New York State Seal

STATE OF NEW YORK

INSURANCE DEPARTMENT

ONE COMMERCE PLAZA
ALBANY, NEW YORK 12257

David A. Paterson

Governor

James J. Wrynn

Superintendent

OGC Op. No. 10-02-08

The Office of General Counsel issued the following opinion on February 16, 2010 representing the position of the New York State Insurance Department.

Re: Gap Waivers

Question Presented:

May a creditor or lessor upon the purchase or lease of property makes a gap waiver to the debtor or lessor that does not fully waive the purchaser’s liability for the gap amount on the loan or lease upon the total loss of personal property occasioned by its theft or physical damage?

Conclusion:

No. A creditor or lessor who issues a gap waiver must waive the full amount of the debtor’s or lessee’s liability for the gap amount on the loan or lease, less the actual cash value of the property; otherwise, the creditor or lessor would be doing an insurance business that requires a license from the New York State Insurance Department.

Facts:

The inquiry is of a general nature, without reference to particular facts.

Analysis:

The inquirer asks whether a lessor or creditor making a gap waiver may limit the amount of the waiver, or otherwise condition the waiver to the extent that the lessor’s or creditor’s gap insurance policy limits its coverage to the creditor or lessor. The inquirer proffers, as an example, a limitation on the amount of the loan that the gap waiver may cover, such as no more than 125 percent of the property’s manufacturer’s recommended selling price/National Automobile Dealers Association (MSRP/NADA) value at the time of its lease or purchase. The inquirer also offers, as another example, a gap waiver that excludes “certain types of repayment such as balloon loans, loans in excess of a certain term or collateral use exclusions.”

A gap waiver is an agreement whereby the creditor or lessor agrees to waive the debtor’s or lessee’s obligation for the gap amount in the event of total loss of the personal property that is the subject of the loan or lease by theft or physical damage. Insurance Law § 107(a)(52) provides:

(52) "Gap amount" means:

(A) in the case of a lease of personal property, the difference, if any, between:

(i) the amount owed by the lessee, under the early termination provision of the lease, as of the date of a total loss of the leased property caused by its theft or physical damage, or the amount which would have been owed by the lessee had the lessor not waived such obligations; 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.

(B) In the case of a loan or other credit transaction on the purchase of personal property, the difference, if any, between:

(i) 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 its 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 payments and other unpaid charges, arising from the failure of the debtor to fulfill the obligations under the loan or other credit transaction agreement, 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 debtor is required under the loan or other credit transaction agreement to maintain a physical damage insurance policy on the personal property which is the subject of the loan or other credit transaction 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.

Thus, the gap amount is the difference between the balance of the loan or lease, respectively, and the actual cash value of the property reduced by any unpaid fees, payments or other charges.

But for an exemption set forth in Insurance Law § 1101(b)(3), the offering of a gap waiver would constitute the doing of an insurance business, which would require a license from the New York Insurance Department. Indeed, prior to the enactment of the statutory exemption in 1994, the Insurance Department had issued numerous opinions concluding that gap waivers constitute the doing of an insurance business. See, e.g., Opinion of Office General Counsel Nos. 93-22 (March 5, 1993) and 92-72 (May 27, 1992 NILS).

Insurance Law § 1101(b)(3) sets forth the following conditions for the 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 obligation 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).

By the plain terms of Insurance Law § 1101(b)(3), to come within the exemption, a gap waiver must provide for the waiver of the full gap amount, as defined by Insurance Law § 107(a)(52). However, because public policy dictates that a wrongdoer may not benefit from his wrongdoing, a gap waiver that excludes damage to the property resulting from intentional, fraudulent or criminal acts of the lessee or debtor (or an agent thereto), even though it is a conditioned waiver of the gap amount, is acceptable and comes within the statutory exemption from doing an insurance business. See New York State Insurance Department's November 1995 Monthly Bulletin ("The Gap Law: Innovation for Consumers and Business").

With reference to the inquiry, a gap waiver amount that is limited to no more than 125 percent of the property’s MSRP/NADA value at the time of purchase could result in a waiver of less than the full gap amount. Gap waivers containing exclusions based upon the use to which an owner or lessee puts the property (other than an exclusion for damage resulting from intentional, fraudulent or criminal acts), or gap waivers conditioned upon the term or type of repayment (such as balloon payments) that the waiver covers also result in a waiver of less than the full gap amount. Given that in these examples the waiver does not waive the full gap amount, the exemption in Insurance Law § 1101(b)(3) does not apply. Thus, a creditor or lessor who makes a gap waiver with any of the conditions or limitations that the inquirer expressly references would be doing an insurance business that requires a license from the Department.

The inquirer also asks if the Department’s answer to the above would change with respect to a direct loan, which the inquirer defines as loans between a financial institution and the borrower using a consumer loan note, as opposed to an indirect loan, which the inquirer defines as a loan originated by auto dealers using the retail installment contract, which is in turn purchased by the financial institution. By its terms, the exemption in Insurance Law § 1101(b)(3) from the doing of an insurance business applies to any lessor or creditor, or assignee thereof; hence, it applies to both "direct" and "indirect" loan transactions. See OGC Opinion No. 02-09-22 (September 24, 2002). Any waiver of the gap amount by either a "direct" or “indirect” lender that does not come within the exemption would constitute the doing of an insurance business by the creditor. See id.

Please note that the making of certain gap waivers is also governed by N.Y. Personal Property Law §§ 302A (motor vehicle retail installment agreements), 402B (non-motor vehicle retail installment agreements), and 335 (motor vehicle retail leases), and N.Y. General Business Law § 399-w (non-motor vehicle retail leases), all of which apply the definition of gap waiver set forth in Insurance Law § 107(a)(52). This opinion is limited only to an interpretation of the Insurance Law.

For further information you may contact Senior Attorney Brenda M. Gibbs at the Albany Office.