OGC Op. No. 10-11-02
The Office of General Counsel issued the following opinion on November 15, 2010, representing the position of the New York Sate Insurance Department.
Re: Total Loss Protection and Vehicle Loss Assist Policies
1. Does the proposed Vehicle Loss Assist agreement comply with the Insurance Law?
2. Does the proposed Total Loss Protection Wrap agreement comply with the Insurance Law?
1. No. The proposed Vehicle Loss Assist agreement constitutes an insurance contract pursuant to N.Y. Ins. Law § 1101(a) (McKinney 2006), and the making of such contract by an unlicensed person constitutes the doing of an insurance business without a license in violation of Insurance Law § 1102(a).
2. An agreement, such as the proposed Total Loss Protection Wrap agreement, that provides for a pre-arranged credit by a motor vehicle dealer towards the purchase from the same dealer of a replacement vehicle after a total loss, may be permitted, provided that the amount the customer pays after the application of the credit covers the cost of the replacement vehicle to the dealer, including reasonable overhead expenses. Such product does not constitute insurance, therefore its sale does not violate the Insurance Law.
The inquirer describes two agreements to be marketed by XYZ, LLC and asks whether the agreements comply with the Insurance Law and the regulations promulgated thereunder. Under the proposed Vehicle Loss Assist agreement, XYZ, LLC provides the purchaser or lessee of a motor vehicle (“customer”) with a $2,500 benefit in the event of a total loss of the motor vehicle, in the event that the amount of the proceeds from the customer’s primary insurance settlement is not sufficient to pay the total amount due to a lessor or lender (“dealer”), in addition to the benefits afforded the customer under the Guaranteed Asset Protection (“GAP”) provisions in the customer’s lease or loan agreement. 1 A total loss under the agreement is a direct and accidental loss of, or damage to, the vehicle where: (1) the total cost to repair the vehicle, including related charges, is greater than or equal to the value of the vehicle immediately prior to the loss, as determined by the insurer providing underlying physical damage coverage for the motor vehicle, or (2) the vehicle was stolen and not recovered within 30 days. The benefit is only payable after payment has been made under the customer’s GAP agreement, if any; thus, it appears that the $2,500 benefit actually only covers the deductible under the physical damage policy.
The proposed Total Loss Protection Wrap agreement, which is self-styled by XYZ, LLC as a guarantee, covers motor vehicles with a theft deterrent system installed that consists of, but is not limited to, vehicle etching and decals. Upon the total loss of the motor vehicle due to theft or accidental occurrence, the dealer provides the buyer with a credit towards the purchase from the dealer of a replacement vehicle in an amount equal to $2,500 if the original vehicle is new, or a credit towards the purchase of a replacement vehicle not to exceed $2,500, or the National Automobile Dealers Association (“NADA”) Retail Official Used Car Guide value of the vehicle at the time of the loss, whichever is less, if the original vehicle is a used vehicle. The agreement explicitly states that the “guarantee” is not available for any loss that would result in a credit that would totally eliminate dealer profit on a replacement vehicle.
Insurance Law § 1101(a) is relevant to both queries by the inquirer, 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 customer 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 that sells such a contract acts as an insurance producer pursuant to 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.”
1. VEHICLE LOSS ASSIST AGREEMENT
The first query asks whether the Vehicle Loss Assist agreement complies with the Insurance Law. The agreement confers a benefit of $2,500 on the customer upon the total loss of the motor vehicle, which is a fortuitous event under Insurance Law § 1101(a)(2). Therefore, the Vehicle Loss Assist policy is an insurance contract pursuant to Insurance Law § 1101(a) and the making of such contract by an unlicensed person constitutes the doing of an insurance business without a license in violation of Insurance Law § 1102(a). A person that sells such a contract is an unclicensed insurance producer in violation of Insurance Law § 2102(a)(1). See Office of General Counsel (“OGC”) Opinion No. 05-02-03 (February 2, 2005). 2
2. TOTAL LOSS PROTECTION WRAP AGREEMENT
The second query asks whether the Total Loss Protection Wrap agreement complies with the Insurance Law. As discussed above, the making of an agreement that confers a benefit upon a customer upon the happening of a fortuitous event, such as the total loss of a vehicle, constitutes the making of an insurance contract pursuant to Insurance Law § 1101 and the doing of an insurance business pursuant to Insurance Law § 1102. However, the Department has previously concluded that a credit or discount may be offered by a dealer 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 amount the customer pays plus 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 OGC Opinion No. 99-68 (June 10, 1999); OGC Opinion No. 99-22 (February 22, 1999).
Therefore, provided that the cost of the replacement vehicle less the credit or discount and the amount paid by the customer actually does in fact cover the dealer’s cost without eliminating dealer profit, the proposed Total Loss Protection Wrap agreement would not constitute insurance. The inclusion of an item in the agreement that sets forth that no guarantee will be provided if it eliminates any dealer profit is something the Insurance Department has insisted on in similar agreements. See OGC Opinion No. 08-03-13 (March 19, 2008). However, the agreement must clearly delineate that it is between the dealer and customer. As a result, references to “we” as XYZ, LLC in the agreement must be removed. 3 Further, the dealer must provide the replacement vehicle. Also, no reference should be made to the agreement as a policy so as to avoid confusion between this product and actual insurance.
For further information you may contact Associate Counsel Alexander Tisch at the New York City Office.
1 Although the inquirer does not specify what the inquirer means by a GAP provision, typically such an agreement covers the “gap amount,” which is defined in Insurance Law § 107(a)(52) to mean: “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.” A motor vehicle gap waiver may be offered by a lessor or creditor (the motor vehicle dealer) under certain conditions pursuant to Insurance Law § 1101(b)(3) subject to Personal Property Law §§ 302A and 335 (for retail installment contracts and leases respectively) to cover the gap amount owed by the customer after a total loss.
2 Because the lease or loan agreement requires that the consumer purchase a gap waiver or gap insurance to cover the gap amount, it appears that the only amount the customer would be obligated for, and that this insurance would cover, is the deductible.
3 XYZ, LLC, the administrator, may administer the program, but may not indemnify the dealer or pay the buyer the amount of the credit due the buyer subsequent to the loss, even if the cost of rendition is covered, because the administrator’s indemnification or payment would be doing an insurance business without a license. See OGC Opinion No. 99-164 (December 23, 1999); OGC Opinion No. 99-146 (November 22, 1999); OGC Opinion No. 99-78 (June 22, 1999).