OGC Op. No. 09-07-04
The Office of General Counsel issued the following opinion on July 21, 2009 representing the position of the New York State Insurance Department.
Re: Total Loss Protection Program
1. May an automobile dealer offer the proposed Automotive Replacement Coverage (“ARC”) plan, with regard to the credit or discount that may be offered by the dealer, without contravening the Insurance Law?
2. May an insurer indemnify the automobile dealer for a replacement vehicle where there is a total loss due to theft, collision, or comprehensive causes under a contractual indemnification policy?
1. An automobile dealer may offer its customers an ARC plan, provided that the credit or discount from the dealer 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). However, the Office of General Counsel (“O.G.C.”) does not, at this time, have sufficient facts to opine as to whether the ARC plan satisfies that legal standard.
2. No. An insurer in New York may not indemnify an automobile dealer under a contractual indemnification policy for the replacement vehicle. An indemnification of that sort runs afoul of N.Y. Ins. Law § 1113(a)(13) (McKinney 2006), because that form of insurance is not authorized in New York. Therefore, the sale of such insurance would constitute the doing of an insurance business without a license, in violation of Insurance Law § 1102(a).
The inquiry is made on behalf of BCD, Inc. (“BCD”), which administrates the ARC plan at issue. ARC is a credit offered by an automobile dealer to a customer that, in the event of a total loss of a motor vehicle due to theft, collision or comprehensive causes, would fund the difference between (a) the purchase price of an equivalent replacement vehicle and (b) the actual cash settlement received from the customer’s primary insurance company, up to $25,000.
When O.G.C. issued Opinion No. 09-01-05 (January 13, 2009) (available on the Insurance Department’s website), it appeared that BCD was to indemnify the dealer for the credit or discount. O.G.C. thus concluded that the replacement vehicle credit or discount exceeded the likely ultimate cost or such credit or discount to the dealer, and that BCD’s indemnification would constitute the doing an insurance business without a license.
The inquirer now asserts that BCD was never going to indemnify the dealer, and that the dealer instead will be indemnified by a “contractual liability” insurance policy issued by XYZ Insurance Company (“XYZ”). The inquirer asserts that the ARC plan is similar to Total Loss Protection (“TLP”) plans 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).
The inquirer again asks whether the proposed credit is lawful, and whether the insurer may legally indemnify the dealer.
I. The first question asks whether the ARC plan as clarified complies with the Insurance Law with regard to the credit or discount that may be offered by the dealer. Insurance Law § 1101(a) is germane to that query. That statute 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 within the meaning of 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 § 1102.1 In addition, any person who sells an insurance contract acts as an “insurance producer” within the meaning of Insurance Law § 2101(k).2
However, O.G.C. has previously concluded that a credit or discount 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. In other words, a seller may agree in the discount to reduce its profit margin on the replacement item, but may not agree to sell the item at a break even or lower point. 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 or discount does not cover the dealer’s cost, then the dealer would be doing an insurance business without a license in violation of Insurance Law § 1102(a), and any person selling the “replacement credit” would violate Insurance Law § 2102(a)(1) by acting as an unlicensed insurance producer.
Here, O.G.C. is unable to determine, based on the facts presented, whether the cost of the replacement vehicle minus the credit or discount will in fact cover the dealer’s cost.3 Further, the ARC plan contract does not state that its guarantee will not totally eliminate any dealer profit, which is a recitation that O.G.C. previously has identified as necessary for similar “total loss” contracts. See O.G.C. Opinion No. 08-03-13 (March 19, 2008).
II. The second inquiry asks whether an insurer may indemnify the automobile dealer for a replacement vehicle after a total loss. The inquirer clarified that BCD only administers the ARC program, and does not indemnify the dealer or pay the buyer the amount of the credit due to the buyer subsequent to the loss.
If the administrator were to indemnify, the administrator’s indemnification or payment would constitute the doing an insurance business without a license in contravention of Insurance Law § 1102(a). 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).However, the inquirer indicates that the dealer always was going to be indemnified though a “contractual liability” policy issued by XYZ, an authorized insurer in New York. Part II of the “Customer Registration and Guarantee” form that was provided to the Department indicates that the purchaser would have a $500 deductible subtracted from the amount provided for the replacement vehicle.
Yet, the proposed insurance coverage to indemnify the dealer for the amount of the credit is not authorized under Insurance Law § 1113(a)(13)4 , or any other section of the Insurance Law. Therefore, it is not a kind of insurance that may be lawfully written in New York. The offering of unauthorized insurance by XYZ thus would constitute the doing an insurance business without a license, in contravention of Insurance Law § 1102.
For further information you may contact Alexander Tisch Associate Counsel at the New York City Office.
1 Insurance Law § 1102 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…”
2 Insurance Law § 2101(k) defines “insurance producer” as “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 Given that the credit or discount available under the ARC plan may be as much as $25,000, it seems highly unlikely that the dealer profit would approach that amount under typical circumstances.
4 Insurance Law § 1113(a)(13) reads as follows: “personal injury liability insurance, means insurance against legal liability of the insured, and against loss, damage or expense incident to a claim of such liability (including the insurer’s obligation to pay medical, hospital, surgical and disability benefits to injured persons, and funeral and death benefits to dependents, beneficiaries or personal representatives of persons who are killed, irrespective of legal liability of the insured), arising out of death or injury of any person, or arising out of injury to the economic interests or any person, as the result of negligence in rendering expert, fiduciary or professional service, but excluding any kind of insurance specified in paragraph fifteen except insurance to protect an insured against liability for indemnification or contribution to a third party held responsible for injury to the insured’s employee arising out of and in the course of employment when such insurance is written pursuant to this paragraph and not written pursuant to paragraph fifteen of this subsection.”