The Office of General Counsel issued the following informal opinion on February 10, 2000.
Service Contract Providers and Risk Retention Groups
Questions Presented:
(1) Can a risk retention group underwrite the obligations of a service contract provider?
(2) Can a service contract provider like Alpha seek to "reinsure" 100% of the service contract risk?
(3) Are the persons marketing service contracts that are backed up by insurance policies required to have an insurance license?
Conclusions:
(1) No. An insurance policy issued by a RRG not domiciled in New York to a New York service contract provider does not meet the financial responsibility requirements of New York Insurance Law Article 79 (McKinney Supp. 1999-2000) in that the RRG is not an authorized insurer.
(2) Yes. Under N.Y. Insurance Law Section 7903(c)(1) (McKinney Supp. 1999-2000), a registered service contract provider, to assure faithful performance of all its service contract obligations, may obtain insurance under a service contract reimbursement insurance policy issued by an insurer authorized to issue such coverage in New York State to pay the provider for service contract claims it pays or to pay consumers with such claims on the provider's behalf.
(3) No. Under Article 79 of the Insurance Law, service contracts are not insurance. Therefore, a person who markets service contracts does not have to be licensed as either an insurance agent or broker. However, anyone who is obligated to perform under the service contracts must be registered with the Department as a service contract provider. As stated in N.Y. Insurance Law §7907(f) (McKinney Supp.1999-2000): "Except for the registration requirements in this section, providers and administrators of service contracts are exempt from any licensing requirements."
Facts:
The Department received an inquiry regarding Alpha Corp. ("Alpha"), a company issuing service contracts, and Bravo Corp. ("Bravo") a company that claims to be, and operates in other states as, a risk retention group ("RRG") under the federal Liability Risk Retention Act ("LRRA") (15 USC §3901, et seq.). It is not registered as a RRG in New York.
Analysis:
The relevant law regarding service contracts is contained in N.Y. Insurance Law Article 79 (McKinney Supp. 1999-2000) and N.Y. Comp. R. & Regs. tit. 11, §390 (Dept. Reg. 155). The law and regulations govern service contracts sold in New York State, and the Department investigates service contract complaints.
Alpha and Bravo contend that Bravo, a RRG, issues contractual liability insurance which provides coverage to insureds assuming the liability of others by contract or agreement, holding harmless a person whose liability the insured voluntarily assumes. They further contend that a RRG can write such coverage under the LRRA.
The policy underwritten by Bravo does not satisfy the financial responsibility requirement contained in N.Y. Insurance Law §7903 (McKinney Supp. 1999-2000). One method to satisfy the service contract provider financial responsibility requirement is to have an authorized insurer issue a service contract reimbursement insurance policy. As defined by N.Y. Insurance Law §107(a)(10) (McKinney 1985), Bravo, a RRG not domiciled in New York, is not an authorized insurer. In addition, none of the alternatives proving financial responsibility are satisfied.
The service contract you sent to this Department cannot be lawfully issued in New York, and the parties issuing same, Alpha and its dealers, may not engage in these activities.
For further information regarding this opinion you may contact Associate Attorney Jeffrey A. Stonehill of the Departments New York office.