The Office of General Counsel issued the following opinion on June 15, 2007, representing the position of the New York State Insurance Department.
RE: Auto Club Offering Residual Value Insurance in New York
May an auto club offer to pay a member up to $5,000 if the actual value of a member’s car is less than the remaining loan balance on the car at the time of trade-in?
No. An auto club may not offer to pay a member up to $5,000 if the actual value of the member’s car is less than the remaining loan balance on the car at the time of trade-in because the program constitutes doing an insurance business for which a license is required.
The inquirer reports that it represents an auto club that proposes to offer “The Inequity Protection Plan” in New York. Under the plan, a member is entitled to receive up to $5,000 from the auto club if the actual value of the member’s car is less than the remaining loan balance at the time of trade-in. As an example of the events that would trigger such payment, the inquirer outlines the following scenario:
A member purchases a new car and finances the entire purchase with a $10,880 loan from a bank with a term of 72 months. After 36 months, the member trades in his/her vehicle to the dealer from whom s/he purchased the car. At the time of trade-in, the National Automobile Dealers Association (NADA) guide appraises the retail value of the car at $5,725. However, the balance remaining on the member’s car loan is $6,442.79. Because the value of the car is less than the balance of the loan, and the member is subsequently at a loss for $717.79, the member would be eligible for redemption for that amount.
In order to be eligible for the full payment (up to $5,000), a member would also have to trade-in his/her vehicle to the dealer from whom the vehicle was originally purchased. Otherwise, the member may trade in the vehicle at any participating dealer, and receive up to one-half of the loss. The inquirer states that its program is structured in this manner so that dealers can get the benefit of repeat business, as an incentive for recommending your product to buyers. Furthermore, the member must make payments for at least one-half of the loan term before he or she is eligible for this benefit from the auto club.
New York Insurance Law § 1101(a)(1) (McKinney 2006) defines “insurance contract” as any agreement or other transaction whereby one party (the insurer) is obligated to confer a 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. In turn, a fortuitous event is defined as “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.” Ins. Law § 1101(a)(2). In addition, Insurance Law § 1101(b)(1) provides that:
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;
(D) doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an insurance business within the meaning of this chapter.
Thus, if a business is “recognized” as “constituting the doing of an insurance business” within the meaning of the Insurance Law, then the business is doing an insurance business.
The “Inequity Protection Plan” clearly meets all the elements of an insurance contract: upon receiving a membership fee, the plan confers a benefit of pecuniary value (the difference in the market value and the loan payoff amount) to a member, which is dependent upon the happening of a fortuitous event that clearly affects the member’s financial interest adversely, notwithstanding that the member has some control over the timing of the trade-in. Depreciation in the market value of the member’s vehicle at the time of trade-in, and the loss in value are contingent on market factors that are, or are assumed by the parties to be, to a substantial extent, beyond the control of either party. Thus, in New York, this type of coverage constitutes doing an insurance business for which a license is required under Insurance Law § 1102(a) (McKinney 2006).
In addition, even if the “Inequity Protection Plan” did not meet the definition of an “insurance contract,” it still would constitute doing an insurance business because the inquirer’s proposal constitutes “residual value insurance” within the meaning of Insurance Law § 1113(a)(22). That statute states:
"Residual value insurance" means insurance issued in connection with a lease or contract which sets forth a specific termination value at the end of the term of the lease or contract for the property covered by such lease or contract, and which insures against loss of economic value of tangible personal property or real property or improvements thereto except loss due to physical damage to property, excluding any lease or contract that falls within the definition of financial guaranty insurance as set forth in paragraph one of subsection (a) of section six thousand nine hundred one of this chapter.
Thus, in order to determine whether the coverage meets the definition of “residual value insurance,” three elements must be present: 1) the insurance must be issued in connection with a lease or contract that sets forth a specific termination value at the end of the term of the lease or contract for the property covered by the lease or contract; 2) the insurance must insure against loss of economic value of tangible personal property or real property, or improvements thereto, except loss due to physical damage; and 3) the insurance must exclude any lease or contract that falls within the Insurance Law’s definition of financial guaranty insurance.
The “Inequity Protection Plan” unmistakably meets these three requirements. First, the agreement is issued in connection with a loan contract between the buyer and the bank, and the contract sets forth a specific termination value at the end of the term of the contract. (A specific dollar amount or a specific termination date for the loan agreement need not be set forth in the contract. See Office of General Counsel Opinions dated October 24, 1996, and August 10, 2000). The termination value here is the payoff balance due to the bank when the auto club member trades in his or her vehicle. Second, the coverage insures against the loss of economic value of the vehicle, except loss due to physical damage. Finally, the insurance is not financial guaranty insurance because the coverage is not conditioned upon a “financial default or insolvency,” see N.Y. Ins. Law § 6901(a), but rather upon the sale of the vehicle. See Office of General Counsel Opinions dated October 24, 1996, August 10, 2000, and September 22, 2000.
Based on the foregoing, the “Inequity Protection Plan” would constitute the doing of an insurance business in New York. Since the inquirer’s company is neither authorized as an insurer nor otherwise comes within an exception to the Insurance Law’s licensing requirement, it may not at this time offer the “Inequity Protection Plan” in this State.
For further information you may contact Assistant Attorney Sapna Maloor, at the New York City Office.