OGC Op. No. 04-02-22
The Office of General Counsel issued the following opinion on February 20, 2004, representing the position of the New York State Insurance Department.
Re: Automobile Tire and Wheel Road Hazard and Other Aftermarket Programs
1. Does the sale of the "Warranty Compliance" program constitute the doing of an insurance business in New York?
2. Does the sale of the "Theft-Deterrent" program constitute the doing of an insurance business in New York?
3. Does the sale of the "Protective Coatings" program constitute the doing of an insurance business in New York?
4. Does the sale of the "Tire and Wheel Road Hazard" program constitute the doing of an insurance business in New York?
1. The sale of the "Warranty Compliance" program would not constitute the doing of an insurance business in New York.
2. The sale of the "Theft-Deterrent" program would constitute the doing of an insurance business in New York.
3. While certain aspects of the "Protective Coatings" program would be permissible in New York as a warranty, other obligations under the program would constitute the doing of an insurance business in New York.
4. The sale of the "Tire and Wheel Road Hazard" program would constitute the doing of an insurance business in New York.
The inquirer states that ABC Auto Care ("ABC Auto") is a "creator, marketer and administrator of aftermarket programs and products for auto dealerships to sell to consumers at the time of vehicle sale." The inquirer notes that each of the programs are backed by insurance and are sold to auto dealers through independent general agents across the country. The independent general agents may be, but are not necessarily, also licensed as insurance agents or brokers.
The inquirer submitted four programs that he wishes to market in New York and requests the Departments opinion as to whether any of them involve insurance licensing or other compliance requirements. All of the programs are available to either the registered owner or the lessee, hereinafter collectively referred to as the "customer". Although the contracts are sold by the dealers, all of the contracts are between ABC Auto and the customer directly, and not the dealer, except, as discussed below, the Protective Coating program. There is a separate dealer agreement between ABC Auto and the dealer that covers all of the programs. While there are specific provisions in regard to each of the programs, there is a general provision under which ABC Auto agrees to investigate or arrange for payment of any claim or reimbursement that is properly submitted.
In an e-mail, the inquirer confirmed that the following summary of the four programs accurately describes the programs:
"Warranty Compliance" Program
In the brochures that the inquirer supplied, the program appears to be called the "Protection Auto Care" package; however, the inquirer confirms that the name of the program is in fact "Warranty Compliance." The inquirer describes it as a "customer retention, pre-paid oil change program." Under the program, the automobile dealer will perform scheduled maintenance on an automobile at predetermined mileages during the specified period. For example, under the 12 month/12,000 mile program, with a 5,000 mile interval, the customer would be entitled to maintenance every 5,000 miles, but not past the 12,000 mile or 2 month mark, presumably, whichever comes first. The maintenance consists of replacement of engine oil and oil filter, inspection and top-off of fluid levels, adjustment of tire pressure, and lubrication of the chassis. The customer is also entitled to a free automobile rental, in accordance with the limitations in the agreement. The inquirer states further:
Under Benefit Package 1 coverage, the customer receives the oil change service described, plus tire rotations on every other service and the first-day rental car benefit. Under VIP coverage (Value Increase Package), the customer receives the oil change service only. VIP is not "sold" to the customer and the dealer agrees not to mark up the dealer cost as part of the Dealer Agreement. VIP was designed to be packaged with the dealer's vehicle service contract offering to increase the perceived value of the service contract and to justify the cost of the service contract.
Under the dealer agreement, ABC Auto agrees to reimburse the dealer for oil change service and tire rotation claims that are properly and timely submitted by the dealer. DEF Insurance Company insures the program, under a policy of "contractual liability" insurance. The inquirer states that the policy obligates the insurer to indemnify ABC Auto for claims that the inquirer is obligated to pay as a result of a claim arising under the program. In other words, the inquirer states that, under the program, " a claim is simply a reimbursement to the auto dealer for the oil change service rendered to the customer." The inquirer states that no certificate of insurance is issued to either the dealers or the customers. However, claims are paid directly to the dealer.
The inquirer describes the Theft-Deterrent program as being a "theft-deterrent program where 6 body panels of the vehicle are permanently marked with a traceable registration number." If the vehicle is stolen and not recovered within 30 days, or recovered and declared a total loss as a result of the theft, the customer is entitled to, depending upon the program level, either $1,000 or $2,000 paid directly to the customer; and either $1,500 or $3,000 replacement vehicle benefit from the original selling dealer, which would be applied to the purchase of a replacement vehicle from the same dealer. In addition, if the vehicle is stolen and recovered within 30 days, the customer will receive reimbursement for any deductible under the customers primary automobile comprehensive insurance policy in settlement of any loss as a direct result of the theft, up to a maximum of $1,000.
Although the agreement does not specifically state, ABC Auto presumably agrees to reimburse the dealer under the replacement vehicle benefit. ABC Auto has obtained a "contractual liability" insurance policy from MFIN Insurance Company ("MFIN"), under which the insurer agrees to indemnify ABC Auto for claims that ABC Auto is obligated to pay as a result of any claim arising under the program. Although the inquirer states that no policy or certificate is issued by the MFIN to either the dealer or the customer, the packet of materials that the inquirer sent includes a "Certification of Insurance", which presumably is intended to be provided to the dealers as evidence that insurance for ABC Auto exists. In addition, MFIN actually issues the checks that are issued to the customer and the dealer. The policy is reinsured by a Reinsurance Group, which has a New York address.
"Protective Coatings" program
The inquirer states that the coatings program involves "exterior and interior protective coatings to preserve the finish and fabric of the vehicle." There are a number of coverages involved in this program:
Automotive Fabric Protector: The contract provides, if ABC Autos fabric protector has been applied, "if the fabric has been properly treated and becomes stained from any food or drink normally consumable by humans, the blood or urine of humans or from mold or mildew stains, and the stains cannot be removed by our recommended methods, we may arrange for a professional cleaner to service the stained area(s) at no cost to the vehicle owner. If this service fails to remove the covered stain, we may have the stained area replaced free of charge."
Automotive Leather Care System: The contract provides, if ABC Autos leather conditioner has been applied, "if the leather has been properly treated and becomes stained from any food or beverage normally consumed by humans, the blood or urine of humans, or from ballpoint pen ink or lipstick, and the stains cannot be removed by our leather cleaning products and recommended methods, or becomes damaged from accidental rips, tears, burns, cuts, punctures, or from finish cracking or peeling, we may arrange for a professional leather technician to service the stained or damaged area(s) at no cost to the vehicle owner. Some stains may require more than one cleaning. If the authorized leather technician cannot remove the stain or repair the damaged area(s), we may replace the covered stained or damaged area(s) of the leather."
Automotive Vinyl and Tire Dressing: The contract provides, "if ABC Autos vinyl dressing has been applied, if the properly treated vinyl becomes stained from any food or beverage normally consumed by humans, the blood or urine of humans, or from ballpoint pen ink, lipstick marks or becomes damaged from accidental rips, tears, burns, cuts, punctures, or from cracking or peeling, we may arrange for a professional technician to service the stained or damaged area(s) of the vinyl interior at no cost to the vehicle owner. Some stains may require more than one cleaning. If the authorized technician cannot remove the stain or repair the damaged area(s), we may replace the covered stained or damaged area(s) of the vinyl."
Automotive Paint Protector: The contract provides, if ABC Autos paint protector is applied, that should the factory painted surface of the vehicle treated with the [protector] prematurely fade, oxidize, or otherwise reflect a deterioration in gloss as a result of sun exposure, acid rain, bird droppings, tree sap, water spotting, humidity, dirt, weather, detergents we may effect repair of the deteriorated portion of the painted surface of the vehicle at no cost to the vehicle owner."
In regard to all of the products, the contract does not provide coverage where the surfaces, materials, or areas have become damaged by "acts of God, fire, vandalism, collisions, defective manufacturers materials and/or areas of the vehicle that have been altered, modified, repaired, or changed in any way from manufacturers original condition, nor to any surface that has been improperly washed or maintained. Nor does the validated warranty apply to any damage resulting from any acts of owner abuse or neglect or any acts of any other person " There are other exclusions that apply to particular products, but they are not relevant for this discussion.
Although the contract is between the customer and ABC Auto, and appears to obligate ABC Auto to provide the benefits provided therein, in the inquirers e-mail of February 9, 2004, he states that the "warranty" is actually afforded by GHK Products, which manufacturers the various products for ABC Auto. The contract provides that if the customer submits a claim via the Internet, the claim would be filed at the manufacturers website.
"Tire and Wheel Road Hazard" program
The inquirer states that the road hazard program "provides coverage for repair or replacement of tires and wheels damaged by road hazards such as construction debris, nails, screws, potholes, etc., which are not covered by tire manufacturers limited warranties." The program provides for 100% of the charges incurred for the repair of flat tires caused by a road hazard, including mounting, balancing, new valve stem and all applicable state and local taxes. The program also provides for 100% of the charges for replacement of the tire with a tire of like kind and quality where the tire is damaged beyond repair or blown out.
The program contains a number or exclusions, including tire or wheel failure outside the United States; destruction or damage to a tire or wheel due to impact with a curb; replacement of tires due to normal wear, wear by misalignment or suspension problems; rim leaks, manufactures defects, vandalism, fire, upset collision, theft or misuse occasioned by driving on tire when flat, and a number of other exclusions that are not relevant to this inquiry.
The program is insured by MFIN Insurance Company, under a "contractual liability" policy, which the inquirer describes as similar to the policies under the Theft-Deterrent and Warranty Compliance programs; that is, the insurer agrees to indemnify ABC Auto for any claims arising under the program. A Certification of Insurance is issued, as in the Theft-Deterrent program. The insurers checks are not issued to ABC Auto but to the dealer or customer.
The issue in regard to each of the four programs is essentially the same, that is, whether the program involves the doing of an insurance business or constitutes either a warranty or service contract. Hence, before addressing each program separately, we begin with a general discussion of the issues involved.
N.Y. Ins. Law § 1101 (McKinney 2000 & Supp. 2004), provides, in pertinent part:
(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 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.
(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;
(B) 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;
N.Y. Ins. Law § 1102(a) (McKinney 2000 & Sup. 2004) prohibits any person, firm, association, corporation, or joint-stock corporation from doing an insurance business in New York unless authorized by a license in force pursuant to the Insurance Law, or exempted by the provisions of the Insurance Law from such requirement. Any person aiding an unauthorized insurer in doing an insurance business would be in violation of N.Y. Ins. Law § 2117(a) (McKinney 2000 & Supp. 2004).
While the Insurance Law does not define "warranty", in general, a warranty relates in some way to the nature or efficiency of a product or service. Commonly, the warrantor 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 the product. Ollendorf Watch Co., Inc. v. Pink, 279 N.Y. 32, 17 N.E.2d 675 (1938).
A "service contract" is defined, in pertinent part, in N.Y. Ins. Law § 7902(k) (McKinney 2000) to mean:
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
A service contract does not include a maintenance agreement, which is defined N.Y. Ins. Law § 7902(d) (McKinney 2000) to mean:
(d) "Maintenance agreement" means a contract of limited duration that provides for scheduled maintenance of property, other than contracts providing for the repair or replacement of such property due to a defect in materials or workmanship or wear and tear.
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). The making of a warranty constitutes the doing of an insurance business if done as a vocation and not as merely incidental to any other legitimate business or activity of the warrantor, guarantor or surety.
Where there is no relationship to the product, service, or act as described above, the maker of the contract undertakes an obligation involving a fortuitous risk, 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. Insurance Law Article 79 (McKinney 2000 & Supp. 2003). N.Y. Ins. Law § 1101(b)(3-a) (McKinney 2000) provides, in pertinent part, that the marketing, sale, offer for sale, issuance, making, proposing to make or administration of a service contract pursuant to Article 79 shall not constitute the doing of an insurance business in this state. 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. Insurance Law § 7907 (McKinney 2000).
"Warranty Compliance" Program
The warranty compliance program does not provide coverage dependent upon the happening of a fortuitous event. Rather, it provides for oil changes and other maintenance on a regularly scheduled basis that is predetermined. It is irrelevant that ABC Auto itself is not providing the maintenance but has instead contracted out the obligation to automobile dealers because there is no fortuitous event involved. Similarly, the agreement is neither a warranty nor a service contract, but rather falls squarely within the definition of a maintenance agreement, which is explicitly excluded from the definition of service contract. Accordingly, the making of the contract does not constitute the doing of an insurance business or service contract business, and the sale of such program would not be a violation of the Insurance Law.
ABC Autos anti-theft deterrent program constitutes insurance, within the meaning of the Insurance Law. The theft of the vehicle (and subsequent damage or non-recovery) is the triggering event under the agreement. The theft is, to a substantial extent, beyond the control of either the company or the consumer. By promising to provide a monetary benefit to the consumer directly upon the unrecovered theft or constructive total loss of the vehicle, or upon the damage of a recovered vehicle, ABC Auto would be providing to the consumer a benefit of pecuniary value upon the happening of a fortuitous event, and such agreement would constitute a contract of insurance. Accordingly, under the proposed program, ABC Auto would be acting as an insurer without a license and would be in violation of Section 1102.
In addition, by selling the program, the dealers would be aiding an unauthorized insurer in violation of N. Y. Ins. Law § 2117.
There are several ways the program may be modified to conform to New York law. N. Y. Ins. Law § 3446 (McKinney 2000) was enacted in 1999 to authorize companies such as the inquirers to obtain a policy of group insurance from an authorized insurer. Under the policy, coverage would be provided directly from the insurer to consumers that purchased a product such as the inquirers. See also N.Y. Comp. Codes R. & Regs. tit. 11, Part 310 (2000) (Regulation 167), which establishes minimum provisions for such product or system group insurance policies. The Regulation is available on the Insurance Departments website, http://www.ins.state.ny.us.
Alternatively, a motor vehicle dealer that itself provides a discount to a consumer on a replacement vehicle, dependent upon the total loss of a prior purchase would not be doing an insurance business within the meaning of N. Y. Ins. Law § 1101 (b) (McKinney 2000) so long as the discount price of the new vehicle (including any other discounts that the dealer may provide) covers the cost of the vehicle to the dealer, any labor or material cost borne by the dealer, and reasonable overhead expense, thus avoiding assumption of a risk of loss. In other words, a dealer may agree in the discount to reduce its profit margin on the new vehicle but may not agree to sell the vehicle at a break-even or lower point. However, ABC Auto may not compensate the dealer nor is there insurance available in New York that can reimburse the dealer for its waiver of the full purchase price. For a more extended discussion, see the August 29, 2001, Office of General Counsel opinion, which may be found on the Departments website as opinion 01-08-18.
"Protective Coatings" program
If the paint, leather, fabric, or vinyl trim protection, can in fact provide the protection indicated, then ABC Auto or GHK Products may agree, in the event the product fails to perform as promised under ordinary usage where the product has been properly applied, that it will take remedial steps to clean, or if necessary, replace, the stained leather, fabric or vinyl trim surface or the deteriorated paint. Such agreement would constitute a warranty and neither insurance nor a service contract because ABC Auto is the distributor of the products and GHK Products is the manufacturer of the products. Therefore, a warranty would be incidental to either companys vocation of selling or manufacturing the products. As noted above, the warranty itself appears to obligate ABC Auto notwithstanding the inquirers statement that the warranty is from GHK Products.
However, damage to the leather from accidental rips, tears, burns, cuts, or punctures would constitute fortuitous events and would constitute insurance and not a warranty. To the extent that the contract would provide coverage for those events, then the contract would likewise not be a warranty but insurance. Accordingly, the program would have to be modified before it may be offered in New York.
"Tire and Wheel Road Hazard" program
Based on the facts as presented, it is our view that the Road Hazard plan is insurance and is neither a warranty nor a service contract. The obligations under the Road Hazard plan are not based upon a defect in materials or workmanship; in fact, manufacturer defect is expressly excluded from coverage. Instead, the coverage is based upon the happening of fortuitous events that are outside the control of either ABC Auto or the consumer; namely, the coverage is conditioned upon damage resulting from a road hazard.
The Road Hazard contract covers loss from road hazards, but it does not define the term. Although the contract excludes "acts of God", which clearly are fortuitous, the contract does not exclude damage directly related to road conditions, such as glass, irregular surfacing, etc. Loss resulting from such road hazards is nonetheless just as fortuitous as loss resulting from an act of God".
Accordingly, under the proposed program, ABC Auto would be acting as an insurer without a license and would be in violation of Section 1102. In addition, by selling the program, the dealers would be aiding an unauthorized insurer in violation of N. Y. Ins. Law § 2117.
Although DEF Insurance Company is an authorized insurer in New York, MFIN is not. The inquirer stated that the insurance policies insure only ABC Auto and no certificates or other evidence of insurance is provided to either the customer or the dealer. However, since the inquirers company is located outside of New York state, we assume that the policies are principally negotiated, issued and delivered outside of New York. Accordingly, MFINs policies are not subject to New York law but DEF Insurance Company would have to comply with New York law, to the extent that its policy insures ABC Autos risks or operations in New York. In New York an insurer properly licensed to write service contract reimbursement insurance may insure those contracts that are warranties. However, an insurer may not insure those contracts that are maintenance agreements. In this case, since DEF Insurance Company would be insuring maintenance agreements, it may not provide such coverage in regard to New York risks.
In summary, while certain of the programs may be offered by ABC Auto and New York dealers, the other programs would have to be modified in accordance with this opinion. Please note that this opinion is limited to an interpretation of the Insurance Law and no opinion is offered regarding any other law.
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.