OGC Opinion No. 08-03-20
The Office of General Counsel issued the following opinion on March 27, 2008, representing the position of the New York State Insurance Department.
RE: Gap Waivers and Gap Insurance
Question:
Where a motor vehicle is purchased in New York with the proceeds of a loan made by a bank, is the automobile dealership, insurer or creditor required to offer gap insurance or a gap waiver to its customers?
Conclusion:
No. The Insurance Law does not require that gap insurance or a gap waiver be offered to the buyer of a motor vehicle. However, a creditor under a retail instalment contract is required to offer a gap waiver to the buyer of a motor vehicle under certain circumstances pursuant to N.Y. Pers. Prop. Law § 302A(2) (McKinney 2006).
Facts:
The inquirer reports that he purchased a motor vehicle with a loan from ABC Co. The inquirer also reports that he was recently in an automobile accident, which resulted in a total loss of a vehicle. At the time of sale, neither the automobile dealership nor the bank offered the inquirer gap insurance or a gap waiver when he first acquired the vehicle.
Analysis:
A gap waiver is an agreement whereby the creditor or lessor agrees to waive the debtor’s or lessee’s obligation for the difference between the gap amount1 and the actual cash value of the property. The offering of a gap waiver is not considered “doing of an insurance business” if three conditions are met. Insurance Law § 1101(b) 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 obligations 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. (Emphasis added.)
Insurance Law § 1113 (a)(26) authorizes and defines gap insurance, including the two kinds of motor vehicle gap insurance, in pertinent part as follows:
"Gap insurance" means insurance covering the gap amount 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 lessee/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. (Emphasis added.)
Gap insurance provides coverage for the gap amount – i.e., the difference between the actual cash value of a vehicle at the time of loss, and the amount owing on the lease or loan at that time. Only a licensed insurance agent or broker may offer gap insurance on behalf of an insurer, because Insurance Law § 2102(a)(1) prohibits any person, firm, association or corporation from acting as an insurance agent or insurance broker in New York without an appropriate license.
The Insurance Law does not require that gap insurance or a gap waiver be offered to motor vehicle buyers. However, New York Personal Property Law § 302(A), which defines the obligations a creditor has to a debtor with regard to the offering of gap waivers/insurance, reads in pertinent part as follows:
1. If the retail instalment contract provides that the buyer shall be responsible upon a total loss of the vehicle occasioned by its theft, confiscation or physical damage for the gap amount as defined in paragraph fifty-two of subsection (a) of section one hundred seven of the insurance law, the holder, 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. If the holder is required under subdivision two of this section to offer to waive its contractual right to hold the buyer liable for the gap amount in the event of a total loss of the vehicle occasioned by its theft or physical damage, the notice shall also: (a) state that for a separate charge disclosed in the notice the holder will waive its contractual right to hold the buyer liable for the gap amount in the event of a total loss of the vehicle occasioned by its theft or physical damage; (b) contain a provision informing the buyer that he or she may, as an alternative to purchasing a waiver, be able to purchase insurance covering the gap amount from an insurance company which has been licensed by the superintendent of insurance to write motor vehicle debtor gap insurance in this state; and (c) contain a provision permitting the buyer to indicate whether he or she wants the holder to waive its contractual right to hold the buyer liable for the gap amount in the event of a total loss of the vehicle occasioned by its theft or physical damage. The notice shall be signed by the buyer….
2. If the retail instalment contract provides that the buyer shall be responsible upon a total loss of the vehicle occasioned by its theft or physical damage for the gap amount, the holder, prior to the execution of the agreement, shall offer to waive its contractual right to hold the buyer liable for the gap amount in the event of a total loss of the vehicle occasioned by its theft or physical damage, only if motor vehicle creditor gap insurance coverage is available to the holder and such coverage is obtained from a property/casualty insurance company….
3. A holder shall not be obligated under subdivision two of this section to offer to waive its contractual right to hold the buyer liable for the gap amount if, during the current calendar year or during the odd-numbered calendar year immediately preceding the calendar year in which the agreement is entered into, the holder has received motor vehicle creditor gap insurance declination notices or other evidence of unavailability from every insurance company whose name appears on the insurance department compilation of insurance companies which during that calendar year were authorized to write motor vehicle creditor gap insurance in this state…. (Emphasis added.)
Personal Property Law § 302A(1) provides that no retail instalment contract may be conditioned upon the buyer obtaining motor vehicle debtor gap insurance2 . Personal Property Law § 302A(2) further provides that if the retail instalment contract holds the 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 of the contract from a New York authorized insurer. Finally, Personal Property Law § 302A(3) provides that the holder is not required to offer the gap waiver only if it has 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.
The Personal Property Law is not applicable to banks in certain circumstances. If a bank or other financial institution 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. In that situation, the bank would not be obligated to offer a gap waiver to a buyer.
For further information, you may contact Principal Attorney Barbara A. Kluger at the New York City office.
1 Insurance Law § 107(a)(52)(B)(i) defines the “gap amount” in a loan or other credit transaction on the purchase of personal property as: 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 the 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 rental payments and other unpaid charges, arising from the failure of the lessee to fulfill the lessee's obligations under the lease, 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 lessee is required under the lease agreement to maintain a physical damage insurance policy on the personal property which is the subject of the lease 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 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. Please note that the PPL uses the spelling “installment” rather than the preferred “installment.”