The Office of General Counsel issued the following informal opinion on August 9, 2000, representing the position of the New York State Insurance Department.
RE: Warranties and Service Contracts
Questions Presented:
Does New York law make a distinction between insurance and warranties?
Does New York law make a distinction between warranties and service contracts?
If warranties are considered insurance, does New York law make an exemption for warranty programs underwritten by an insurer licensed to do business in your state?
Does New York law make a distinction between coverage that is imbedded into the cost of the product (comes with the product for no additional charge) and coverage that is sold separately (itemized bill with a separate charge for the coverage)?
If claims under a warranty are submitted to a third party administrator ("TPA") for review and payment, what requirements are applicable to the TPA?
Does New York law make a distinction between warranties that are sold by the manufacturer, seller and a third party corporation?
Conclusions:
Yes, the making of warranties sometimes may constitute the doing of an insurance business. N.Y. Ins. Law §1101(b)(1)(B) (McKinney 1985) provides that the making, or proposing to make, as warrantor, guarantor or surety, any contract of warranty, guaranty or suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the warrantor, guarantor or surety, constitutes doing an insurance business.
Yes, service contracts are governed by Article 79 of the New York Insurance Law (McKinney Supp. 2000) and are not insurance contracts. Warranties may or may not be insurance (see 1 above).
No, if warranties are considered insurance contracts (see 1 above), the requirements relating to that type of insurance contract are applicable, including the requirement that they may be issued only by an insurer licensed to do business in New York State.
Yes, where the contract is provided without separate or additional consideration beyond the price of the product, it may be a warranty. Where the coverage is sold for separate or additional consideration, it is a service contract and the obligor must be registered as a service contract provider.
New York State does not, per se, regulate the activities of TPAs. Where a TPA engages in activities that would require licensing (for example, acting as an insurer, agent, broker or adjuster), it must obtain the appropriate license from this Department.
If the coverage is sold for a separate or additional consideration, then the agreement constitutes a service contract (see response "4" above).
Facts:
An advisory opinion was requested which was not related to any specific facts. Particular circumstances could alter the responses set out above.
Analysis:
Prior to 1997, the New York Insurance Law did not regulate "service contracts". The Departments analysis was limited to distinguishing between non-insurance warranties and warranties that constituted insurance contracts.
N.Y. Ins. Law § 1101(a) (McKinney 1985) reads as follows:
(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.
(3) "Contract of warranty, guaranty or suretyship" means an insurance contract only if made by a warrantor, guarantor or surety who or which, as such, is doing an insurance business."
The statute further provides that the making, or proposing to make, as warrantor, guarantor or surety, any contract of warranty, guaranty or suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the warrantor, guarantor or surety, constitutes the doing of an insurance business in the state. The above provision applies whether such a transaction is effected within New York State or by mail from outside New York. N.Y. Ins. Law § 1101(b)(1) (McKinney 1985 and Supp. 2000).
Under the pre-1997 Law, a two step analysis was required. First, it was necessary to determine if the contract was a warranty. It was necessary to look to various factors, including the nature of an agreement, the scope of the obligations undertaken, the maker of the agreement and its "relationship" to the product, and the degree of "control" over the product. These factors were assessed to determine if a particular contract was an insurance contract, or if it was truly a warranty. Then, it was necessary to determine if the maker of the warranty, by issuing the contract, was doing an insurance business.
Chapter 614 of the Laws of 1997 added a new Article 79 to the New York Insurance Law, establishing rules relating to service contacts and providers of such contracts. While N.Y. Ins. Law § 1101(a)(3)(McKinney 1985)[see above], regarding warranties was not amended, a new subparagraph (3-a) was added to N.Y. Ins. Law § 1101(b)(McKinney Supp. 2000), excepting the making of service contracts from the doing of an insurance business in this State. A service contract is thus regulated as a non-insurance contract, and a provider thereof must register with this Department. N.Y. Ins. Law § 7902(k)(McKinney Supp. 2000) reads as follows:
"(k) "Service contract" means a contract or agreement, for a separate or additional consideration, for a specific duration to perform the repair, replacement or maintenance of property, or indemnification for repair, replacement or maintenance, due to a defect in materials or workmanship or wear and tear, with or without additional provision for indemnity payments for incidental damages, provided any such indemnity payment per incident shall not exceed the purchase price of the property serviced. Service contracts may include towing, rental and emergency road service, and may also provide for the repair, replacement or maintenance of property for damage resulting from power surges and accidental damage from handling. Service contracts may also include contracts to repair, replace or maintain residential appliances and systems."
The same statute defines "provider" to mean, "a person who markets, sells, offers for sale, issues, makes or proposes to make or administers a service contract, and who is contractually obligated to provide service under a service contract." N.Y. Ins. Law § 7902(h) (McKinney Supp. 2000).
N.Y. Ins. Law § 7901(b) (McKinney Supp. 2000) provides that Article 79 does not apply to either "express or implied warranties" or "maintenance agreements." Maintenance agreements are agreements whereby one party agrees to provide regularly scheduled maintenance of property for a limited duration. N.Y. Ins. Law § 7902(d) (McKinney Supp. 2000).
There are certain common characteristics of service contracts and warranties. Both types of contracts relate in some way to the nature or efficiency of a product. Commonly, the party agrees to repair or replace a product that fails to perform properly, such as a contract covering a defect in materials or workmanship, or a contract otherwise covering the breakdown of a product.
Where the maker of a contract has a relationship to the product, or does some act that imparts knowledge of the product to the extent of minimizing, if not eliminating, the element of chance or risk contemplated by § 1101(a), and there is no separate or additional consideration charged, then the contract is one of warranty. However, if there is separate or additional consideration charged for the contract, the Department considers it to be a service contract, not a warranty.
Taking into account the statutory sections cited above, the following general conclusions are relevant:
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A warranty may be made by the manufacturer, the retailer or some other entity in the stream of commerce relating to the sale of a product, so long as there is no separate or additional consideration charged for the warranty, and the warranty is made as merely incidental to another legitimate business activity. Otherwise, the warrantor would be doing an insurance business.
- If the entity making the contract is not a licensed insurer, and the contract is sold for a separate or additional consideration beyond the cost of the product warranted (even if the maker party is within the stream of commerce), then the contract is a service contract and the provider must be registered pursuant to Insurance Law Article 79.
Please note that there may be exceptions to the above relationship between insurance, a service contract and a warranty, and specific factual situations may compel a different result.
The Insurance Department does not regulate or license third party administrators. However, where the TPA engages in any activity involving either the doing of an insurance business, acting as an agent, broker or adjuster, or aiding an unauthorized insurer, such activities would come within the restrictions of the New York Insurance Law. The TPA would either be required to secure the appropriate license (insurer, agent, broker or adjuster) or might be subject to discipline for acting in violation of the Insurance Law (doing business without a license or aiding an unlicensed insurer).
With respect to administrators of "service contracts," N.Y. Ins. Law § 7902(b)
(McKinney Supp. 2000) states as follows:
"(b) "Administrator" means any person designated by a provider to be responsible for administration of service contracts, including servicing, claims management and processing, recordkeeping, customer service and collection of fees."
An outside organization that handles service contract marketing and claims for the service contract provider is an administrator under the foregoing statutory definition. An employee of a service contract provider whose job duties include responsibility for service contracts is also an administrator under the statutory definition.
However, a service contract administrator is not required to become registered under Article 79 of the Insurance Law unless it is contractually obligated to "provide service." In such a case, the administrator is also a provider and must register as a service contract provider with the Superintendent of Insurance. N.Y. Ins. Law § 7907 (McKinney Supp. 2000). An administrator who is not contractually obligated to provide service under a service contract need not be registered.
N.Y. Ins. Law § 7907(a)(4) (McKinney Supp. 2000) requires that a service contract provider application include identifying information about administrators designated by the provider, together with acknowledgement by each administrator (not employed by the provider) of each administrators obligations under Article 79 of the New York Insurance Law.
For further information you may contact Associate Attorney Sam Wachtel.