The Office of General Counsel issued the following opinion on April 2, 2007, representing the position of the New York State Insurance Department.
Re: Dealer Vehicle Repair Guaranty
1. Does the proposed repair program constitute the doing of an insurance business?
2. Must the provider of the repair service under the repair contract specify, on the bill submitted to the insurer, that the provider has granted the insured a waiver of any portion of the deductible?
1. A definitive answer cannot be provided to the question, because the obligations of the parties are uncertain. However, a service plan where the pre-paid fee is a membership fee, and where certain services occasioned by the happening of a fortuitous event are offered for an additional fee per service, does not constitute the doing of an insurance business that requires a license, so long as the additional fee covers the cost of rendering the service, including reasonable overhead.
2. If, by paying part of the deductible, the provider charges less for the services than the charges specified on the estimate or on the bill that it provides to the insurer, then the provider may be committing insurance fraud in violation of N.Y. Penal Law § 176.05(1) and N.Y. Ins. Law § 403. Additionally, an insured who submits a claim to his or her insurer, knowing that the provider has waived a deductible, could also be committing insurance fraud.
The inquirer had been asked by a New York automobile dealership (the “Dealer”) to develop and administer a membership program for its customers whereby the Dealer would agree to perform necessary repair work for a discounted price in the event that a leased vehicle sustains physical damage. The Dealer owns and operates a repair shop where the proposed repairs would be made.
The repair contract provides in pertinent part:
In the event such repair costs, as determined by customer’s physical damage insurer, shall exceed $1,000, the deductible amount (no greater than $1,000) of the customer’s physical damage insurance policy shall be waived by the dealer, provided the amount paid to the dealer for repairs does not exceed minimal amount required by dealer to earn its customary profit.
The inquirer reported that the program was intended to apply to substantial physical damage claims. He states that the Dealer will provide the customer with a discount (to cover the deductible) only to the extent that the Dealer is assured of earning a reasonable profit in addition to any overhead costs. In order to offset this discount, each customer who enters into this agreement will pay a monthly fee of approximately ten dollars, which will be added to the underlying lease entered into between the customer and the lender. The customer may then elect to schedule repairs at the Dealer’s repair shop upon obtaining the insurer’s approval. The contracts are in force for one year, and may be annually renewed at the option of the parties.
The inquirer stated that the main objective of the program is threefold. First, the lender is provided with greater assurance that the customer will seek to repair the collateral. Second, as a result, this will enable the customer to obtain more favorable financing from the lender. Third, the Dealer expects to attract a loyal customer base for its repair shop.
The inquirer stated that the lender will be the stated provider of the contract, and that the Dealer will act on the lender’s behalf, or in conjunction with the lender, in offering this contract to the customer. He did not specify why the lender is the stated provider of the contract, nor whether the lender is an obligor with respect to the Dealer’s obligation to the customer under the contract. The monthly fee paid to the lender will be applied toward the administrative costs incurred in running the program. The Dealer allegedly will not be reimbursed by the lender or any other party for providing these discounts. The inquirer did not indicate how the Dealer’s charges will be presented to the customer’s insurer.
N.Y. Ins. Law § 1101(a) is relevant to your inquiry. It provides the following definitions, which pertain to the doing of an insurance business:
(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.
N.Y. Ins. Law § 1101(b)(1) (McKinney’s 2006) sets forth various acts that, whether effected by mail from outside New York or otherwise, constitute doing an insurance business in New York. The statute states in relevant part:
(1) Except as provided in paragraph two, three or three-a of this subsection, any of the following acts in this state, effected by mail from outside this state or otherwise, by any person, firm, association, corporation or joint-stock company shall constitute doing an insurance business in this state and shall constitute doing business in the state within the meaning of section three hundred two of the civil practice law and rules:
(A) making, or proposing to make, as insurer, any insurance contract, including either issuance or delivery of a policy or contract of insurance to a resident of this state or to any firm, association, or corporation authorized to do business herein, or solicitation of applications for any such policies or contracts….
N.Y. Ins. Law § 1102(a) (McKinney’s 2006) generally prohibits any unauthorized insurer from doing an insurance business in New York. It reads in pertinent part as follows:
No person, firm, association, corporation or joint-stock company shall do an insurance business in this state unless authorized by a license in force pursuant to the provisions of this chapter, or exempted by the provisions of this chapter from such requirement….
The contractual arrangement described contains all the elements of an insurance contract since it obligates the Dealer to confer a benefit of pecuniary value upon the customer upon the happening of a fortuitous element (namely, the occurrence of physical damage to the leased vehicle). However, a service plan where the pre-paid fee is a membership fee, and where certain services occasioned by the happening of a fortuitous event are offered by the provider of the services for an additional fee per service (even if such charge is less than the usual fee for such service), does not constitute the doing of an insurance business that requires a license, so long as the additional fee covers the cost of rendering the service, including reasonable overhead. See Opinion of General Counsel No. 02-05-20 (2002).
The inquirer states that the provider is assured of making a reasonable profit on each transaction; however, it is not clear to us how this could always be the case. For example, if a customer had a $1000 deductible on his insurance policy, and damage costs came to $1200, it is unlikely that the Dealer could afford to waive the whole deductible without taking a loss on the repair since the Dealer would actually be making only $200 on each repair. It would appear that, in some instances, less than the full deductible would have to be waived in order for the Dealer to make a profit but the agreement does not make that clear. To the extent that the agreement would result in the Dealer not covering its cost of rendering the services, including overhead expenses, the program would constitute the doing of an insurance business and the Dealer would have to become licensed as an insurer.
Moreover, this exception does not extend to the lender in the scenario that you present, because the lender is not providing the repair services. The inquirer noted that, under the program, the customer will pay the monthly fee to the lender, who is the stated provider, but that the Dealer will provide the waiver. If the lender is legally bound under the contract to provide the customer with a waiver, or if the lender has agreed to indemnify the Dealer for the amount of the waived deductible, then the exception to the definition of “doing an insurance business” is inapplicable here. In other words, in order for the program to come within the exception to doing an insurance business, the legal obligation to render discounted repair services must remain solely with the Dealer at all times.
With regard to the second question raised by the inquiry, N.Y. Penal Law § 176.05(1) provides as follows:
A fraudulent insurance act is committed by any person who, knowingly and with intent to defraud presents, causes to be presented, or prepares with knowledge or belief that it will be presented to or by an insurer, self insurer, or purported insurer, or purported self insurer, or any agent thereof, any written statement as part of, or in support of, an application for the issuance of, or the rating of a commercial insurance policy, or certificate or evidence of self insurance for commercial insurance or commercial self insurance, or a claim for payment or other benefit pursuant to an insurance policy or self insurance program for commercial or personal insurance which he knows to: (i) contain materially false information concerning any fact material thereto; or (ii) conceal, for the purpose of misleading, information concerning any fact material thereto.
Similarly, N.Y. Ins. Law § 403(c) authorizes the Superintendent of Insurance to impose a civil penalty for insurance fraud. It provides as follows:
In addition to any criminal liability arising under the provisions of this section, the superintendent shall be empowered to levy a civil penalty not exceeding five thousand dollars and the amount of the claim for each violation upon any person, including those persons and their employees licensed pursuant to this chapter, who is found to have: (i) committed a fraudulent insurance act or otherwise violates the provisions of this section; or (ii) knowingly and with intent to defraud files, makes, or assists, solicits or conspires with another to file or make an application for a premium reduction, pursuant to subsection (a) of section two thousand three hundred thirty-six of this chapter, containing any materially false information or which, for the purpose of misleading, conceals information concerning any fact material thereto.
The Department previously has addressed the issue of insurance fraud where a provider waives the deductible portion of an insurance policy. See Opinions of General Counsel Nos. 05-04-07 and 06-07-04. If the Dealer submits to the insurer a bill that does not accurately reflect the discount, then the Dealer and the insured both may be guilty of insurance fraud. For example, if an insurance policy requires the insured to pay a $1,000 deductible before the insurer reimburses the insured for the repair charges, and the Dealer reports to the insurer that its usual and customary charge for the service was $1,500, the insurer would pay the Dealer $500 expecting that the Dealer would require the insured to pay the remaining $1,000. However, if the Dealer waives the $1,000 deductible and does not report this to the insurer, then the bill would contain materially false information, since the insured did not in fact pay $1,500.
Under these circumstances, the Dealer may be committing insurance fraud, as that term is defined in N.Y. Penal Law § 176.05. In addition, an insured who submits a claim to his or her insurer, knowing that the Dealer has waived a deductible without advising the insurer that the deductible was waived, could also be guilty of insurance fraud within the meaning of Ins. Law § 403. Whether such actions constitute insurance fraud would depend upon the facts of the particular case, and the intent of the parties.
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.