New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
ONE COMMERCE PLAZA
ALBANY, NEW YORK 12257

George E. Pataki
Governor

Howard Mills
Superintendent

The Office of General Counsel issued the following opinion on October 14, 2005 representing the position of the New York State Insurance Department.

RE: Financial Responsibility Requirements for Service Contract Providers.

Questions Presented:

1. Does the phrase "claims paid under" contained in N.Y. Ins. Law § 7903(c)(2) (McKinney Supp. 2005) and Regulation 155 include the cost of services that are provided directly by a service contract provider?

2. Where a service contract provider uses the net worth option provided in N.Y. Ins. Law § 7903(c)(3) (McKinney Supp. 2005) to demonstrate financial responsibility pursuant to N.Y. Ins. Law § 7903 (McKinney Supp. 2005) and submits the statements of the service contract provider’s parent or indirect parent to meet the required net worth or stockholders’ equity is there any limit on the guarantee that the parent or indirect parent must provide?

Conclusions:

1. The phrase "claims paid under" as applied in N.Y. Ins. Law §7903(c)(2) and Regulation 155 includes the claim cost for services that are provided directly by a service contract provider.

2. Where a service contract provider demonstrates financial responsibility using the net worth option pursuant to N.Y. Ins. Law § 7903(c)(3) and submits the statements of the service contract provider’s parent or indirect parent to meet the required net worth or stockholders’ stockholders equity, such parent or indirect parent must provide a guarantee for the entire obligation of the service contract provider under all the service contracts it sells in this state.

Facts:

The inquirer is counsel for ABC Corporation ("ABC"). ABC is a parent of a service contract provider. The service contract provider provides services to its customers directly rather than providing indemnification.

Analysis:

N.Y. Ins. Law § 7903(c) (McKinney Supp. 2005) requires each service contract provider to ensure its financial responsibility for its service contracts and provides three options for doing so. This opinion will only address two of the options, N.Y. Ins. Law §§ 7903(c)(2) (McKinney Supp. 2005) and 7903(c)(3) (McKinney Supp. 2005), since only these two are applicable to this inquiry.

N.Y. Ins. Law § 7903(c)(2) (McKinney Supp. 2005) provides, in relevant part, as follows:

(2) (A) maintain a funded reserve account for its obligations under its service contracts issued and outstanding in this state, which reserve account (i) contains reserves in an amount not less than forty percent of the gross consideration received upon the sale of, less claims paid under, all its service contracts then in force, but not less than zero, and (ii) shall be subject to examination and review by the superintendent; and

(B) place in trust with the superintendent a financial security deposit, having a value of not less than five percent of the gross consideration received upon the sale of, less claims paid under, all service contracts issued and then in force, but not less than fifty thousand dollars, consisting of one or more of the following:

i) a surety bond issued by an authorized surety;

(ii) securities of the type eligible for deposit by authorized insurers in this state;

(iii) cash; or

(iv) a letter of credit issued by a qualified United States financial institution; . . . (emphasis added)

Neither the statute nor the implementing regulation, 11 NYCRR § 390.10 (Regulation 155), defines the phrase "claims paid under." The inquirer asked whether "claims paid under" includes expenses of a service contract provider that provides the services directly without making a payment for the claim.

Although according to the definition of the term "service contract", as provided in N.Y. Ins. Law § 7901(k) (McKinney 2000), a service contract provider may either perform or provide indemnification for the repair, replacement or maintenance of property, N.Y. Ins. Law § 7903(c)(2) (McKinney Supp. 2005) does not distinguish between whether claims are satisfied by indemnification or by a provider performing the repair, replacement or maintenance. Thus, the claims cost of a service contract provider that provides services directly are included within the phrase "claims paid under."

The inquirer also asked about the extent of the obligation of a parent under net worth option pursuant to N.Y. Ins. Law § 7903(c)(3). Specifically, the inquirer asked whether a parent could use the amount of the funded reserve account and financial security deposit that would have been required if the service contract provider had selected the option provided in N.Y. Ins. Law § 7903(c)(2) as the method for satisfying the contract providers financial responsibility obligations.

N.Y. Ins. Law § 7903(c)(3) (McKinney Supp. 2005) provides, in relevant part, as follows:

(3) (A) maintain a net worth or stockholders' equity of at least one hundred million dollars; and

(B) provide the superintendent with a copy of the financial statements of the provider, either on a stand alone basis or consolidated with its consolidated affiliates, included in its or its direct or indirect parent company's most recent annual report on form 10-K or form 20-F filed with the securities and exchange commission within the last calendar year, or if the provider or its direct or indirect parent company is not required to file such reports with the securities and exchange commission, a copy of the audited financial statements of the provider, either on a stand alone basis or consolidated with its consolidated affiliates. . . If the provider's direct or indirect parent company's form 10-K, form 20-F, or audited financial statements are filed to meet the provider's financial stability requirement, then the parent company shall agree to guarantee the obligations of the provider relating to service contracts sold by the provider in this state. (emphasis added)

The statute does not limit the financial obligation that must be undertaken by the parent in the guarantee. Thus, the amount of the funded reserve account and financial security deposit that would have been required if the service contract provider had selected the option provided in N.Y. Ins. Law § 7903(c)(2) as the method for satisfying the contract provider’s financial responsibility obligations would be insufficient to meet the parental guarantee required under net worth option provided in N.Y. Ins. Law § 7903(c)(3) (McKinney Supp. 2005). Instead, the guarantee provided by the parent must cover the entire obligation of the service contract provider under all the service contracts that it sells in this state.

For further information you may contact Assistant Counsel Brenda M. Gibbs at the Albany Office.