OGC Opinion No. 07-03-03

The Office of General Counsel issued the following opinion on March 6, 2007, representing the position of the New York State Insurance Department.

Re: Proposed contract to replace or repair cell phones

Questions Presented:

(1) Does a contract whereby a commercial business (hereinafter, "business") for a fee obligates itself to replace a lost or stolen cell phone constitute the doing of an insurance business that would require the business to be licensed as an insurer?

(2) Does a contract whereby a business for a fee obligates itself to repair or replace a cell phone due to a defect in materials or workmanship or wear and tear constitute the doing of an insurance business that would require the business to be licensed as an insurer?

(3) May the proposed contract referred to in questions one and two above be advertised on the business's internet website, and may a retail seller of cell phones distribute the business's advertising brochures?

Conclusions:

(1) Yes. The proposed contract would constitute the doing of an insurance business that would require the business to be licensed as an insurer. Under the proposed arrangement, the business is obligated to replace a lost or stolen cell phone, which is a benefit of pecuniary value dependent upon the happening of a fortuitous event.

(2) Not necessarily. The proposed contractual arrangement would not constitute the doing of an insurance business if the business were registered with the Superintendent of Insurance as a service contract provider.

(3) If the proposed contract were limited to repair or replacement of a cell phone due to a defect in materials or workmanship or wear and tear, and if the business were registered with the Superintendent as a service contract provider, then the business may advertise on its internet website, and the retail seller of cell phones may distribute the service contract provider's advertising brochures.

Facts:

The inquirer reports that he does not at this time have a business to repair or replace cell phones. The inquirer is neither the manufacturer, distributor, nor seller of cell phones, nor otherwise in the chain of sale or distribution of the phones. The inquirer proposes starting a business whereby he provides two services for an annual fee of $44 paid by a cell phone owner. First, if a cell phone were lost or stolen, the inquirer would replace it with a comparable cell phone that retails for no more than $300. Second, if a cell phone were in need of repair, the inquirer's proposed contractual arrangement would be limited to coverage for a defect in materials or workmanship or wear and tear. If a cell phone could not be repaired, the inquirer would replace it with a comparable cell phone that retails for no more than $300. The inquirer does not inspect the cell phone at the time that the proposed contract is made. The inquirer's proposed contract does not provide for scheduled maintenance.

The inquirer proposes two types of marketing for his contemplated business. The inquirer would create a website, and he would create brochures that contain advertising. The inquirer assumes that retail sellers of cell phones would distribute the brochures to their customers.

Analysis:

The inquirer's inquiry is governed by N.Y. Ins. Law § 1101(a) (McKinney 2006). That provision states:

(a) In this article:

(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.

To the extent that the inquirer's proposed contract would obligate his business to replace a cell phone if it were lost or stolen, it is an insurance contract within the meaning of Insurance Law § 1101(a): it would confer a benefit of pecuniary value dependent upon the happening of a fortuitous event, and pursuant to N.Y. Ins. Law § 1101(b)(1)(C) (McKinney 2006), would constitute the doing of an insurance business. Under N.Y. Ins. Law § 1102(a) (McKinney 2006), no person, firm, association, corporation, or joint-stock corporation may engage in the business of insurance unless licensed pursuant to the Insurance Law or otherwise exempted by the Insurance Law.

To the extent that the inquirer's proposed contract would obligate his business to repair or replace a cell phone that cannot be repaired due to a defect in materials or workmanship or wear and tear, it would not constitute a permissible warranty that is incidental to any other legitimate business activity of the warrantor.¹ However, the inquirer's proposed contract could in that regard constitute a "service contract." In that circumstance, the inquirer would need not be licensed as an insurer, provided that he could satisfy the requirements of N.Y. Ins. Law Article 79 (McKinney 2000 & Supp. 2007).

N.Y. Ins. Law § 7902(k) (McKinney Supp. 2007) defines "service contract" as "a contract or agreement, for a separate or additional consideration, for a specific duration, to perform the repair, replacement or maintenance of property due to a defect in materials or workmanship or wear and tear . . . ." N.Y. Ins. Law § 7902(h) (McKinney Supp. 2007) defines a "service contract provider" as "a person who markets, sells, offers for sale, issues, makes or proposes to make or administers a service contract, and who is contractually obligated to provide service under a service contract." N.Y. Ins. Law § 7907 (McKinney 2000) provides that any service contract provider must register as such with the Superintendent. N.Y. Ins. Law § 1101(b)(3-a) (McKinney 2006) 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."

Finally, to the extent that the inquirer wants to advertise his proposed service contract on his business's internet website and in brochures that would be distributed by retail sellers of cell phones, the Insurance Law and regulations promulgated there under do not prohibit a registered service contract provider from advertising on an internet website. A service contract provider must comply with N.Y. Ins. Law § 7906(b) (McKinney 2000), which states:

(b) A provider shall not in its service contracts or literature make, permit or cause to be made any false or misleading statement, or deliberately omit any material statement that would make the service contracts or literature misleading if omitted, in connection with the sale, offer to sell, or advertisement of a service contact.

The inquirer may wish to retain private counsel to advise on a business plan. The inquirer may also wish to consult: (1) the texts of Insurance Law Article 79 and N.Y. Comp. Codes R. & Regs. tit. 11, Part 390 (2003) (Regulation 155) and (2) Office of General Counsel Opinions regarding service contracts.

Service contract provider applications may be obtained by writing to the following address:

Licensing Bureau, 20th Floor
New York State Insurance Department
One Commerce Plaza
Albany, NY 12257

For further information you may contact Senior Attorney Robert Freedman, at the New York City Office.

¹ The Insurance Law does not define the term "warranty".  However, in order to be a warranty, the maker of the contract must have a relationship to the product or service that minimizes, if not eliminates, the element of chance or risk contemplated by Insurance Law § 1101(a).  The inquirer reports that his contemplated business does not inspect the cell phone at the time the proposed contract is made, and that his contemplated business is neither the manufacturer, distributor, nor seller of cell phones, nor otherwise in the chain of sale or distribution of cell phones.  As a result, the repair or replacement service contemplated under the inquirer's proposed contract due to a defect in materials or workmanship or wear and tear is not a warranty. Even if the proposed contract were a warranty, the inquirer's contemplated business would nonetheless be making warranties as a vocation pursuant to N.Y. Ins. Law § 1101(b)(1)(B) (McKinney 2006), which would constitute the doing of an insurance business that would require licensing as an insurer.