The Office of General Counsel issued the following information on March 17, 2005, representing the position of the New York State Insurance Department.
Re: Warranty On Auto Anti-Theft Devise Constitutes Insurance
Does ABC Corporations warranty on its auto anti-theft device constitute insurance?
Yes; ABC Corporations warranty on its auto anti-theft device constitutes insurance.
A copy of the warranty issued by ABC Corporation on its auto anti-theft device was provided to the Department. It provides, in part, the following:
In addition to the [ABC Corporation] Limited Parts and Labor Warranty, we warrant that if, within two (2) years from the date of installation of the [ABC Corporation] unit, the Purchasers vehicle is stolen and not recovered within twenty-four hours from the time that report of the theft is officially recorded by the police department having jurisdiction, [ABC] Corporation will (i) pay you an amount equal to the purchase price paid for the [ABC Corporation] unit up to a maximum of $695, and (ii) pay you an amount equal to the aggregate purchase price paid for the [ABC Corporation] Starter Disabler and the [ABC Corporation] Shock Sensor up to an aggregate maximum of $300, provided, however, that the total payment to you shall not exceed $895. For purposes of this warranty, the price paid does not include any finance, lease, tax or other charges. This warranty applies only when both the theft of the vehicle and the report of the theft occur within the boundaries of a jurisdiction where the [ABC Corporation] System is fully operative at the time of the theft (for further details, see the [ABC Corporation] Recovery Network page in the Owners Manual). This one-time payment of an amount equal to the purchase price of the [ABC Corporation] unit shall be complete and final remedy available to Purchaser in the event of non-recovery of your vehicle within twenty-four hours after the report of the theft to police. In connection with any claim under the [ABC Corporation] Limited Recovery Warranty it is the responsibility of the Purchaser to provide (i) dated/time-stamped proof of report of theft from the appropriate police department, (ii) dated proof of purchase of the [ABC Corporation] unit; and (iii) confirmation by such police department that the vehicle was not recovered within twenty-four hours following the report.
N.Y. Ins. Law § 1101 (McKinney Supp. 2005) states, in part relevant to this inquiry:
(a) In this article: (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.
Section 1101(b)(1) provides that, among other things, the following acts shall constitute the doing of an insurance business:
(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 therein, 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[.]
A warranty relates in some way to the nature or efficiency of the product. It is a representation that the product is of a certain make and fitness, or that the product will work properly. A warranty does not cover a hazard that has nothing to do with the make or quality of the product. A guaranty is an undertaking that the amount contracted to be paid will be paid, or services guaranteed will be performed. A guaranty relates directly to the substance and purpose of the transaction. See Ollendorf Watch Co. v. Pink, 279 N.Y. 32, 17 N.E.2d 676 (1938).
The "warranty" made by the ABC Corporation is neither a warranty nor a guaranty. It is an obligation to pay a purchaser a benefit of pecuniary value (the cost of the ABC Corporation system, up to a stated maximum) upon the happening of a fortuitous event: the theft of the vehicle. The theft is the triggering event. Theft is an event that is clearly fortuitous in nature. Whether a vehicle will be stolen is, to a substantial event, beyond the control of either ABC Corporation or the purchaser. See Office of General Counsel Opinions June 20, 1997; July 1, 1994; January 30, 1992. In addition, there may be intervening events that cause the failure of the vehicle to be located within 24 hours after it is reported stolen to the police. Failure of recovery may have nothing to do with the nature or efficiency of the ABC Corporation System itself. Hence, the benefit provided by ABC Corporation is insurance as defined by N.Y. Ins. Law § 1101.
N.Y. Ins. Law §1102 provides that, unless specifically exempted, no one shall do an insurance business in this state unless authorized by a license in force pursuant to the Insurance Law. Hence, the ABC Corporation may not offer or provide this coverage to New York purchasers.
In addition, N.Y. Ins. Law § 3446 (McKinney 2000) was specifically added by the Legislature in 1999 to address the kind of product add-on that ABC Corporation describes in its purported warranty, and it states:
(a) A group policy may be issued to a group policyholder, who shall be a manufacturer, distributor, or installer of a product or system, or a trustee of a trust established, or participated in, by one or more manufacturers, distributors, or installers, in accordance with the provisions of this section.
(b) The group shall consist only of members 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 (other than loss or damage resulting from defect in materials or workmanship, or wear and tear), and the policy shall only cover such loss or damage.
(c) The policy, and certificates issued thereunder, may provide coverage for a kind of insurance authorized by paragraphs four through twelve, nineteen and twenty of subsection (a) of section one thousand one hundred thirteen of this chapter, and may be issued or delivered in this state only by an insurer authorized in this state to write the coverage.
(d) The coverage shall not be duplicative of coverage under any other applicable insurance policy.
(e) The insurer must treat in like manner all eligible group members of the same class.
(f) The premium for the group policy, including certificates thereunder, shall be paid by the group policyholder from funds contributed wholly by the group policyholder.
(g) The superintendent may promulgate regulations regarding product and system group policies, including regulations governing issuance of certificates to group members; minimum provisions of certificates; policy cancellation and renewal; minimum number of group members; payment of premium; and policy dividends, retrospective premium credits, or retrospective premium refunds; and may establish other reasonable limitations.
(h) A product or system group policyholder shall comply with the provisions of section two thousand one hundred twenty-two of this chapter, in the same manner as an insurance agent or broker, in any advertisement, sign, pamphlet, circular, card, or other public announcement referring to coverage under a group policy or certificate.
(i) A product or system group policy or certificate shall not be subject to section three thousand four hundred twenty-five or section three thousand four hundred twenty-six of this article.
(j)(1) "Manufacturer" means a person that:
(A) manufactures or produces the product or system and sells it under its own trade name or label;
(B) does not manufacture or produce the product or system but sells it under its own trade name or label;
(C) manufactures or produces the product or system and it is sold under the trade name or label of another person; or
(D) does not manufacture or produce the product or system but, pursuant to a written contract, licenses the use of its trade name or label to another person that sells the product or system under the licensor's trade name or label.
(2) "Manufacturer" shall also include a distributor which is a parent, affiliate, or subsidiary of a manufacturer.
(3) The holder of a patent shall not be considered a manufacturer solely because it receives royalties on its patents.
N.Y. Comp. Codes R. & Regs. tit. 11, Part 310 (Regulation 167) is the regulation promulgated to implement § 3446. N.Y. Comp. Codes R. & Regs. tit. 11, § 310.0 (b) states:
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.
Thus, in order for ABC Corporation to make this benefit available, it must do so as prescribed in N.Y. Ins. Law § 3446 (McKinney 2000) and by N.Y. Comp. Codes R. & Regs. tit. 11, Part 310 (Regulation 167).
For further information you may contact Associate Attorney Sally Geisel at the New York City Office.