The Office of General Counsel issued the following opinion on March 11, 2008, representing the position of the New York State Insurance Department.
RE: Gap Insurance and Financed Motor Vehicles
1. Is a creditor that finances the purchase, but is not a retail seller, of a motor vehicle in New York required to offer a gap waiver to the buyer of the motor vehicle absent a signed declination?
2. Is the buyer of a motor vehicle responsible for payment of the full amount, including the gap amount, after a total loss of a motor vehicle?
1. No. A creditor that finances the purchase, but is not the retail seller (or assignee thereof), of a motor vehicle in New York is not required to offer a gap waiver to the buyer of a motor vehicle pursuant to either the N.Y. Insurance Law or the N.Y. Personal Property Law (“PPL”).
2. Yes. Absent a provision in the contract to the contrary, a buyer is responsible for the full amount, including the gap amount, after a total loss.
It is reported that the inquirer purchased a motor vehicle in New York that was financed through the creditor, XYZ, and that the inquirer suffered a total loss of that motor vehicle. The inquirer further states that XYZ informed the inquirer that it did not offer a gap waiver or lessee/debtor gap insurance at the time that the inquirer purchased and financed the inquirer’s motor vehicle. The inquirer did not sign a waiver declining a gap waiver or gap insurance.
A brief description of New York’s gap insurance and waiver laws is necessary before responding to the inquiry. Because the inquiry relates solely to motor vehicles, gap laws will be addressed principally in that context.
Under a lease or a loan or other credit transaction, a lessee or debtor (here, the buyer of the motor vehicle) is typically obligated to the lessor or creditor for the full outstanding amount under the lease or credit transaction, in the event that the lease or credit transaction is terminated early due to the total loss of the property that is subject to the lease or credit transaction. As a matter of course, the lessor or creditor will require the lessee or debtor to purchase physical damage insurance to protect the lessor’s or creditor’s interest in the event that the property sustains damage or is stolen. Most motor vehicle physical damage insurance policies provide coverage for “actual cash value” only, which takes into account the depreciation of the vehicle.
Over the life of the lease or credit transaction, the actual cash value of the property may at times be significantly less than the amount owed by the lessee or debtor. This means that, after the lessee or debtor collects under the physical damage insurance policy and uses those proceeds to pay the lessor or creditor, the lessee or debtor still owes often substantial amounts under the lease or credit transaction. Lessors and creditors thus sell “gap waivers” whereby the lessor or the creditor agrees to waive the lessee or debtor’s obligation for the “gap” (i.e; that is, the difference between the amount owed under the lease or credit transaction, and the actual cash value). See Office of General Counsel (“O.G.C.”) Opinion (August 30, 2001).
N.Y. Insurance Law § 1113(a)(26) (McKinney 2006) authorizes and defines gap insurance in pertinent part, as follows:
“Gap insurance means insurance covering the gap amount1 which is payable upon the total loss of personal property, which is the subject of a lease or loan or other credit transaction occasioned by its theft or physical damage. The kinds of gap insurance are:
(A) “Motor vehicle lessor/creditor gap insurance” which insures the lessor, creditor, or the lessor’s or creditor’s assignee, under a motor vehicle lease or loan or other credit transaction pursuant to which the lessor, creditor, or, in the absence of a waiver by the lessor or creditor, the assignee has waived the obligation of the lessee or debtor for the gap amount;
(B) “Motor vehicle lessor/debtor gap insurance” which insures the lessee or debtor under a motor vehicle lease or loan or other credit transaction pursuant to which the lessor, creditor, or the lessor’s or creditor’s assignee has not waived the obligation of the lessee or debtor for the gap amount;
The Insurance Law does not require a creditor to offer a buyer the opportunity to purchase gap insurance.2
It appears from the facts presented here that USAA is not a retail seller and that its loan, therefore, does not constitute a retail installment contract. If USAA were a retail seller, it might, as creditor of a motor vehicle, be required to offer a gap waiver. The offering of a gap waiver is not considered the “doing of an insurance business” within the meaning of Insurance Law § 1101, provided that three conditions are met. See O.G.C. Opinion No. 05-02-12 (February 7, 2005). Insurance Law § 1101(b)(3) sets forth the conditions for a gap waiver exemption:
(3) Notwithstanding the foregoing, the making of an agreement pursuant to which a lessor of personal property, a creditor making a loan or other credit transaction on personal property or, in the absence of a waiver by the lessor or creditor, the lessor's or creditor's assignee waives the obligation of the lessee or debtor for the gap amount, as such term is defined in paragraph fifty-two of subsection (a) of section one hundred seven of this chapter, shall not constitute, or be deemed to constitute, the doing of an insurance business if:
(i) the lessor or creditor or, in the absence of a waiver by the lessor or creditor, the assignee waives any and all obligations of the lessee or debtor for the gap amount and the lessee or debtor is discharged from any and all further obligation to pay the gap amount;
(ii) the waiver applies only in the event of a total loss of the personal property occasioned by its theft or physical damage;
(iii) in the event the lessor, creditor or assignee purchases lessor or creditor gap insurance, the charge to the lessee or debtor for the waiver does not exceed the cost of the lessor or creditor gap insurance coverage; provided, however, that nothing contained herein shall be construed to prohibit the lessor from including the charge for the waiver in the capitalized cost as that term is defined in subdivision eleven of section three hundred thirty-one of the personal property law.
Article 9 of the Personal Property Law governs motor vehicle installment sales and defines the obligations that a creditor has to a buyer with regard to the offering of gap waivers.3 PPL § 302A(1) provides that if a retail installment contract4 requires that a buyer stand responsible for a total loss of a motor vehicle by its theft, confiscation or physical damage for the gap amount, the holder5 , prior to the execution of the contract, shall by a notice on a separate document conspicuously disclose that fact and the obligations for which the buyer would remain liable in the event of a theft, confiscation or total loss of the vehicle. PPL § 302A(2) provides that if a retail installment contract holds a buyer responsible for the gap amount, then a gap waiver must be offered, but only if motor vehicle creditor gap insurance is available to the holder from a New York authorized insurer. Such gap waiver shall be disclosed in the separate notice pursuant to PPL § 302A(1). PPL § 302A(3) provides that the holder is required to offer the gap waiver only if it has not obtained declination notices or other evidence of unavailability of insurance from every insurer authorized to write gap insurance in this state, during the current calendar year or during the odd-numbered calendar year immediately preceding the calendar year in which the agreement is entered into.
If a bank or other financial institution, such as XYZ, originates a loan, and does not sell the property to a retail buyer, the bank would not be a retail seller pursuant to the PPL, and therefore, it would not be obligated to offer a gap waiver to a buyer. See O.G.C. Opinion 02-06-21 (June 14, 2002). However, if the bank or other financial institution were to purchase a loan as assignee, also called an indirect loan, it would be a holder, and would be obligated to offer a gap waiver under the PPL. See O.G.C. Opinion No. 95-43 (June 27, 1995). This does not appear to be the case under the fact pattern presented. Therefore, XYZ was not required to offer a gap waiver to the inquirer as a buyer, nor provide notice in the contract that the inquirer is responsible for the gap amount. Nor is XYZ responsible to pay the gap amount to the inquirer upon the total loss of the motor vehicle.
For further information you may contact Associate Counsel Alexander Tisch at the New York City Office.
1 Insurance Law § 107(a)(52) defines "gap amount" as: “the difference, if any, between: (i) the amount owed by the debtor under the loan or other credit transaction as of the date of a total loss of the personal property which is the subject of the loan or other credit transaction agreement caused by its theft or physical damage, or the amount that would have been owed by the debtor had the creditor not waived such obligation; and (ii) the sum of: (I) any unpaid payments and other unpaid charges, arising from the failure of the debtor to fulfill the obligations under the loan or other credit transaction agreement, that had accrued prior to the date of the loss; and (II) the actual cash value of the personal property as of the date of the loss. If the debtor is required under the loan or other credit transaction agreement to maintain a physical damage insurance policy on the personal property which is the subject of the loan or other credit transaction agreement, and that policy is in effect on the date of the loss, then "actual cash value" shall have the same meaning as under the physical damage insurance policy
2 A creditor may sell gap insurance to a buyer provided that the creditor and the person that sells the insurance are licensed as an insurance agents and brokers in New York. See O.G.C. Opinion No. 01-08-20 (August 30, 2001).
3 PPL Article 9-A contains similar provisions that apply to motor vehicle lease contracts, and there are similar requirements for non-motor vehicle retail installment contracts in PPL Article 10 and non-motor vehicle lease contracts in General Business Law § 339-w (McKinney 2004). Please note that the PPL uses the spelling “instalment” rather than the preferred spelling “installment.”
4 Pursuant to PPL § 301(5), a “retail instalment contract” or “contract” means an agreement, entered into in this state, pursuant to which the title to, the property or a security interest in or a lien upon a motor vehicle, which is the subject matter of a retail instalment sale, is retained or taken by a retail seller from a retail buyer as security, in whole or in part, for the buyer’s obligation. The term includes such an agreement wherever entered into if executed by the buyer in this state and if solicited in person by a salesman or other person acting on his own behalf or that of the seller. The term also includes a contract whereby a security interest in favor of the seller is created or retained and a contract for the bailment or leasing of a motor vehicle by which the bailee or lessee contracts to pay as compensation for its use a sum substantially equivalent to or in excess of its value and by which it is agreed that the bailee or lessee is bound to become, or for no other or for a nominal consideration has the option of becoming, the owner of the motor vehicle upon full compliance with the terms of the contract.
5 Pursuant to PPL § 301(10), a “holder” of a retail installment contract means the retail seller of the motor vehicle under or subject to the contract, or if the contract is purchased by a financing agency or other assignee, the financing agency of other assignee.