OGC Op. No. 04-04-24
The Office of General Counsel issued the following opinion on April 27, 2004, representing the position of the New York State Insurance Department.
Re: Proposed Customer Storage Protection Plan and Insurance
May an owner of a self-service storage facility, who is not an authorized insurer, include a "warranty" in an occupancy agreement by which the owner assumes liability for loss or damage to an occupants stored property as a result of events such as roof leakage, fire, water damage, explosion, theft or malicious mischief, in exchange for a fixed fee?
No, the owner may not include such a provision in an occupancy agreement because this would constitute doing an insurance business, for which licensing as an insurer is required. However, an owner of a self-service storage facility may offer a rider to an occupancy agreement to its occupants whereby the owner assumes the risk for its own liability (which has been previously discharged through the underlying rental agreement between the owner and its occupants) for a fixed monthly fee if such risk is: (1) of a kind, or type, for which the owner would otherwise be liable under the law, and (2) of a kind, or type, that the owner may legally limit under the law.
The inquirer represents a self-storage business that has received a proposal from a California insurance agency, for a program that is presented as an alternative leasing arrangement. Under the proposal, the inquirers client would offer an optional "warranty" to its tenants. This "warranty" would pay the tenant for the loss or destruction of the tenants personal property while stored in the self-storage unit rented by the tenant. The insurance agency offers to administer the program and to sell the storage company an underlying "contract liability" insurance policy should the storage company, which is the obligor under the "warranty", want to limit its exposure. ABC Insurance Corporation would offer the policy. The insurance agency is licensed as an insurance agent in New York and ABC Insurance Corporation is an authorized insurer in New York. The inquirer included a copy of a letter to counsel for the insurance agency, dated August 29, 2003, from the California Department of Insurance indicating that the proposed alternative lease provisions for a landlord to assume various risks associated with the leased property in exchange for a higher rent to be paid did not constitute insurance under California law, citing Truta v. Avis Rent A Car System, Inc., 193 Cal. App. 3d 802, 238 Cal. Rptr. 806 (Ct. of Ap. 1st App. Dist., 1987).
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.
If the owner promises the occupant that, in exchange for a fee, it will assume the risk of loss or damage to the occupants property dependent upon a fortuitous event, such activity would constitute doing an insurance business.
The Truta case, similar to a New York lower court decision, Hertz Corp. v. Corcoran, 137 Misc. 2d 403, 520 N.Y.S.2d 700 (1987), held that the collision damage waiver sold by the lessor of a motor vehicle was not insurance. However, both of those cases are distinguishable from the proposed program. Truta involved an automobile rental companys collision damage waiver, which released the lessee from responsibility for any damage that may occur to the rental companys vehicle while in the custody and care of the lessee. As the inquirer points out in the letter, the collision damage waiver differs from the proposed program in that, in the event of a loss, no money was paid to anyone under the collision damage waiver. However, under this proposal, the storage company would indemnify the purchaser for the loss or damage to the purchasers property.1
Nor do we believe the proposed agreement is truly a "warranty". 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. Generally, 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).
An owner of a self-service storage facility, who would be leasing the facility to an occupant, would be a warrantor if it agreed to repair, replace or maintain a product (the storage unit) that fails to perform due to a defect in materials or workmanship or wear and tear. The owner would not be doing an insurance business, if it would be engaged in making warranties as incidental to its business, rather than as a vocation.
However, where the owner warrants against fortuitous events that are beyond its control, it would be doing an insurance business and would have to become licensed as an insurer. Under the proposal, the owners obligation would not be based on defects in the product or service that is being provided, but would be dependent upon the happening of various fortuitous events that would be beyond the control of the owner. Thus, the contract would not constitute a warranty.
An owner of a self-service storage facility may, however, offer a protection plan (in the form of a rider to an occupancy agreement) to its occupants whereby the owner assumes the risk for its own liability (which has been previously discharged through an underlying rental agreement between the owner and its occupants) for a fixed monthly fee if such risk is: (1) of a kind, or type, for which the owner would otherwise be liable under the law, and (2) of a kind, or type, that the owner may legally limit under the law.
Such a protection plan may not insure its occupants against loss arising from fortuitous events; and the company may not assume, through the protection plan, any risk beyond that which the law imposes upon it (i.e. negligence, strict liability, etc.). The assumption of liability without such limitations constitutes the doing of an insurance business and requires a license as an insurer. Additionally, any advertisement materials used to promote the plan must make it clear that the plan is not insurance and does not offer the same protections as insurance.
The ABC insurance policy was filed in September 2003 with the Insurance Departments Property Bureau for informational purposes only as an inland marine policy. The Bureau will contact the agent and ABC to revise the policy as necessary to ensure compliance with this opinion.
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.
1 Please note that the Department takes the position that certain waivers dependent upon the happening of fortuitous events do constitute insurance under New York law unless specifically exempted. See, for example opinions dated April 2, 2002 and June 27, 2002, which may be found on the Departments website at http://www.ins.state.ny.us/ropi2002.htm.