The Office of General Counsel issued the following opinion on May 11, 2004, representing the position of the New York State Insurance Department.
Re: The Product Warranty of a Tire Product
Does the sale of a tire product and its Product Warranty constitute the doing of an insurance business in New York?
The sale of a tire product and road hazard warranty program would constitute the doing of an insurance business in New York.
The inquirers client, a car dealer, wishes to sell a product that is applied to the tire to enhance the appearance of the tire and to protect the tire from road hazard by preventing the rubber from drying out and/or rotting. The distributor of such product, who also acts as the administrator of the product, is convinced of its effectiveness and it includes along with the sale of the product, a "Product Warranty" to the consumer purchasing the product. The inquirer describes the Product Warranty in the inquirers letter as providing that, " should the product . . . fail to prevent treated tires from becoming serviceable due to a road hazard, they will repair or replace under the conditions of the product warranty." The inquirer states explicitly that the inquirer did not include along with the inquirers inquiry a copy of the product warranty form and says that the inquirer realizes this means that the Department cannot give a definitive answer to the inquirers question, but nevertheless that the Department can give an opinion based upon the inquirers description of the product and its warranty.
The Product Warranty is an integral part of the sale of the product, both the product and the Product Warranty together are marketed by the distributor through sales by car dealers. The inquirer cites to N.Y. Ins. Law § 1101(a) and takes the position that the product has a direct effect on the ability of the tire to withstand damages from road hazard and has a direct relationship with the Product Warranty, both of which will be administered and provided by the distributor. Therefore, the inquirer takes the position that this product and warranty combination may be sold in New York as a "non insurance business product."
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. 2004).
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 the inquirer presented it is the Departments view that the Product Warranty is insurance and is neither a warranty nor a service contract. Although both the distributor and the inquirers client have a relationship to the product because they are in the chain of distribution, it is not the product that is being warranted under the Product Warranty the inquirer has described. The obligation under the Product Warranty is not based upon a defect in materials or workmanship in the tires but rather it is based upon the failure of the product to prevent damage to the tires it is applied to resulting from road hazard. Even if the product performs as promised, and prevents a tire against damage due to the rubber drying out or rotting, no product that is applied to the surface of a tire can prevent damage caused by a road hazard. Should the tire be damaged due to a road hazard, it is not because the product did not work as intended to prevent drying out or rotting of the tire, but rather it is because there was something in the roadway, an intervening "fortuitous event", within the meaning of the Insurance Law. Road hazards (such as a tire being punctured by a nail in the road) are outside the control of either the maker of the Product Warranty or the car dealer who sells the product and the Product Warranty to the consumer.
Whether it is the distributor or the inquirers client who is assuming the obligation under the Product Warranty, it is the opinion of this Department that should they issue and/or sell the Product Warranty in New York both the distributor and the inquirers client would be doing an insurance business without a license in violation of N.Y. Ins. Law § 1102 (McKinney 2000) and/or aiding an unauthorized insurer to do an insurance business in New York in violation of N.Y. Ins. Law § 2117(a) (McKinney 2000).
For further information one may contact Associate Attorney Barbara A. Kluger at the New York City