The Office of General Counsel issued the following opinion on January 12, 2006, representing the position of the New York State Insurance Department.
RE: Clarification of OGC Opinion 9/30/2005
May a service contract provide coverage to repair or replace property that is stolen or that is damaged from an external cause?
A service contract may not provide coverage where property is stolen nor may it provide coverage for loss or damage arising from external events except that, as provided in N.Y. Ins. Law § 7902(k) (McKinney 2005), a service contract may, in addition to coverage for wear and tear or defects in material or workmanship, also provide for the repair, replacement or maintenance of property for damage resulting from power surges and accidental damage from handling.
No specific facts were presented. A concern was raised about the third sentence in the following paragraph, which appeared in an opinion of this office dated September 30, 2005:
In this case, the telecommunications company undertakes to repair, replace or maintain the wireless equipment that it has leased, sold, or manufactured, due to wear and tear or defect in material or workmanship, then the agreement would be a warranty. If the telecommunications company undertakes to cover defects on equipment that it did not sell, lease, or manufacture, then it would have to register as a service contract provider. If the telecommunications company undertakes to replace a product due to a fortuitous event, such as theft or damage from external causes or where it did not have control over the product and did not register as a service contract provider, then it would be conducting an insurance business and would have to be licensed pursuant to N.Y. Ins. Law § 1102. N.Y. Ins. Law § 1102(a) (McKinney 2005) prohibits any person, firm association, corporation, or joint-stock corporation from doing an insurance business in New York unless licensed pursuant to the Insurance Law.
It was questioned whether the above language could be misconstrued as permitting a service contract provider, without becoming licensed as an insurer, to undertake to repair or replace property for loss or damage to the property arising from a fortuitous event such as theft or damage from external event.
A "service contract" is defined in N.Y. Ins. Law § 7902(k) (McKinney 2005) to mean:
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 or 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, and may also provide for the repair, replacement or maintenance of property for damage resulting from power surges and accidental damage from handling. Service contracts may also include contracts to repair, replace or maintain residential appliances and systems.
A service contract may never provide coverage for loss as the result of theft. Nor may a service contract provide coverage for loss or damage arising out of an external cause except for the limited circumstances as provided for in § 7902(k), which provides, in pertinent part that a service contract may also provide coverage for the repair, replacement or maintenance of property for damage resulting from "accidental damage from handling" and "damage resulting from power surges."
The Department has interpreted the phrase "accidental damage from handling" to mean accidental damage from handling in the normal and customary use of the product. In addition, coverage for accidental damage from handling or power surges may be available only as an incidental coverage to defect coverage and, as such, coverage may not provide greater coverage than the defect coverage, with respect to both the length of the term and the scope of the coverage, whether offered under one contract or as separate agreements. For example, if the service contract provided coverage for defects in the phone for one year but excluded coverage for the battery, then the accidental damage coverage may not exceed a one year term or apply to the battery.
As noted, a service contract providing accidental damage from handling or power surge coverage may not be offered except as part of, or in conjunction with, a service contract providing defect or wear and tear coverage. However, where a manufacturer or seller provides a warranty (whether included with the property without separate charge or offered optionally for a separate fee) instead of a service contract, the same manufacturer or seller may offer coverage for accidental damage from handling or surge protection under a service contract if the terms of the warranty are incorporated into the service contract and the warranty is conformed to the requirements of Article 79, subject to the other above limitations. The warranty itself may not provide coverage for accidental damage from handling or surge protection.
In summary, Article 79 permits service contract providers to provide incidental coverage for certain external events but in the limited circumstances as discussed herein. A service contract provider may not use a service contract to evade the licensing and other requirements applicable to insurers.
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.