it to reduce the number of unneeded replacements and control costs as well as prolong the life of the auto glass.
ABC Co.s obligation under the agreement is limited to two replacements during the term of the agreement but unlimited chip repairs. The agreement excludes repair or replacement due to the customers intentional act or gross negligence. The agreement states that the agreement " is not to be construed as an insurance agreement or indemnity protection."
The issue is whether the program involves the doing of an insurance business or constitutes either a warranty or service contract. N.Y. Ins. Law § 1101 (McKinney 2000 & Supp. 2004), 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 § 1102(a) (McKinney 2000 & Sup. 2004) prohibits any person, firm, association, corporation, or joint-stock corporation from doing an insurance business in New York unless authorized by a license in force pursuant to the Insurance Law, or exempted by the provisions of the Insurance Law from such requirement. Any person aiding an unauthorized insurer in doing an insurance business would be in violation of N.Y. Ins. Law § 2117(a) (McKinney 2000 & Supp. 2004).
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
A service contract does not include a maintenance agreement, which is defined N.Y. Ins. Law § 7902(d) (McKinney 2000) to mean:
(d) "Maintenance agreement" means 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.
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, 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).
Damage to the window glass is the triggering event under the agreement, be it chip, crack, or break. The mere inspection of the window glass does not convert the agreement into a warranty or service contract. The damage would not be the result of any inherent defect in the glass itself but could be caused by any number of outside events, such as a road hazard or other accident, or even the intentional act of someone other than the customer, that occurs subsequent to the inspection. Such damage is, to a substantial extent, the result of a fortuitous event and is beyond the control of either the company or the consumer. Accordingly, the agreement would constitute insurance, within the meaning of the Insurance Law. Under the proposed program, the company would be acting as an insurer without a license and would be in violation of Section 1102.
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.