OGC Op. No. 09-01-08

The Office of General Counsel issued the following opinion on January 13, 2009, representing the position of the New York State Insurance Department.

Re: Total Loss Protection Program

Question:

May an automobile dealer, consistent with the Insurance Law, offer an Automotive Replacement Coverage (“ARC”) plan to its customers that provides a discount towards the purchase of a replacement vehicle when there is a total loss of the original vehicle due to theft, collision or comprehensive causes?

Answer:

An automobile dealer may offer its customers such an ARC plan, provided that the credit for the replacement vehicle does not exceed the ultimate cost of such credit or discount to the dealer (i.e.; 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). As presented, it is unclear whether under the ARC plan, the credit for the replacement vehicle covers the dealer’s cost. Also, the ARC plan appears to allow the plan administrator to indemnify the dealer, which contravenes N.Y. Ins. Law § 1102(a) (McKinney 2006).

Facts:

This inquiry is made on behalf of XYZ, Inc. that administrates the ARC plan at issue. ARC is a guarantee that is sold by the automobile dealer to the consumer that is incidental to the vehicle sales process. The plan provides a discount to a consumer towards the purchase of a replacement vehicle when the consumer suffers a total loss of his or her original vehicle due to theft, collision or comprehensive causes. The inquirer asserts that the ARC plan is similar to Total Loss Protection (“TLP”) plans that were found to comply with the Insurance Law by the Insurance Department. See Office of General Counsel (“O.G.C.”) Opinion No. 08-03-13 (March 19, 2008); O.G.C. Opinion No. 01-09-07 (September 21, 2001).

Analysis:

Insurance Law § 1101(a) is relevant to this 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 who sells such a contract acts as an insurance producer within the meaning of 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’s O.G.C. 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, provided that the credit covers 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).

If the cost of the replacement vehicle minus the credit does not cover the dealer’s cost, 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.

The $25,000 maximum credit under the ARC plan in question, appears to exceed the cost of a large share of potential replacement motor vehicles, which raises a major question of whether the credit in fact meets the ultimate cost of such credit or discount to the dealer. In addition, the contract at issue gives no indication that its guarantee will totally eliminate any dealer profit. Such a provision is one that the O.G.C. previously has insisted on in similar “total loss” contracts. See O.G.C. Opinion No. 08-03-13 (March 19, 2008).

Furthermore, please be advised that XYZ, Inc., the administrator, may administer the ARC program, but may not indemnify the dealer or pay the buyer the amount of the credit due to the buyer subsequent to the loss, even if the dealer’s cost is covered, because the administrator’s indemnification or payment would constitute the 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).

It is unclear based on the “Customer Guarantee and Registration” form and the “Dealer Agreement” provided to the Department whether such an indemnification is taking place. Part II of the “Customer Guarantee and Registration” form indicates that the “Guarantee will pay on your [the purchaser’s] behalf to the Authorized Dealer replacing the vehicle, and subject to the provisions herein, an amount equal to the difference between (1) the actual cash value of your vehicle at the time of loss, as determined by your insurance company and (2) the Replacement Cost Value of a new vehicle or expensive vehicle you purchase of lease, excluding tax, license and registration fees.” The “Dealer Agreement” indicates that the administrator agrees “to maintain in force reimbursement insurance for the obligations under the ARC Program.” Both of these provisions apparently show that the administrator is indemnifying the dealer for the discounts. But to conform with the Insurance Law, any monies must come from the dealer and not the administrator.

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” program to perform as represented would not prevent collisions.¹

For further information you may contact Associate Counsel Alexander Tisch at the New York City Office.

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¹ 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).