The Office of General Counsel issued the following opinion on February 21, 2008, representing the position of the New York State Insurance Department.
RE: Warranty vs. Insurance
In New York, may anyone without a license to sell insurance sell “XYZ”?
No. Insofar as “XYZ” contracts to repair accidental rips, tears, burns and punctures to the interior fabric of automobiles, ABC, its dealers and distributors stand in violation of New York Insurance Law §§ 1102, 2102 and 2117 by selling “XYZ” in New York.
“XYZ” is a registered trademark of ABC. ABC’s website explains that ABC stands for Entire Car Protection, and that “ABC features Protective Coatings, Finance and Insurance Products, a complete line of Detailing, Prep and Service Products and much more.”
ABC provides “wrap around” protection to customers who have purchased “XYZ’s” Appearance Protection System, which includes interior fabric and leather/vinyl protection by the application of products provided by ABC. The “System’s” “wrap around” protection purports to be a warranty. The application for “XYZ” states that “[t]he term of this warranty is except where otherwise noted equivalent to the terms of the primary interior protection warranty, and effective from the date of application.” The coverage provided by the purported warranty is described in the application as follows:
ABC warrants and undertakes with the customer designated in this agreement that should the fabric, leather &/or vinyl of the seats become damaged as a result of accidental RIPS, TEARS (less than 6 inches long) and/or PUNCTURES/BURNS (less than 1 inch in diameter) and the vehicle owner makes a timely claim to ABC at the address provided, ABC will repair the damaged area without charge to the vehicle owner. [Emphasis added.]
The purpose of “XYZ” is to preserve a vehicle’s interior as part of an overall program that includes “DEF”. According to ABC, brittle fabric in an automobile’s interior becomes susceptible to damage from stains, fading, discoloration, rips, tears, cuts, burns and punctures. Through the application of “DEF”, the interior fabric is kept soft and supple, which helps it withstand the effects of damage. ABC purchases all raw materials for “DEF”, and then prepares and manufactures it. The dealers and distributors apply “DEF” to the interior fabric of motor vehicles. The dealers and distributors issue the warranty on “DEF” to customers, and ABC, as manufacturer, guarantees the warranty.
The Department received an inquiry as to whether “XYZ” comports with the Insurance Law. Before responding to that inquiry, and given prior opinions by the Department with respect to similar inquiries, the Department afforded ABC an opportunity to explain why it believes that “XYZ” does not violate New York law.
N.Y. Ins. Law § 1101 (McKinney’s 2007) is germane to the present issue. That statute defines many terms pertinent to this inquiry:
(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.
(b)(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;
(B) making, or proposing to make, as warrantor, guarantor or surety, any contract of warranty, guaranty or suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the warrantor, guarantor or surety;
Insurance Law § 1102 requires a license in order to do an insurance business. That statute provides:
(a) 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. Any person, firm, association, corporation or joint-stock company which transacts any insurance business in this state while not authorized to do so by a license issued and in force pursuant to this chapter, or exempted by this chapter from the requirement of having such license, shall, in addition to any other penalty provided by law, forfeit to the people of this state the sum of one thousand dollars for the first violation and two thousand five hundred dollars for each subsequent violation.
(b) No corporation organized under any law of this state shall do an insurance business outside this state unless so authorized pursuant to the provisions of this chapter or exempted by the provisions of this chapter from such requirement
A warranty relates in some way to the nature or efficiency of a product or service. Commonly, the warrantor agrees to repair or replace a product that fails to perform properly, such as a contract covering a defect in materials or workmanship or a contract otherwise covering the breakdown of a product. Where the maker of a contract has a relationship to the product or service, or does some act that imparts knowledge of the product or service to the extent of minimizing, if not eliminating, the element of chance or risk contemplated by Insurance Law § 1101(a), then the contract is a warranty. Where there is no such relationship or act, the maker of the contract undertakes an obligation involving a fortuitous risk, and the agreement is an insurance contract and constitutes the doing of an insurance business. If the maker is not authorized as an insurer, the contract cannot issue without violating Insurance Law § 1102. See Opinions of Office of General Counsel dated July 20, 1992.
Pursuant to Insurance Law § 1101(b)(1)(B), the making of a contract of warranty, or the proposing to make such contract, constitutes the doing of an insurance business where such warranty is the vocation of the warrantor, and is not merely incidental to any other legitimate business or activity of the warrantor. See, e.g., Opinions of Office of General Counsel dated March 26, 2002 and June 1, 1994. Any person doing an insurance business in New York must be a licensed as an insurer pursuant to Insurance Law § 1102, unless some exception (not relevant here) applies.
Because by definition an “accident” is a fortuitous event, see Dictionary.com (last checked [02/19/2008]), the fact that ABC’s paragraph styled as “warranty” states that “accidental RIPS, TEARS . . . and/or PUNCTURES/BURNS . . . ” are covered events, renders the contractual agreement to fix them as insurance, not a warranty. Nothing in ABC’s January 24, 2008 letter to the Department establishes otherwise.
Furthermore, because ABC is not authorized as an insurer in New York, anyone who sells “XYZ” in New York stands in violation of Insurance Law § 2117(a) by acting for or aiding an unlicensed insurer. Those same persons, unless licensed as an insurance agent or broker, also are in violation of Insurance Law § 2102 by acting as a producer without a license.
Accordingly, the Department directed ABC to cease and desist from selling or renewing “XYZ” in New York, and to advise the Department in writing within ten days of the date of this letter to confirm that ABC would immediately terminate offering “XYZ” in New York.
For further information, one may contact Senior Attorney Susan A. Dess at the New York City office.