The Office of General Counsel issued the following opinion on June 11, 2003, representing the position of the New York State Insurance Department.
Re: Insurance Law Article 79 Service Contracts & Warranties
Question Presented:
Is an "extended warranty" (a warranty that would be in addition to the standard manufacturers warranty that comes with the product and that is sold for an additional fee) considered to be a "service contract" under N.Y. Ins. Law Art. 79 (McKinney 2000); and does the answer change depending on who is the obligor on the contract?
Conclusion:
An "extended warranty" that is sold for an additional fee is not considered to be a service contract or subject to N.Y. Ins. Law Art. 79 (McKinney 2000), when made by the manufacturer or seller.
Facts:
There are no particular facts specified. General questions were asked of the Department regarding service contracts and "extended warranties".
Analysis:
Service contracts and warranties are similar in that both relate to the nature or efficiency of a product, but there are distinctions between them. In order to be a warranty, the maker of the contract must have a relationship to the product or service, or do some act that imparts knowledge of the product or service to the extent of minimizing, if not eliminating, the element of chance or risk contemplated by N.Y. Ins. Law § 1101(a) (McKinney 2000). Where there is no relationship or act, the maker of the contract undertakes an obligation involving a fortuitous risk, and the agreement is an insurance contract and constitutes the doing of an insurance business; except that N.Y. Ins. Law § 1101(b)(3-a) (McKinney 2000) provides that the marketing, sale, offer for sale, issuance, making, proposing to make or administration of a service contract pursuant to article seventy-nine of this chapter or warranty, service contract or maintenance agreement conditioned upon or otherwise associated with the sale or supply of heating fuel shall not constitute doing an insurance business in this state.
Prior to the enactment of Article 79 of the Insurance Law in 1997, the Department concluded that the making of warranties by a manufacturer, seller, or other person in the chain of sale did not constitute the doing of an insurance business, regardless of whether a fee was charged for the warranty. After the enactment of Article 79, the Department opined that where the maker charges a fee for a warranty, as is the case with an "extended warranty", such an agreement is a service contract and the maker must be registered as a service contract provider. Upon reconsideration (see July 13, 2001 Office of General Counsel opinion), the Department concluded that the mere charging of a fee does not convert a warranty into a service contract. If the contract is a warranty, and the warrantor does not make warranties as a vocation but as merely incidental to any other legitimate business or activity of the warrantor, then, even though a fee is charged, the contract remains a warranty and is not a service contract. However, where the contract is not a warranty, because the maker has not exercised the requisite control over the property, or if the maker would be doing an insurance business in making the warranties (as would be the case with a person that is not in the chain of sale), then the maker of the agreement would have to register as a service contract provider.
The Office of General Counsel opinion of July 13, 2001 remains valid and represents the opinion of the Insurance Department on the issues discussed therein.
For further information one may contact Associate Attorney Sam Wachtel at the New York City Office.