|Eric R. Dinallo
The Office of General Counsel issued the following opinion on May 1, 2007, representing the position of the New York State Insurance Department.
Re: Watch Replacement Program
May a manufacturer of a watch procure a product or system group insurance policy for purchasers of the manufacturers watches, where the watches have identification codes that are invisible on the face of the watches but are maintained in a database?
No. The proposed watch identification program does not qualify as a § 3446 group because it does not prevent loss or damage.
ABC Watchmaker ("ABC"), a manufacturer of high-end, luxury watches, has developed a patented system of watch identification. The system engraves an invisible code onto the face of each watch and maintains this identifying code in a database. In order to support its confidence in the identification program, ABC provides purchasers of watches protected by the identification program with a free year of replacement coverage for lost or damaged watches. XYZ insurer will provide this insurance coverage by issuing an inland marine policy, whereby ABC is the sole insured under the policy. ABCs customers will not receive a copy of the policy or any proof of coverage from XYZ, but will be required to return a registration form within 30 days of purchase that informs customers of the replacement coverage.
If a customer purchases ABCs watch identification program and the customer has no other insurance covering the watch, the policy would provide coverage for "sudden or accidental loss or damage, theft or mysterious disappearance." The policy does not cover losses "caused by wear and tear, mechanical breakdown, hidden or latent defect or gradual deterioration and depreciation."
Enacted in 1999, New York Insurance Law § 3446 (McKinney 2007) authorizes the issuance of a group policy to a company that manufactures, distributes, or installs a product or system under certain conditions. Insurance Law § 3446 reads in relevant part as follows:
(a) A group policy may be issued to a group policyholder, who shall be a manufacturer, distributor, or installer of a product or system, or a trustee of a trust established, or participated in, by one or more manufacturers, distributors, or installers, in accordance with the provisions of this section.
(b) The group shall consist only of members who have purchased or own the product or system where the manufacturer, distributor, or installer has represented that the product or system is designed to prevent loss or damage to property from a specific cause (other than loss or damage resulting from defect in materials or workmanship, or wear and tear), and the policy shall only cover such loss or damage.
New York Comp. Codes R. & Reg. ("NYCRR"), tit. 11, Pt. 310 (Regulation 167), which was promulgated in accordance with Insurance Law § 3446(g), also is relevant to your inquiry. 11 NYCRR 310.1(g) defines a "product or system group policy" to mean:
(g) [A] policy issued on a group basis to a group policyholder that provides coverage to group members when the manufacturer, distributor, or installer of a product or system has represented that the product or system is designed to prevent loss or damage to property from a specific cause (other than loss or damage resulting from defect in materials or workmanship, or wear and tear), and the coverage provided to the group members is for loss or damage to such property from such cause. For purposes of this Part, loss or damage to the property (valued as actual cash value, state value, replacement cost, or other method of valuation acceptable to the superintendent) may also include unreimbursed incidental expenses that may be incurred as a result of the loss or damage to the property, such as rental or registration costs for replacement property.
The key feature of a system or group policy is that the manufacturer, distributor, or installer of a product or system has represented that its product or system is designed to prevent loss or damage to property from a specified cause (other than loss or damage resulting from defect in materials or workmanship, or wear and tear), and that the policy provides coverage for such loss or damage. In the scenario presented, the product or system is the invisible coding that ABC manufactures. While the invisible coding may provide its purchasers with a greater ability than the average watch owner to recover a lost watch, the coding is not designed to prevent "loss or damage." Thus, the program does not qualify for a product or system group insurance policy under Insurance Law § 3446.
The invisible coding is not akin to the anti-theft etching programs that may be insured under § 34461, as you claim, because the etching programs are intended to act as a deterrent against theft. For example, under those programs, a decal is usually prominently displayed on an automobile, which alerts a potential thief that the vehicle is protected under the program. Here, by contrast, an invisible code by its very nature cannot deter loss.
The inquirer states that the sale of the watches will coincide with a major marketing effort to notify the public of the invisible coding, and that public recognition will ultimately act as a deterrent to a potential thief. However, that argument is unavailing because, unlike under the prominently displayed etching programs, potential thieves would not be aware of the invisible code. Moreover, the invisible code is no deterrent to losing or damaging the watch a key feature, as noted above, for any programs to qualify for a product or system group insurance policy pursuant to Insurance Law § 3446.
Although ABCs special invisible coding may not be insured under a product or system group insurance policy, the inquiry raises other problems as well. The inquirer states that the registrants would not receive a copy of the insurance policy or a certificate, but § 310.4 of Regulation 167 provides that the insurer shall be responsible for providing each group member with a certificate of insurance. In addition, the inquirer indicated that the policy would be issued on an inland marine basis, presumably to take advantage of N.Y. Ins. Law § 2310(b) (McKinney 2007), which generally exempts an insurer from filing its inland marine policy forms with the Superintendent if, by general custom of the business, the specific risks in question are not written according to manual rates and rating plans. However, § 310.3 of Regulation 167 requires that all product or system group policies and certificates must be filed with the Department, except for certain "a" rated risks.
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.