The Office of General Counsel issued the following opinion on January 12, 2006, representing the position of the New York State Insurance Department.
Re: Insurance covering fuel oil dealer agreements providing coverage for consequential clean-up cost
1. May a fuel oil dealer issue an agreement conditioned upon the sale of fuel oil, under which the fuel oil dealer is obligated to provide coverage for consequential fuel oil clean-up costs if the oil tank leaks?
2. If a fuel oil dealer may issue such an agreement, may the dealer obtain insurance in New York indemnifying it for its obligations incurred under the agreement?
1. It is the Departments position that a fuel oil dealer may provide coverage for consequential fuel oil cleanup costs in a service contract that complies with Article 79 of the New York Insurance Law, where the coverage for the clean-up costs per incident does not exceed the purchase price of the heating system equipment that is the subject of the service contract. However, in Petro, Inc. v. Serio, 2005 NY Slip Op 25310 (NY Sup. Ct. 2005), the court concluded that a fuel oil dealer may provide such coverage in a warranty without limiting the coverage to the purchase price. The Department is appealing the decision in the case.
2. Assuming that a fuel oil dealer may issue a warranty providing for clean-up costs, the dealer may obtain insurance in New York indemnifying it for its obligations for the fuel oil clean-up costs incurred under the contract but not in an amount that exceeds the purchase price of the property so warranted.
No specific facts are provided.
The Department previously opined, in accordance with N.Y. Ins. Law § 7902(k) (McKinney 2000), that a fuel oil dealer may not issue a contract providing for consequential fuel oil clean-up costs except where the contract provides coverage for loss only arising out of defect in materials or workmanship or the breakdown of a particular product, or wear and tear, and the consequential clean-up costs are limited to the purchase price of the property serviced.
In a recent New York Supreme Court decision, the court agreed with the Department that in order to qualify as a service contract under N.Y. Ins. Law § 1101(b)(3-a) (McKinney Supp. 2005), the agreement must meet the definition of "service contract" under § 7902(k), which provides, in pertinent part:
... 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 materials or workmanship or wear and tear, with or without an 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 also include contracts to repair, replace or maintain residential appliances and systems.
Accordingly, the court concluded that the provision of the agreement that obligated the oil dealer to provide clean-up for incidental damages of an oil spill subjected the dealer to the purchase price limitation of the second clause of Insurance Law § 7902(k).
However, the court concluded that the oil dealer could provide such coverage in a warranty under certain circumstances without being limited by the purchase price limitation. The Department is currently appealing that aspect of the courts decision.
The next question is whether insurance may be purchased in New York covering the oil dealers exposure for the clean-ups.
Prior to the enactment of the service contract law in 1997, agreements providing coverage for defects were permissible in New York only if they came within the warranty exception contained in § N.Y. Ins. Law § 1101(b)(1)(B). Insurance covering obligations under warranties or extended warranties was not permissible.1 While such coverage is written as contractual liability insurance in some states, it has been the consistent position of this Department that in New York liability insurance may not be written covering contractual obligations that are voluntarily assumed.
The service contract law exempted registered service contract providers from having to become licensed as insurers in New York. Service contract reimbursement insurance was added in 1997 to the Insurance Law as a new kind of insurance (N.Y. Ins. Law § 1113(a)(28) (McKinney Supp. 2005). Service contract reimbursement insurance originally only provided coverage to satisfy the financial obligations of service contract providers under Article 79, but in 1998, the law was amended to also authorize insurance to a registered service contract provider to indemnify the provider for losses sustained by reason of the performance of the providers obligations under service contracts issued pursuant to Article 79.
Following the enactment of the service contract law, the Department initially concluded that insurance still was not available to indemnify or reimburse warrantors except with regard to motor vehicles and aircraft. Section 390.7(a)(2) of 11 NYCRR 390 (Regulation 155) provides that "[s]ervice contract reimbursement insurance shall not provide coverage to a warrantor for its warranties." However, the Superintendent subsequently concluded that insurance covering obligations incurred under warranties was substantially similar to service contract reimbursement insurance, pursuant to N.Y. Ins. Law § 1113(a)(30) (McKinney Supp. 2005), and therefore may be written by an insurer licensed to write such insurance, but only where the insurer also promises, for the benefit of warranty holders, to discharge the obligations and liabilities of the warrantor, in the event that the provider does not perform. See Department opinion dated December 12, 2001, which may be found at the following web address: http://www.ins.state.ny.us/rg112121.htm
However, in making the determination of substantially similar, the Superintendent was considering that service contracts and warranties essentially covered the same kind of loss, namely, loss arising out of defect in materials or workmanship.
This is not the case should a warranty provide coverage for consequential loss that is greater than the cost of the product warranted. In that case, the potential exposure of the warrantor is far greater under such a warranty than was ever contemplated under a service contract. Accordingly, the Superintendent considers coverage for incidental or consequential loss under a warranty to be substantially similar to service contract reimbursement insurance but only up to the purchase price of the property serviced. Any such insurance in excess of the purchase price may not be written in New York, either by an authorized insurer or in the excess line market.
For further information one may contact Principal Attorney Paul A. Zuckerman at the New York City Office.
1 The one exception was insurance for motor vehicles and aircraft, since, pursuant to insurance N.Y. Ins. Law § 1113(a)(30) (McKinney Supp. 2005), such insurance was substantially similar to motor vehicle and aircraft insurance N.Y. Ins. Law § 1113(a)(19).