The Office of General Counsel issued the following opinion on March 19, 2008, representing the position of the New York State Insurance Department.
RE: Total Loss Protection Program
May a New York motor vehicle dealer sell a Total Loss Protection contract under which, upon the total loss of a vehicle due to theft or accidental occurrence1, the dealer provides a credit towards the purchase of a replacement vehicle that covers the cost to the dealer of the replacement vehicle, including a reasonable profit?
Yes, as set forth below, a New York motor vehicle dealer may sell a Total Loss Protection contract upon the total loss of the vehicle due to theft or accidental occurrence. The dealer may provide a credit towards the purchase of a replacement vehicle, provided that the credit covers the cost of rendition, or the cost of purchase to the dealer, plus any labor or material cost borne by the dealer, and reasonable overhead expenses. Otherwise, the Total Loss Protection contract would constitute the making of an insurance contract without an insurance license pursuant to N.Y. Ins. Law § 1101 (McKinney 2006) and the “doing of an insurance business” without a license pursuant to Insurance Law § 1102. In addition, any person who sells the Total Loss Protection contract would be acting as an insurance producer2 without a license pursuant to Insurance Law § 2101.
A program is proposed whereby New York motor vehicle dealers offer for sale a theft deterrent system to buyers that includes a Total Loss Protection contract covering motor vehicles with a theft deterrent system installed. Upon the total loss of the motor vehicle as a result of theft or “accidental occurrence”, the buyer would be given a credit from the dealer towards the purchase of a replacement vehicle in the amount of 10% of the original Manufacturer Suggested Retail Price (“MSRP”), not to exceed $5,000, minimum payment of $3,000. If the original vehicle is a used vehicle, the credit for the replacement would not exceed 50% of the National Automobile Dealers Association (“NADA”) Retail Official Used Car Guide value of the vehicle as of the date of its purchase to a maximum amount of $3,000. The program would be administered by XYZ, Inc. The determination of whether there is a total loss would be made by the buyer’s primary automobile insurance company. If the buyer does not have theft/comprehensive insurance the determination would be made by an adjuster approved by the dealer at the owner’s expense. The buyer would have to report the total loss to law enforcement within 24 hours of knowledge of the loss, and would have to provide the report to the dealer within 30 days of the loss.
Insurance Law § 1101(a) is relevant to the inquiry, and reads as follows:
(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.
The total loss of a motor vehicle due to theft or “accidental occurrence” constitutes a fortuitous event as defined in Insurance Law § 1101(a)(2). A contract that confers a benefit of pecuniary value upon the buyer constitutes the making of an insurance contract pursuant to Insurance Law § 1101 and the doing of an insurance business pursuant to Insurance Law § 1102. In addition, any person that sold such a contract would be acting as an insurance producer pursuant to Insurance Law § 2101.
Insurance Law § 1102(a), in pertinent part, provides that “[n]o 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 this requirement…” Insurance Law § 2102(a)(1) provides that “[n]o person, firm, association or corporation shall act as an insurance producer or insurance adjuster in this state without having authority to do so by virtue of a license issued and in force pursuant to the provisions of this chapter.”
However, the Department has previously opined that a credit may be offered by a seller towards the purchase of a replacement vehicle, even though it is dependent upon the happening of a fortuitous event, without constituting the doing of an insurance business. See Office of General Counsel (“O.G.C.”) Opinion No. 99-22 (February 22, 1999). Such an agreement may provide for a pre-arranged credit towards the purchase of a replacement vehicle (such as the Total Loss Protection contract), provided that the credit covers the cost of rendition, which is the cost of the replacement vehicle to the dealer, plus any labor or material cost borne by the dealer and reasonable overhead expenses, including profit. See O.G.C. Opinion No. 99-68 (June 10, 1999); O.G.C. Opinion No. 99-22 (February 22, 1999). We note that item IV(2) in the contract at issue provides that no guarantee will be provided that totally eliminates any dealer profit. This is a provision that the Insurance Department has insisted on in similar contracts.
If the cost of the replacement vehicle minus the credit did not cover the cost of rendition, the dealer would be doing an insurance business without a license in violation of Insurance Law § 1102(a), and any person selling the “theft deterrent system” would be in violation of Insurance Law § 2102(a)(1) by acting as an unlicensed insurance producer. Furthermore, XYZ, Inc., the administrator, may administer the program, but may not indemnify the dealer or pay the buyer the amount of the credit due the buyer subsequent to the loss, even if the cost of rendition is covered, because the administrator’s indemnification or payment would be doing an insurance business without a license. See O.G.C. Opinion No. 99-164 (December 23, 1999); O.G.C. Opinion No. 99-146 (November 22, 1999); O.G.C. Opinion No. 99-78 (June 22, 1999).
The inquirer may wish to explore a group insurance policy as a possible alternative. Insurance Law § 3446 was enacted in 1999 to authorize the issuance of a group policy to a company that manufactures, distributes or installs a product or system. (The dealer here could be the group policyholder.) The group policy, which must be obtained from an authorized insurer, would insure purchasers or owners of 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). Under such a policy, coverage is provided directly by the insurer to the purchaser or owner of the product or system (in this instance, the buyer). The coverage is not optional; that is, it must come with the product or system for no separate charge. The premium for the policy is paid by the group policyholder from funds contributed wholly by the group policyholder. The group policyholder or seller of the product or system (in this instance, the dealer) would not have to be a licensed insurance agent or broker when it sells the product or system with the insurance coverage automatically included. See O.G.C. Opinion No. 06-07-14 (July 24, 2006); O.G.C. Opinion No. 02-04-24 (April 23, 2002).
However, a group insurance policy issued pursuant to Insurance Law § 3446 could not cover damages due to collisions, because the failure of the Total Loss Protection program to perform as represented would not prevent collisions.3
For further information you may contact Associate Counsel Alexander Tisch at the New York City Office.
1 The proposed Total Loss Protection contract refers to an “accidental occurrence” without further explanation; the accompanying letter describes an “accidental occurrence” as a collision-type loss.
2 Pursuant to Insurance Law § 2101(k), an “insurance producer means an insurance agent, insurance broker, reinsurance intermediary, excess lines broker, or any other person required to be licensed under the laws of this state to sell, solicit or negotiate insurance.”
3 A watch identification program that included an invisible code engraved on the face of the watch did not qualify as an Insurance Law § 3446 group because the invisible engraving would not prevent loss or damage to the watch. See O.G.C. Opinion No. 07-05-01 (May 1, 2007).