The Office of General Counsel issued the following opinion on July 23, 2004, representing the position of the New York State Insurance Department.
Re: Roadside Assistance With Tire and Wheel Program
1. Would the sale of road assistance program constitute the doing of an insurance business in New York?
2. Would it make a difference if the program was marketed as a guarantee of a tire monitor that would be installed on the tires?
1. While the Department has not objected to motor clubs providing certain emergency road services in New York, the emergency travel expense, the road hazard tire and wheel coverage, and other emergency services would require the obligor to become licensed as an insurer before they could be offered.
2. It would make no difference if the program was marketed as a guarantee of a tire monitor that would be installed on the tires.
The inquirer asked about a road assistance program. According to the marketing brochure that the inquirer submitted, and which the inquirer confirmed in our phone conversation, the company marketing the program is ABC Incorporated ("ABC"). However the sample contract that the inquirer submitted says that services and benefits are administered through MNP Processing Center ("MNP") and the contract appears to obligate MNP to provide the benefits. In our conversation, the inquirer stated that ABC is not currently offering the program in New York, but that the inquirer is interested in selling it in New York. Inasmuch as the program is not currently being offered in New York, we do not have to ascertain who the actual obligor would be. However, the inquirer notes that the program is similar to other programs that he is are aware of being marketed in New York. The program provides as follows:
1. Road hazard tire and wheel coverage:
In the event of a flat tire caused by a road hazard, MNP will reimburse the contract holder for the changes incurred to repair the flat tire. In addition, if a tire covered by the agreement becomes unrepairable due to a road hazard such as cuts, snags, bruises, impacts (not collisions), tear or puncture, the consumer would be reimbursed for the cost of replacing a tire. The contract holder would also be reimbursed for the repair or replacement of wheels rendered unserviceable due to the road hazard failure of a tire covered under the "warranty", which is the only time the agreement is referred to as such. Costs for mounting, balancing and valve stems and taxes would also be reimbursed. Excluded is failure or loss due to negligence, abuse, misuse, or arising out of or related to a collision or upset, malicious mischief, vandalism, fire, chain damage, racing, theft, improper inflation pressure, manufacture defect, impact with a curb or use off-road or on a construction site. Presumably to preclude a double recovery, the contract also excludes damage or loss that is covered under the contract holders primary insurance coverage or a vehicle service contract.
2. Emergency road service:
24-hour emergency road service is provided for a covered vehicle that requires a minor adjustment (exclusive of parts) to enable it to proceed on its own power. The coverage includes changing an inflated spare tire, attempting to start a vehicle with a battery booster, delivery of emergency supplies of gasoline, oil, water or other accessories and supplies, with the cost of the materials to be paid by the contract holder; towing service of up to 25 miles; and locksmith service if keys are locked inside the vehicle or lost or broken.
3. Emergency travel expense:
In the event the vehicle becomes disabled as the result of a traffic accident with another vehicle at least 250 miles from the contract holders home, MNP will reimburse the contract holders emergency living expenses for up to three days for the costs of local lodging and meals, up to $50.00 a day, while the vehicle is being repaired.
The inquirer also asked whether it would make a difference if the road hazard coverage was conditioned upon the failure of a tire monitor, although this is not currently a feature of the program. The tire monitor is a small device that is attached to each tire and which monitors the pressure of the tire. As we understand it, underinflation or overinflation can lead to blowouts, tire damage, rim damage, etc. The inquirer did not indicate exactly how the proposed guarantee would operate, but we assume that it would be limited to those failures caused by such over or under inflation and would not include any damage done by a simple road hazard, glass, nails, etc. This would change the coverage, which currently excludes damage resulting from improper inflation and which does cover simple road hazard damage.
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 our view that the road hazard tire and wheel coverage 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 MNP or the contract holder; namely, the coverage is conditioned upon damage resulting from a road hazard.
Nor do we think it would make a difference if the program was restructured as a guarantee of the tire monitor. For one thing, it would be next to impossible to ascertain that it was the failure of the tire monitor that led to the damage, as opposed to the car owner simply not checking the air for extended periods of time. In other words, the product could be accurately reflecting the tire pressure as being over or under inflated, but if the driver did not check the monitor before the vehicle is used, it cannot be said that any subsequent blow-out is the result of the failure of the product. Moreover, while the tire monitor may be warranted against failure to operate properly, even if it could be ascertained that the damage was a consequence of the products failure, the proposed coverage would be for the consequential damage to the tire, which far exceeds the cost of the product itself and hence would be neither a warranty nor a service contract.
Similarly, the emergency travel expense constitutes insurance because it is dependent upon the happening of a fortuitous event, that is, the vehicle becoming disabled as the result of a traffic accident. In fact, many insurance policies provide such coverage.
With respect to the emergency road service, ABC does not characterize the road assistance program as a "motor club", but it provides services that are similar to those offered by motor clubs. While motor clubs are not subject to licensure or regulation by this Department, if any of the services provided by a motor club constitute doing an insurance business in this state, those services may be offered only by an authorized insurer in accordance with the Insurance Law and regulations.
The Department has issued Circular Letter No. 2 (1979), enclosed, which contains guidelines describing how motor clubs may provide certain benefits in New York. The Department has not objected to a motor club providing towing or roadside assistance services so long as it follows those guidelines, with one exception. A motor club may not obtain a master or group policy for towing, emergency, trip interruption or legal services, as described in item 2 of the Circular Letter, as such a policy would constitute group property/casualty insurance of a kind not authorized under New York Law.
All of the items listed under the emergency road service coverage discussion above would come within the Circular Letter with respect to a motor club offering such coverage, except for the lost keys and lockout coverage.
Any person that was not licensed as an insurance agent or broker that sold or marketed such a program in New York would be doing so in violation of N.Y. Ins. Law § 2102(a) (McKinney 2000 as amended by Ch. 687 of the Laws of 2003). In addition, any person, including a licensed insurance agent or broker, that marketed or sold such a program would be acting for or aiding an unlicensed or unauthorized insurer in violation of N.Y. Ins. Law § 2117(a) (McKinney 2000).
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.