The Office of General Counsel issued the following opinion on April 9, 2008, representing the position of the New York State Insurance Department.
RE: Paintless Dent Repair and other aftermarket programs
May a registered service contract provider offer the following automotive aftermarket programs in New York?
1. Etch – an anti-theft deterrent placed in vehicle window glass.
2. Paintless Dent Repair (“PDR”) – the process of applying pressure and or
vacuum in which small indentations are removed or minimized on the specified body panels.
3. Key Fob (a small pocket size electronic device provided by the vehicle manufacturer, which contains a digital authentication code unique to a specific vehicle for the purpose of opening and operating the vehicle) – (a) The replacement of a stolen or lost Key Fob, and (b) the mechanical or electronic failure of the device to operate as designed.
4. Pre-Paid Maintenance (“PPM”) – the payment by the vehicle’s owner for specified maintenance services prior to their consumption.
5. Glass (Windshield) – (a) the replacement of a windshield that is damaged from an airborne road hazard object, and (b) the repair of a windshield that is damaged from an airborne road hazard object.
6. Tire and Wheel – (a) Tire – the replacement of a tire that has been damaged sufficiently by a road hazard to create an un-safe driving condition or the repair of a tire that has been damaged by a road hazard. (b) Wheel – the replacement of a wheel/rim that has been damaged sufficiently by a road hazard to create an unsafe driving condition or the repair of a wheel/rim that has been damaged by road hazard.
1. No. Sale of the Etch anti-theft program would constitute doing an insurance business in New York under N.Y. Ins. Law § 1101 (McKinney 2006).
2. No. Paintless Dent Repair program constitutes doing an insurance business under Insurance Law § 1101.
3. It depends. If the Key Fob program involves the replacement or repair of the Key Fob, then sale of this program would constitute the doing of an insurance business under Insurance Law § 1101. If the program entails the repair of the Key Fob in the event of a mechanical failure, then this program may constitute a service contract under Article 79 of the Insurance Law.
4. It depends. A Pre-Paid Maintenance program does not constitute the doing of an insurance business if, under the plan the obligor undertakes for a pre-paid fee to perform certain services that are independent of any fortuitous event. However, if the service to be performed is dependent upon the happening of a fortuitous event, then such service constitutes the doing of an insurance business under Insurance Law § 1101. The nature of the service to be offered through this program is unclear from your inquiry.
5. No. The proposed Glass program constitutes the doing of an insurance business pursuant to Insurance Law § 1101 since the service obligation is dependent upon the happening of a fortuitous event.
6. Yes. A service contract provider may offer a Tire and Wheel repair program if the service contract provider is registered in New York pursuant to Article 79 of the Insurance Law, and the contract is made by or for the manufacturer or seller of the motor vehicle tire for repair or replacement of the tire or wheel as a result of damage arising from a road hazard.
The inquirer is the State Compliance Coordinator for an administrator of automotive service contracts and aftermarket product contracts. The company wishes to expand its product offerings and as such, the inquirer aims to ascertain how the Insurance Department treats the various automotive aftermarket programs described above in order to determine the appropriate licenses required to offer these products in New York.
In further communication with the Department, the inquirer states that ABC Corporation is a registered service contract provider in New York. The inquirer also states that the company has no actual contracts or more detailed descriptions of these product offerings, and that the nature of the inquiry is to investigate whether ABC Corporation, as a service contract provider, may offer these products in New York.
The central issue here is whether the sale of any or all of these programs involves the doing of an insurance business or constitutes a warranty or service contract. As such, Articles 11 and 79 of the Insurance Law are relevant to the inquiry. Insurance Law § 1101 defines the doing of an insurance business in New York, and reads, in pertinent part, as follows:
(b)(1) Except as provided in paragraph two, three or three-a of this subsection, any of the following acts in this state, effected by mail from outside this state or otherwise, by any person, firm, association, corporation or joint-stock company shall constitute doing an insurance business in this state and shall constitute doing business in the state within the meaning of section three hundred two of the civil practice law and rules:
(A) making, or proposing to make, as insurer, any insurance contract, including either issuance or delivery of a policy or contract of insurance to a resident of this state or to any firm, association, or corporation authorized to do business herein, or solicitation or applications for any such policies or contracts;
(B) making, or proposing to make, as warrantor, guarantor or surety, any contract of warranty, guaranty or suretyship as vocation and not as merely incidental to any other legitimate business or activity of the warrantor, guarantor or surety;
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(E) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this chapter . . . .
The following definitions set forth in Insurance Law § 1101 also are relevant to your inquiry:
(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 a substantial extent beyond the control of either party.
(3) “Contract of warranty, guaranty or suretyship” means an insurance contract only if made by a warrantor, guarantor or surety who or which, as such, is doing an insurance business.
Insurance Law § 1102(a) prohibits any person, firm, association, corporation or joint-stock corporation from doing an insurance business in New York unless authorized by a license in force pursuant to the Insurance Law, or exempted by the provisions of the Insurance Law from such requirement.
Although the Insurance Law does not define “warranty”, a warranty in general relates in some way to the nature or efficiency of a product or service. Commonly the warrantor agrees to repair or replace a product that fails to perform properly, such as a contract covering a defect in materials or workmanship, or a contract otherwise covering the breakdown of the product. See Ollendorf Watch Co., Inc., v. Pink, 279 N.Y. 32, 17 N.E.2d 675 (1938).
In order to be a warranty, the maker of the contract must have a relationship to the product or service, or do some act that imparts knowledge of the product or service to the extent of minimizing, if not eliminating, the element of chance or risk contemplated by Insurance Law § 1101(a). The making of a warranty constitutes the doing of an insurance business if done as a vocation and not as merely incidental to any other legitimate business or activity of the warrantor, guarantor, or surety. See Office of General Counsel (“OGC”) Opinion No. 07-03-02 (Mar. 6, 2007).
Insurance law § 7902(k) defines in relevant part a “service contract” as follows:
“Service contract” means a contract or agreement, for a separate or additional consideration, for a specified duration to perform the repair, replacement or maintenance of property, or indemnification for repair, replacement or maintenance, due to a defect in 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 include towing, rental and emergency road service and may also provide for the repair, replacement or maintenance of property for damage resulting from power surges and accidental damage from handling.1 Service contracts may also include contracts to repair, replace or maintain residential appliances and systems. Such term shall also mean a contract or agreement made by or for the manufacturer or seller of a motor vehicle tire for repair or replacement of the tire or wheel as a result of damage arising from a road hazard.
Pursuant to Insurance Law § 1101(b)(3-a), the marketing, sale, offer for sale, issuance, making, proposing to maker or administration of a service contract pursuant to Article 79 of the Insurance Law shall not constitute the doing of an insurance business in New York.
A service contract does not include a maintenance agreement, which is defined in by Insurance Law § 7902(d) as follows:
“Maintenance agreement” means a contract of limited duration that provides for scheduled maintenance of property, other than contracts providing for the repair or replacement of such property due to a defect in materials or workmanship or wear and tear.
Additionally, the making of a maintenance agreement does not constitute the doing of insurance business where one party undertakes, for a pre-paid fee, to perform certain specified services that are not dependent upon the occurrence of a fortuitous event. See, e.g., OGC Opinion No. 07-07-19 (July 23, 2007); OGC Opinion dated January 22, 1996.
In view of the foregoing legal standards, we turn to the specific programs about which ABC Corporation inquires:
This anti-theft deterrent program likely constitutes the doing of an insurance business within the meaning of the Insurance Law. Although the inquirer did not provide a detailed description of the program, based on similar programs about which the Insurance Department has opined, the triggering event under the anti-theft agreement would be the theft (and subsequent damage or non-recovery) of the vehicle. See, e.g., OGC Opinion No. 04-02-22 (Feb. 20, 2004); OGC Opinion No. 02-03-22 (Mar. 25, 2002). The theft is substantially beyond the control of either the company or the consumer, and as such, would constitute a fortuitous event under Insurance Law § 1101(a)(2). If ABC Corporation is obligated to provide a pecuniary benefit to the consumer in the event of the theft or constructive loss of the vehicle upon the happening of a fortuitous event, then such an obligation would constitute and insurance contract. Accordingly, any offer of the Etch program in New York by ABC Corporation would constitute the doing of an insurance business without a license in violation of Insurance Law § 1102.
However, if the Etch program includes the payment of a pre-paid fee that covers the cost of rendering services plus the cost of reasonable overhead expenses, then the program would not constitute the doing of an insurance business for which a license would be required. See, e.g., OGC Opinion No. 07-03-11 (Mar. 15, 2007); OGC Opinion No. 02-05-20 (May 17, 2002); OGC Opinion No. 01-06-10 (June 15, 2001). Additionally, the sale of the Etch program would not be considered the doing of an insurance business if the program also offers group insurance coverage pursuant to Insurance Law § 3446. This statute was enacted in 1999 to authorize the issuance of a group policy to a company that manufactures, distributes or installs a product or system such as the etch program. See, e.g., OGC Opinion No. 06-07-14 (July 24, 2006); OGC Opinion No. 04-02-22 (Feb. 20, 2004). The group policy, which must be obtained from an authorized insurer, provides coverage directly from the insurer to the purchaser of a program that seeks to protect against loss or damage as a result of a specific cause other than defect in materials or workmanship or wear and tear. The coverage also must be non-optional; that is, the coverage must be offered as a part of the program at no additional charge. Id; see also New York Codes Rules and Regulations (“NYCCR”) tit. 11 Part 310 (Regulation 167), (implementing Insurance Law § 3446) (available at the Insurance Department’s website, http://www.ins.state.ny.us.)
2. Paintless Dent Repair (“PDR”)
Likewise, the inquirer did not provide a description of the service to be offered under the PDR program. However, based on other PDR programs that the Department has reviewed, such a program normally covers dents and dings that occur as a result of fortuitous events and not just due to ordinary wear and tear or defects in workmanship. See, e.g., OGC Opinion No. 07-09-02 (Sept. 5, 2007); OGC Opinion No. 05-02-12 (Feb. 7, 2005). As such, the PDR program would constitute a contract of insurance within the meaning of Insurance Law § 1101, and may only be offered by an insurer that is authorized to do business in New York State.
3. Key Fob
ABC Corporation would like to offer two types of coverage under this program: (a) replacement of a stolen or lost Key Fob, and (b) repair and/or replacement due to the “mechanical or electronic failure of the device to operate as designed.” The portion of the service providing replacement of the Key Fob if lost or stolen is the doing of an insurance business within the meaning of Insurance Law § 1101, since the obligation is triggered by a fortuitous event – i.e., loss or theft. However, the replacement or repair of a Key Fob as a result of a defect would be considered a service contract within the meaning of Insurance Law § 7902(k). Therefore, while a registered service contract provider may offer a service to repair or replace a Key Fob based on a design defect, the service contract provider may not offer a service to replace a lost or stolen Key Fob unless it is an authorized insurer in New York.
4. Pre-Paid Maintenance (“PPM”)
The type of maintenance services to be provided under the PPM program is unclear from the inquiry. Nor can the Department discern whether the obligation to perform such services will be dependent upon the happening of a fortuitous event. Therefore, the Department may only address this program in general terms. If the program involves performance of scheduled maintenance services for a pre-paid fee, and the obligation is not triggered by a fortuitous event, then such a program is considered a maintenance agreement under Insurance Law § 7902(d). As such, the sale of the PPM program may not violate the Insurance Law.
5. Glass (Windshield)
The inquirer’s Glass program, as proposed, would constitute the doing of an insurance business if offered in New York. The obligation to repair or replace the windshield is triggered by the occurrence of a fortuitous event, to wit, damage from an airborne road hazard object. Such damage is clearly beyond the control of either the obligor or the consumer. Accordingly, the sale of the Glass program as described would violate the Insurance Law in the absence of a valid license to do an insurance business.
6. Tire and Wheel
In 2006, the New York Legislature amended Insurance Law 7902(k) to include road hazard contracts in the definition of “service contract”, but only if the contract is made by a registered service contract provider and the contract is made by or for the manufacturer or seller of the motor vehicle tire. If the maker of the contract is not registered with the Department as a service contract provider, then the making of such an agreement continues to constitute the doing of an insurance business, and the maker of the contract may not offer such road hazard coverage without becoming an authorized insurer. See OGC Opinion No. 07-06-12 (June 15, 2007).
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In sum, some of the proposed automotive aftermarket programs discussed above could be sold lawfully in New York by a registered service contract provider. However, the Department will require a more detailed explanation of ABC Corporation’s programs in order to opine definitively as to whether the company may offer them for sale in New York as a registered service contract provider.
For further information, you may contact Senior Attorney Camielle A. Campbell at the New York City office.
1 The Insurance Department has interpreted term “accidental damage and handling” to mean accidental damage from handling in the normal and customary use of the product (here, the automobile). See, e.g., OGC Opinion No. 07-09-02 (Sept. 5, 2007); OGC Opinion No. 07-07-19 (July 23, 2007); OGC Opinion No. 06-03-04 (Mar. 8, 2006).