The Office of General Counsel issued the following opinion on May 4, 2004, representing the position of the New York State Insurance Department.
Re: Insurance on Maintenance Agreements
May an authorized surety insurer insure performance of a maintenance agreement?
An authorized surety insurer may guarantee performance under a maintenance agreement but an insurer may not indemnify the maker of such agreement for the costs of performing the maintenance agreement.
A clarification of OGC Opinion 2/20/04 was requested. It states, in part:
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.
It was inquired whether it was meant "that an authorized surety insurer can not insure performance of a maintenance agreement which would seem to be a lawful contract, though not a service contract, for purposes of Section 1113(a)(16)(E)?"
A maintenance agreement is defined in 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.
Fidelity and surety insurance is defined in N.Y. Ins. Law § 1113(a)(16) (McKinney 2000 & Supp. 2004), in relevant part, to mean:
(16) "Fidelity and surety insurance," means:
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(E) Becoming surety on, or guaranteeing the performance of, any lawful contract, not specifically provided for in this paragraph, except (i) mortgage guaranty insurance, which may only be written by an insurer authorized to write such insurance pursuant to article sixty-five of this chapter, (ii) a contract that falls within the definition of financial guaranty insurance as set forth in paragraph one of subsection (a) of section six thousand nine hundred one of this chapter, (iii) any insurance contract unless such guaranty is authorized pursuant to subsection (c) of section one thousand one hundred fourteen of this article; or (iv) service contract reimbursement insurance as specified in paragraph twenty-eight of this subsection;
A surety insurer may guarantee the performance of a lawfully made maintenance agreement. However, the distinction that was drawn in the February 20th letter was that while an insurer issuing a service contract reimbursement insurance policy may indemnify a service contract provider for losses sustained by reason of the performance of the provider's obligations under the service contract,1 an insurer may not indemnify the maker of a maintenance agreement for the costs of performing the maintenance agreement.
There are a number of reasons for this conclusion, not the least of which is that since the performance under the maintenance agreement is a regularly scheduled occurrence there is no fortuitous occurrence under the agreement to insure against. Although in some states insurers write "contractual liability" insurance under which the policy insures obligations assumed by contract, in New York, such a policy may not be written as liability insurance.
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.
1We have also opined that a service contract reimbursement insurer may indemnify a warrantor under losses sustained by reason of the performance of the warrantor's obligations under warranties. Such coverage has been deemed to be substantially similar to service contract reimbursement insurance or, in the case of motor vehicles or aircraft, may also be written as substantially similar to motor vehicle and aircraft physical damage insurance.