New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

David A. Paterson
Governor

Eric R. Dinallo
Superintendent

The Office of General Counsel issued the following opinion on March 20, 2008, representing the position of the New York State Insurance Department.

Re: Service Contracts issued by ABC Energy Services – applicability of Article 79 financial responsibility requirements

Questions Presented:

1) Are those service contracts that ABC sells in New York State that cover the heating equipment of ABC Corporation’s natural gas customers, which is fueled by natural gas, exempt under N.Y. Ins. Law §§ 1101 or 7901(b)(4) from regulation either as insurance or as service contracts?

2) Are those service contracts that ABC sells in New York State that cover water heaters and air conditioning systems owned by ABC Corporation’s natural gas customers, equipment, which are not fueled by natural gas, exempt from regulation as service contracts under Article 79 of the Insurance Law and 11 NYCRR 390 (Regulation 155), or from regulation as insurance under Insurance Law § 1101(b)(3-a)?

3) Are those service contracts that ABC sells in New York State that cover both heating equipment fueled by natural gas, as well as water heaters and air conditioning systems not fueled by natural gas, exempt from regulation as service contracts under Article 79 of the Insurance Law and Regulation 155, or from regulation as insurance under Insurance Law § 1101(b)(3-a)?

Conclusion:

1) Yes. Those service contracts that ABC sells in New York State that cover only the heating equipment of ABC Corporation’s natural gas customers are exempt from regulation as either insurance or service contracts because they are service contracts conditioned upon or otherwise associated with the sale or supply of heating fuel.

2) No. Those service contracts that ABC sells in New York State that cover water heaters not powered by natural gas and/or air conditioning systems owned by ABC Corporation’s natural gas customers but which covered equipment is not powered by natural gas are not exempt under Insurance Law § 7901(b)(4) from regulation as service contracts. Nor are they exempt from the doing of an insurance business under Insurance Law § 1101(b)(3-a), because they do not constitute service contracts or maintenance agreements that are conditioned upon or otherwise associated with the sale or supply of heating fuel.

3) ABC’s service contracts that cover both equipment fueled by natural gas and equipment that is not fueled by natural gas (“mixed service contracts”) are service contracts which, in their entirety, are subject to and must comply with the service contract law. Neither the service contract exemption contained in Insurance Law § 7901(b)(4), nor the insurance exemption set forth in Insurance Law § 1101(b)(3-a) applies to such service contracts because the contracts are not, in their entirety, conditioned upon or otherwise associated with the sale or supply of heating fuel.

Facts:

The following facts were derived both from the inquirer’s current inquiry and from the inquirer’s previous letter dated February 6, 2007 to the Insurance Department’s Consumer Services Bureau, relating to ABC’s registration in New York as a service contract provider.

The inquirer described the history of ABC’s service contract business, in pertinent part, as follows:

* * *

ABC Corporation is the parent corporation of ABC, which sells service contracts. ABC offers four general service contract plans and is the obligor under each of these plans: (1) Premier Gas Heating Plan (covering parts and associated labor for one heating unit, one water heating unit and a yearly safety check/tune-up for the covered heating system); (2) Premier Cooling Plan (covering parts and associated labor for one central air conditioning unit); (3) Premier Plus Gas Heating and Cooling Plan (providing all of the coverage in plans 1 and 2 above, and adding such coverages for additional heating, water heating and/or cooling units); and (4) a Basic Parts Plan (covering parts only for one heating unit and one water hearing unit).

The copies of the service contract enrollment forms that the inquirer sent to the Department, which also set forth the terms of the service contracts themselves, show that ABC offers consumers a menu of choices of coverages, each at a different cost, when it offers a consumer a service contract. Therefore, each service contract that is issued will provide the coverage(s) selected and cover those pieces of equipment that have been selected for coverage by the consumer. The Plans cover one or more of the following kinds of equipment: (a) gas-fired central heating equipment; (b) gas or electric water heating equipment: and (c) electrical central air conditioning condensing equipment.

ABC’s New York heating service plans cover the repair and maintenance of natural gas heating equipment, including boilers, furnaces heat pumps, radiant floor heating, room heaters and water heaters and for water heating equipment (gas or electric powered). ABC also issues New York cooling service plans that cover repair and maintenance of cooling equipment and ventilation systems.

ABC has chosen the parental guarantee method as proof of its financial responsibility pursuant to Insurance Law § 7903(c)(3)(B), and has filed ABC Corporation’s parental guarantee with the Department as part of its registration in New York as a service contract provider.

Analysis:

When Article 79, which governs service contracts issued in New York State, was enacted in 1997, it encompassed service contracts conditioned upon or otherwise associated with the sale or supply of heating fuel. However, in 1998, the Legislature added Insurance Law § 7901(b)(4) to provide that Article 79 does not apply to “warranties, service contracts and maintenance agreements that are conditioned upon or otherwise associated with the sale or supply of heating fuel.” However, because the Legislature did not at the same time amend Insurance Law § 1101, which defines the doing of an insurance business, the Department subsequently opined that whether service contracts or warranties constituted insurance were subject to the analysis that the Department applied prior to the 1997 service contract law. See Office of General Counsel Opinion, dated July 17, 2001.

In 2000, the Legislature amended Insurance Law § 1101(b)(3-a) to add a reference to heating fuel agreements. That statute reads as follows:

(3-a) Notwithstanding the foregoing, the marketing, sale, offer for sale, issuance, making, proposing to make or administration of a service contract pursuant to article seventy-nine of this chapter or warranty, service contract or maintenance agreement conditioned upon or otherwise associated with the sale or supply of heating fuel shall not constitute doing an insurance business in this state.

The foregoing statutory provision thus exempts service contracts conditioned upon or otherwise associated with the sale or supply of heating fuel not only from Article 79, but also from the doing of an insurance business under Insurance Law § 1101. In doing so, such service contracts are put beyond the realm of regulation under the Insurance Law.

The inquirer asserts that its heating service plans are statutorily exempt from regulation as service contracts under Insurance Law § 7901(b)(4), but acknowledges that its cooling service plans may be subject to regulation by the Department under Article 79. In the inquirer’s February 6, 2007 letter to the Department’s Consumer Services Bureau the inquirer offered its legal analysis to support the company’s position. ABC asserts that although the term “heating fuel” is not defined in Article 79, natural gas is commonly considered to be a heating fuel. ABC further asserts that ABC’s heating service contracts, which include repair and maintenance services for natural gas heating equipment, including boilers, furnaces, heat pumps, radiant floor heating, room heaters and water heaters, all come within the statutory exception because they are service and maintenance agreements associated with the sale or supply of heating fuel.

In an opinion dated July 17, 2001, the Department’s Office of General Counsel opined that the 1998 statutory amendment adding Insurance Law § 7904(b)(4) to the Insurance Law exempts service contracts from Article 79 issued by fuel oil dealers that cover heating equipment fueled by the heating fuel oil that the dealer sells to the customer. We agree that natural gas is a heating fuel within the meaning of the statute, and concur that the exemption also applies to contracts issued by natural gas distributors and their subsidiaries, such as ABC Corporation and ABC, because these service contracts are conditioned upon or otherwise associated with the sale or supply of natural gas.

As to ABC’s cooling service plans, which include repair and maintenance services for cooling equipment and ventilation systems, the inquirer concludes that they do not fall within the statutory exemptions of Insurance Law § 7901(b) and may be subject to regulation by the Department under Article 79. The Office of General Counsel agrees that ABC’s cooling service plans are not exempt from Article 79, and are in fact, service contracts subject to the provisions of that article.

In reviewing the heating service contracts that the inquirer sent to the Department we noticed that some of the units that may be covered under a ABC heating service contract, such as electric powered water heaters, are not fueled by natural gas or other “heating fuel”. As to ABC heating service contracts, since they also provide coverage for equipment that is not fueled by natural gas or other heating fuel, they do not come within the statutory exemption. Such ABC service contracts are, therefore, subject to Article 79.

In view of these conclusions, ABC need not demonstrate its financial responsibility in accordance with Insurance Law § 7903 as to its service contracts that are conditioned upon or otherwise associated with the sale or supply of heating fuel. In addition, under Insurance Law § 1101(b)(3-a) such service contracts are not insurance contracts subject to the strictures of the Insurance Law as to marketing, sale, offer for sale, issuance, making, proposing to make or administration. And while the guarantee that ABC’s parent has issued in support of ABC’s financial responsibility under Insurance Law § 7903(c)(3) must cover ABC’s obligations under its New York service contracts, the parental guarantee is not required to cover ABC’s obligations under contracts that it issues covering equipment run by natural gas.

However, ABC’s cooling service contracts covering electrical central air conditioning, as well as the mixed service contracts, are not conditioned upon or otherwise associated with the sale or supply of heating fuel and, therefore, are neither exempt from regulation as service contracts under Article 79 nor exempt from regulation as insurance under Insurance Law § 1101(b)(3-a). Accordingly, the mixed service contracts are therefore service contracts, ABC must therefore demonstrate its compliance with the financial responsibility requirements set forth in Insurance Law § 7903. Since ABC has chosen to demonstrate its financial responsibility by the parental guarantee method, ABC’s parental guarantee must encompass all of ABC’s service contract obligations under the mixed service contracts.

For further information you may contact Principal Attorney Barbara A. Kluger at the New York City Office.