The Office of General Counsel issued the following opinion on March 24, 2005, representing the position of the New York State Insurance Department.
Excess wear waiver
Does the proposed excess wear waiver program constitute the doing of an insurance business in this State?
The proposed excess wear waiver program constitutes the doing of an insurance business in this State.
An opinion was requested regarding a proposed excess wear waiver program that lessors would like to offer in New York in connection with long-term motor vehicle leases. The requestor states that under the excess wear waiver, the lessor would agree to waive a specified amount of "excess wear charges" assessed against the lessee upon termination of the vehicle lease. The requestor contends that such an agreement would not constitute insurance but requests the Departments confirmation. The requestor also states that the lessors may seek insurance to offset the amounts waived.
Although the requestor states that he is unable to provide us with a draft copy of the excess waiver, he states that the relevant provision of the agreement reads as follows:
If I [lessee] do not purchase the Vehicle at Lease end and subject to the limited wear waiver below, I will reimburse Lessor for the amount it would cost Lessor to repair excess wear and use to the Vehicle, whether or not Lessor makes repairs. Excess wear and use includes, but is not limited to: (a) any mechanical defect or failure; (b) broken or missing parts or accessories (including missing keys or remote entry devices); (c) damaged body, fenders, metal work, lights or trim, or damaged or broken glass; (d) paint which is chipped; (e) interior rips, stains, burns or excessively worn areas; (f) missing or unsafe wheels or tires (including spare), tires with less than 1/8 inch remaining tread at the shallowest point; (g) damage or any other condition which makes the Vehicle unsafe or unlawful to operate; or (h) safety or emission control equipment not in proper working order.
A limited waiver is included without additional charge in the lease agreement. The limited waiver would waive charges for individual items of wear from a single event which cost less than $500 to repair for a maximum limited waiver of $1,500. The lessee would remain liable for any excess wear charge of $500 or more from a single event and excess wear charges in excess of $1,500. The proposed excess waiver would be separately sold and would be applicable to excess wear charges not waived under the limited waiver.
It is the opinion of this Department that the proposed excess wear waiver would constitute doing an insurance business within the meaning of N.Y. Ins. Law § 1101 (McKinney Supp. 2005. Under the proposed excess wear waiver, the lessor would obligate itself to confer a benefit of pecuniary value (foregoing the full cost of repairs to the vehicle) upon another (the lessee) upon the happening of a fortuitous event (the loss, theft, damage or destruction of the property arising from events outside the control of either party). Since the lessor would not be a licensed insurer, it would be doing an insurance business in violation of N.Y. Ins. Law § 1102 (McKinney Supp. 2005)
Hertz Corp. v. Corcoran, 137 Misc.2d 403, 520 N.Y.S.2d 700 (Sup. Ct., N.Y. Co., 1987)1 involved collision damage waivers that were offered to automobile renters by automobile rental companies. Under the specific circumstances in that case, the court held that the collision damage waiver was not insurance.
The Department's appeal in Hertz was not perfected because of the enactment in 1987 of N.Y. Gen. Bus. Law § 396-z, prohibiting the sale of collision damage waivers by automobile rental companies on rentals of 30 days or less, made the collision damage waiver issue moot.
Hertz is distinguishable from the present situation since Hertz involved short-term rentals of 30 days or less, whereas the proposed agreement involves long-term leases. While the Hertz Court concluded that the daily renter had no insurable interest in the motor vehicle, a very different situation presents itself with respect to long term leases. The lessee clearly has a "lawful and substantial economic interest in the safety or preservation of property from loss, destruction or pecuniary damage." Insurance Law § 3401. Under a long-term lease, unlike the short-term rental agreements, which are 30 days or less, the lessee typically is primarily responsible for the physical damage insurance that is purchased on the vehicle and the named insured. Moreover, under N.Y. Veh. & Traff. Law § 128 (McKinney 1996), the lessee is deemed to be an owner of the vehicle.
Several New York cases support the Departments position on waivers. See Luc Leasing Corp. v. Muhl, 172 Misc. 2d 753, 659 N.Y.S.2d 422 (1997), which distinguished Hertz; Barna v. Clifford Country Estates, 143 Misc. 813, 258 N.Y.S. 671 (1932).
In addition, N.Y. Ins. Law § 1101(b)(3) was added in 1994 as an exception from the definition of doing an insurance business in order to specifically allow a lessor or creditor to waive, under certain conditions, the gap amount (which essentially is the difference between the amount owed under the lease or loan agreement and the actual cash value of the property that is the subject of the lease or loan agreement.) See N.Y. Ins. Law § 107(a)(52) (McKinney 2000) for a more precise definition. In making this amendment, the Legislature explicitly recognized that such agreements would otherwise constitute the doing of an insurance business.
GBL § 396-z (McKinney Supp. 2005) was amended in 2002 to specifically authorize a rental vehicle company to enter into what is now termed "optional vehicle protection" agreements, subject to certain limitations and restrictions. However, § 396-z would not apply to the proposed excess wear waivers because the law applies only to automobile rentals, not long-term leases, as would be the case here. The Department considers § 396-z to be an exception from the Insurance Laws definition of doing an insurance business in § 1101.
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.
1 See also Kramer v. Avis Car Leasing, Inc. Index 23344/82 (Sup. Ct. N.Y. Co., 1983), affd 100 A.D.2d 937,474 N.Y.S.2d 160 (1st Dept, 1984) mot. Iv. den. 63 N.Y.2d 605 (1984) and Super Glue Corp. v. Avis Rent A Car Systems. Inc. Index 2084/84 (Sup. Ct., Queens Co., 1984).