The Office of General Counsel issued the following opinion on March 13, 2008, representing the position of the New York State Insurance Department.
Re: Transferability of service contracts
Does the Insurance Law prohibit a “home warranty” company from transferring to a purchaser a “home warranty” that is offered to a seller as part of a real estate broker’s “auto list” promotion?
No. There is nothing in the Insurance Law that prohibits a “home warranty” company, registered as a service contract provider in New York, from transferring a seller’s “home warranty” to a purchaser. Such a prohibition may be imposed as a matter of contract.
The inquirer is a real estate broker in New York and the inquirer believes that if a real estate agent/broker or home owner purchases a “home warranty” after the “listing protection” period, any subsequent purchaser of the home would yield the benefit of the “home warranty” for one year. The inquirer questions whether this scenario violates the Insurance Law or the Real Estate Settlement Procedures Act (“RESPA”) 12 U.S.C.A. § 2601 et seq. (West 2001), and if not, whether offering the purchaser the same coverage at no cost would violate the Insurance Law.1
In clarifying the inquiry, the inquirer states that a real estate broker offered to a seller a “home warranty” issued by ABC Company as an incentive to “auto list” the seller’s property with the broker. The “home warranty” would be at no cost to the seller. If the property were sold, then neither the seller nor the purchaser would be obligated to buy the “home warranty.” The inquirer states that after the sale of the residential property, ABC Company nonetheless refused to transfer the “home warranty” to the purchaser, because, according to ABC Company, to do so would violate the Insurance Law. However, the inquirer asserts that generally, a standard “home warranty” is free to the seller, but if the property is sold the “home warranty” may be transferred to the purchaser, provided that either the seller or purchaser pays for the “home warranty.”
The inquirer is unaware whether the “home warranty” agreement was extended only to the seller, but the inquirer would like to know if transferring the “warranty” to the purchaser at no cost is in fact a violation of the Insurance Law or RESPA. The inquirer provided to the Department a copy of ABC Company’s “New York Sample Contract,” a brochure describing the “home warranty” coverage that ABC Company provides. However, the inquirer could not state definitively whether this contract is reflective of the actual contract in question.
Although the inquirer refers to the ABC Company contract as a “home warranty,” how a contract is characterized is irrelevant when determining whether such contract constitutes a warranty or a service contract under the Insurance Law. Generally, whether a particular contract constitutes a warranty or a service contract depends on the relationship that the obligor has to the product or service. Where there is a relationship to the product, such as one that a manufacturer or seller would have, the contract constitutes a warranty. However, if the contract is issued by a third party that is not in the chain of sale, or a manufacturer or seller that makes the warranty as a vocation (see N.Y. Ins. Law § 1101(b)(1) (McKinney 2006)), the obligor thereunder must register with the Superintendent as a service contract provider pursuant to Article 79 of the Insurance Law and in accordance with New York Codes, Rules and Regulations (“NYCRR”) tit. 11 Part 390 et seq. (Regulation 155). Insurance Law § 7902(k) defines a “service contract,” in pertinent part, as follows:
“Service contract” means a contract or agreement, for a separate or additional consideration, for a specific duration to perform the repair, replacement or maintenance of property, or indemnification for repair, replacement or maintenance, due to defect in the materials or workmanship or wear and tear, with or without additional provision for indemnity payments for incidental damages, provided any such indemnity payment per incident shall not exceed the purchase price of the property serviced . . . . Service contracts may also include contracts to repair replace or maintain residential appliances and systems . . . .
Whether a “home warranty” is in fact a warranty or a service contract depends upon the facts surrounding the transaction, as well as the terms and undertakings of the contract. Although the inquirer did not provide a copy of the actual contract at issue, the terms of ABC Company’s “New York Sample Contract” indicate that the ABC Company “home warranty” is in fact a service contract. The agreement provides coverage for repair or replacement due to normal wear and tear only, and excludes coverage due to fortuitous events such as war, vandalism and acts of God – these are indicia of a service contract. See e.g., OGC Opinion No. 07-09-15 (Sept. 17, 2007); OGC Opinion No. 04-04-31 (Apr. 28, 2004); OGC Opinion No. 04-02-22 (Feb. 20, 2004). Also, ABC Company has no relationship to the products and systems covered in the contract. See e.g., OGC Opinion No. 04-04-31 (Apr. 28, 2004); OGC Opinion No. 02-10-13 (Oct. 15, 2002); OGC Opinion No. 02-02-13 (Feb. 12, 2002). As such, the ABC Company contract would be governed by Article 79 of the Insurance Law, and in fact ABC Company is a registered service contract provider.
There are no provisions in Article 79 of the Insurance Law that requires a service contract provider to transfer to a purchaser coverage under a service contract that was made with a seller. The transferability of the coverage provided by the contract generally would be determined by the contractual agreement between the service contract provider and the service contract holder. However, Insurance Law § 7905(j) requires that service contracts state the terms, restrictions or conditions governing the transferability of such contracts. Indeed, the ABC Company sample contract that the inquirer provided requires the service contract holder to notify the company of the change in ownership and provide contact information for the new owner in order to effectuate a transfer of coverage.
The inquirer also asks about RESPA, but that is a federal law that applies to the real estate settlement process involving federally related mortgage loans. As such, the interpretation of RESPA is beyond the purview of the New York Insurance Department. The inquirer may wish to contact the federal Housing and Urban Development (“HUD”) for further information about the statute.
In sum, a service contract provider’s refusal to permit the transfer of a service contract from the service contract holder to a third party does not per se run afoul of Article 79 of the Insurance Law. As a general matter, the transferability of a service contract depends upon the provisions in the specific contract in question. However, since the Insurance Department was not provided with a copy of the actual contract at issue here, we cannot make a specific determination in this case.
For further information you may contact Senior Attorney Camielle A. Campbell at the New York City Office.
1 Although under Article 79 of the Insurance Law a service contract must specify the “consideration” offered in exchange for the service, there is no prohibition upon a person other than a service contract provider (e.g., a real estate broker) from offering a purchaser or seller a service contract as an incentive or promotion.