The Office of General Counsel issued the following informal opinion on March 22, 2005, representing the position of the New York State Insurance Department.
Re: Tire and Rim Program
Does tire and wheel coverage providing reimbursement for road hazards constitute the doing of an insurance business if its included as a part of a valid service contract offered in New York?
Yes, tire and wheel coverage providing reimbursement for road hazards would constitute the doing of an insurance business if it were offered in New York, regardless of whether such coverage were to be offered within a proper service contract.
The inquiry concerns the "ABC Program" offered by XYZ Products International, Inc. and the "123: Mechanical Breakdown Protection Program" (hereinafter "123 Program") offered by 789 Service Corporation.
The tire and wheel coverage of the "ABC Program" provides reimbursement for charges incurred for the repair of flat tires caused by road hazards or replacement should the tire become non-repairable due to impact leads, snags, cuts, puncture or other road hazards; and reimbursement for repair or replacement of wheels rendered unserviceable due to failure of the wheel. Reimbursement includes the cost of mounting and balancing as well as any local and state taxes. The "ABC Program" also provides repair of chips and cracks in windshields caused by propelled rocks or road hazard debris; and repair of dents and dings. The brochure states that the contract may contain additional benefits.
The tire coverage provided by 123 "pays up to $100 for the replacement of any covered tire destroyed due to road hazard and up to $20.00 for any covered tire which becomes flat due to road hazard." 123 also has four different packages options with coverage for the various systems within an automobile, with the Elite Plus containing all of the available benefits. These programs appear to provide for "mechanical breakdown" coverage for the mechanical, electrical and audio systems, coverage for seals and gaskets, and also provide for wear and tear. All of the packages include the tire coverage and reimbursement for trip interruption, road service, towing, rental and lockout service. The trip interruption provides for reimbursement for meals and lodging expenses if a repair facility must keep the vehicle overnight for repairs covered under the agreement.
The issue in regard to each of the two programs is essentially the same, that is, whether tire and wheel coverage for road hazards involves the doing of an insurance business or constitutes either a warranty or service contract. Therefore, the same statutory provisions are applicable.
N.Y. Ins. Law § 1101 (McKinney Supp. 2005), 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 Supp. 2005) 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 2005).
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) as:
a contract or agreement, for a separate or additional consideration, for a specific duration to perform the repair, replacement or maintenance of property, or indemnification for repair, replacement or maintenance, due to a defect in materials or workmanship or wear and 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.
With respect to 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. Neither of these programs are warranties.
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. 2005). N.Y. Ins. Law § 1101(b)(3-a) (McKinney Supp. 2005) 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 [of the Insurance Law] . . . 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).
Including a service which constitutes doing the business of insurance within a service contract or a warranty does not change the character of that service. Such service may not be sold without the appropriate insurance license whether it is sold on its own or as a package with other non-insurance services.
Based upon the facts as presented, it is our view that the tire coverage provided within both programs is neither a warranty nor a service contract. The obligations undertaken by each program are not based upon defects in material but upon the happening of a fortuitous event that is beyond the control of either the companies offering the programs or the consumer. In the absence of a license to do an insurance business in New York, the companies offering either of these two programs would be acting in violation of N.Y. Ins. Law §1102 (McKinney Supp. 2005). In addition, if any dealer were to offer either of these two programs to customers, the dealer would be aiding an unauthorized insurer in violation of N.Y. Ins. Law § 2117(a) (McKinney Supp. 2005).
Although, the inquiry focused on the tire and wheel services, we note that the two programs contain additional problems. With respect to the ABC Program, it appears from the information provided in the brochure that the other benefits, namely the windshield repair protection and the dent and ding protection would constitute the doing of an insurance business. These two benefits are not based upon defects in material but upon the happening of a fortuitous event that is beyond the control of either the companies offering the programs or the consumer. The windshield repair protection provides front windshield repair of chips and cracks caused by propelled rocks or road hazard debris. And, although the dent and ding protection does not specifically list the causes covered, it is likely that it covers dents and dings caused by fortuitous events, such as propelled rocks, runaway shopping carts and other accidents. If so, it constitutes doing an insurance business. Furthermore, even if these products could be considered service contracts, XYZ Products International has not registered as a service contract provider with the Department pursuant to N.Y. Insurance Law § 7907 (McKinney 2000).
The brochure for 123 does not provide enough information for us to determine whether its mechanical breakdown coverages could qualify as a service contract since the materials do not specify whether the cause of the breakdown would be limited to defects in materials and workmanship or wear and tear. However, since 789 Service Corporation is not registered as a service contract provider, it would be doing an insurance business without a license if it offered 123 in New York. Moreover, even if the company became registered, the tire coverage constitutes doing an insurance business.
Finally, the emergency road services, namely towing, lockout and trip interruption services, offered by 123 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) 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 authorize 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 coverage, except for the lockout coverage and trip interruption services.
Any person who 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 Supp. 2005). 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 Supp. 2005).
We are referring these programs to our Consumer Services Bureau for investigation.
For further information you may contact Assistant Counsel Brenda M. Gibbs at the Albany Office.