The Office of General Counsel issued the following opinion on July 29, 2003, representing the position of the New York State Insurance Department.
Re: Vehicle Service Contract
Question Presented:
May the XYZ contract ("the Contract"), which is marketed by ABC Dealer Services, Inc. ("ABC"), be sold by automobile dealers in New York State?
Conclusion:
The Contract may not be offered for sale in New York State either by an automobile dealer or any other person because ABC is not registered in this State as a service contract provider.
Facts:
The Department was sent a copy of several pages of a blank XYZ contract, which refers to itself as a vehicle service contract, that some of the automobile dealer members in an Association have been approached to sell to their customers in New York. In New York State, the obligor under the Contract is identified as ABC, which is located outside New York. ABC is also referred to elsewhere in the contract as the Administrator.
The Contract provides coverage for the cost of repairs for specified breakdowns of new or used motor vehicles. Additional coverage options may be purchased at the time of the sale of the Contract for roadside assistance and road hazards. According to the terms of the Contract the dealer who is identified therein may receive compensation from ABC for services it provides in connection with the sale of the Contract.
The optional coverages that are available at extra charge are, as follows:
Roadside Assistance Coverage
The optional roadside assistance coverage provides 24-hour assistance protection should the vehicle break down for a reason other than an accident. The costs covered include towing, jump starts, flat tire changes, fluid delivery, courtesy help and emergency phone call support, to a maximum benefit of $100 per incident.
Road Hazard Coverage
The optional road hazard coverage covers the tires and wheels of the vehicle for the usable tread life of the tire against damage due to a valid road hazard (such as damage due to running over nails, glass and potholes) that renders the tire unserviceable. The repair of the tire, including mounting, balancing and taxes for these services is covered. Also covered is tire replacement, up to the original tire sale price, if a tire becomes unserviceable because of a road hazard during its useable tread life. There is no coverage for tires whose trend is worn down to 2/32 of an inch or more.
Rental Car Coverage
The optional rental car coverage is for the cost of renting substitute transportation due to repairs to the covered vehicle after expiration of the manufacturers warranty and which are not excluded under the contract. The limit of this coverage is $30 per day for up to two days with an additional two days if needed because the delivery of parts has been delayed.
ABCs performance under the Contract is insured by a policy from the PQR Insurance Company and if a covered claim under the Contract is not paid within thirty days after proof of loss, the contract holder may file a claim directly with PQR.
ABC Dealer Services, Inc. is not registered in New York State as a service contract provider. It is also not licensed as an insurer under the New York Insurance Law.
Analysis:
Subsection (b)(1)(A) of Section 1101 of the N.Y Ins. Law addresses what constitutes the doing of an insurance business in New York, as follows:
(b)(1) Except as provided in paragraph two, three or three-a of this subsection, any of the following acts in this state, effected by mail from outside this state or otherwise, by any person, firm, association, corporation or joint-stock company shall constitute doing an insurance business in this state and shall constitute doing business in the state within the meaning of section three hundred two of the civil practice law and rules.
(A) making, or proposing to make, as insurer, any insurance contract, including either issuance or delivery of a policy or contract of insurance to a resident of this state or to any firm, association, or corporation authorized to do business herein, or solicitation of applications for any such policies or contracts
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An "insurance contract" is defined in N.Y. Ins. Law § 1101 (McKinney 2000) as follows:
(a)(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, 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.
Pursuant to N.Y. Ins. Law § 1101(b)(1)(B) and (b)(3-a) (McKinney Supp. 2003) neither the sale and marketing of a contract of warranty that is merely incidental to the warrantors legitimate business or activity, nor the sale and marketing of a service contract pursuant to Article 79 constitutes doing an insurance business in New York State.
Pursuant to N.Y. Ins. Law § 1102(a) (McKinney 2000) no person, firm, association, corporation or joint-stock company may do an insurance business in New York unless it is authorized to conduct such a business under a license issued under the N.Y. Insurance Law, unless it is exempted by a provision of the Insurance Law from the licensing requirement.
ABC is the obligor under the Contract. Insofar as ABC has no relationship to the vehicle covered by the Contract its undertaking of the obligation to pay for repairs for breakdowns to the vehicle is a fortuitous risk under the New York Law and the Contract is an insurance contract and constitutes the doing of an insurance business, unless the contract is a service contract issued in accordance with N.Y. Ins. Law Article 79 (McKinney 2000 & Supp. 2003) or, under N.Y. Ins. Law § 1101(b)(3-a) (McKinney 2000) it is a contract of warranty. As to ABC, the Contract is not a contract of warranty because its issuance is ABCs vocation and it is not merely incidental to ABCs legitimate business or activity.
Neither is the Contract a service contract even though the Contract, by its own terms, states that it is a service contract. Under the New York Service Contract Law that is contained in N.Y. Ins. Law Article 79, a "service contract" is defined, in pertinent part, in § 7902(k)(McKinney 2000) 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 due to a defect in materials or workmanship or wear or 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
No person or other entity who is obligated to provide service under a service contract may issue, sell or offer for sale a service contract in New York unless it first registers with the Superintendent of Insurance as a service contract provider, pursuant to N.Y. Ins. Law § 7907 (McKinney 2000). Since ABC is not registered as a service contract provider in New York it can not sell the Contract in New York State and neither may it engage another person not registered as a service contract provider in New York State to sell the Contract.
Any automobile dealer who assists ABC in selling the Contract in New York State would thereby be enabling ABC, an entity who is neither registered to do a service contract business in New York nor licensed to do an insurance business in New York, to do such business in New York in violation of N.Y. Ins. Law § 1102 (McKinney 2000). Such an automobile dealer would thereby be acting either as an agent for or otherwise aiding ABC, an unlicensed and unauthorized insurer, to do an insurance business in this State in violation of N.Y. Ins. Law § 2117(a) (McKinney Supp. 2003).
Even if ABC was to become registered in New York State as a service contract provider, or if automobile dealers were to become the obligors under warranties they would sell in New York, certain portions of the optional coverages could not be offered in New York as they would constitute the doing of an insurance business.
The optional Road Hazard Coverage could not be offered in New York as part of a service contract because the coverage afforded thereunder does not constitute an obligation to provide indemnity payments for incidental damages associated with the sale of a service contract. The obligations thereunder are not based upon a defect in materials or workmanship, but the coverage is instead based upon damage from a road hazard which, by definition, involves the happening of fortuitous events that are outside the control of either ABC or the service contract holder (the consumer). Thus, it provides an insurance coverage which ABC cannot provide as it is not licensed as an insurance company to do an insurance business in this State. No person may write such coverage without having a license to do an insurance business.
On the other hand, the optional Roadside Assistance Coverage could be offered in New York if ABC becomes registered in New York as a service contract provider because such coverage is for indemnity payments for incidental damages associated with the service contract and is not dependent upon the happening of a fortuitous event. See, the definition of "Service Contract" in N.Y. Ins. Law § 7902(k) (McKinney 2000). However, if the automobile dealer was to become the obligor under the contract as a warranty in New York, as to the optional Roadside Assistance Coverage, the Department refers to Circular Letter No. 2 (1979) and the attached December 13, 2002 opinion, regarding benefits that may be provided by road clubs, as to its discussion of the benefits that could be provided.
As to the optional Rental Car Coverage, if ABC was to become registered in New York State as a service contract provider it could, pursuant to N.Y. Ins. Law § 7902(k) offer rental car coverage as to repairs due to a defect in materials or workmanship or wear and tear (and not the happening of fortuitous events such as an accident), as incidental damages to those covered under the service contract.
For further information you may contact Associate Attorney Barbara A. Kluger at the New York City Office.