The Office of General Counsel issued the following opinion on May 24, 2004, representing the position of the New York State Insurance Department.
Re: Service Contracts or Warranties and Risk Retention Groups
Where a policy issued by a risk retention group insures the performance of all the obligations under a service contract or warranty made in New York, must the service contract or warranty include a statement in its policy that the risk retention group is not licensed in the State of New York, not subject to its supervision, and not protected, in the event of insolvency of the risk retention group, by state insurance insolvency guaranty funds?
See discussion below.
The inquirer asked "[s]hould a Vehicle Service Contract issued by a Risk Retention Group carry the words "This Insurance Policy is written by an insurer(s) not licensed in the state of New York, not subject to its [sic] supervision and not protected, in the event of the insolvency of the insurer, by the State of New York security fund. The policy may not be subject to all of the regulations of the Insurance Department pertaining to policy forms."
It is not clear whether, by the term "Vehicle Service Contract", the inquirer is limiting his inquiry to service contracts issued by a registered service contract provider in accordance with N.Y. Ins. Law Article 79 or also inquiring about warranties. Moreover, in asking about "vehicle service contracts" issued by a risk retention group (RRG), the inquirer seem to confuse the RRG and the maker of the "vehicle service contract." A RRG may write liability insurance only and does not issue service contracts or warranties. Pursuant to § 3902(a)(1)(I) of the federal Liability Risk Retention Act (15 U.S.C. 3901 et seq.) and N.Y. Ins. Law § 5905(a)(1) (McKinney 2000), every policy issued by a RRG must contain the following notice:
This policy is issued by your risk retention group. Your risk retention group may not be subject to all of the insurance laws and regulations of your state. State insurance insolvency guaranty funds are not available for your risk retention group.
However, we assume that the inquirer is asking whether a service contract made by a registered service contract provider or warranty made by a warrantor needs to contain such a disclaimer statement about the RRG should the RRG insure the performance under the service contract or warranty.
A policy that insures the performance of a service contract provider's or warrantor's obligation under a service contract or warranty may not be written as liability insurance in New York. It is the Department's position that a "contractual liability" insurance policy that insures voluntarily assumed contractual obligations, and not a legal liability imposed by law, may not be written as liability insurance in New York. In New York, such insurance must be written, in the case of a service contract, as service contract reimbursement insurance, pursuant to N.Y. Ins. Law § 1113(a)(28) (McKinney 2000 & Supp. 2004); or, in the case of a warranty, as substantially similar to service contract reimbursement insurance, pursuant to N.Y. Ins. Law § 1113(a)(28) and (30) (McKinney 2000 & Supp. 2004) or, for motor vehicle or aircraft warranties, as substantially similar to motor vehicle and aircraft physical damage insurance, pursuant to N.Y. Ins. Law § 1113(a)(19) and (30) (McKinney 2000 & Supp. 2004).
While service contracts and warranties provide similar protection, and the terms are often used interchangeably, they are treated differently under New York law. As more fully discussed in other opinions of this Department (see, for example, opinion dated May 7, 2004), both service contracts and warranties provide coverage for defects in materials or workmanship. Generally speaking, pursuant to N.Y. Ins. Law § 1101(b)(1)(B) (McKinney 2000 & Supp. 2004), a warranty, if made by the manufacturer, seller, distributor, or other person in the chain of sale, does not constitute the doing of an insurance business and is not regulated in any manner by this Department. Accordingly, the Insurance Law does not require that a warrantor include a statement regarding the insurer insuring the warrantor's performance under the warranty.
Service contracts are not insurance if made by a service contract provider that has registered with the Superintendent pursuant to N.Y. Ins. Law § 7903(c) (McKinney 2000). As a requirement of registration, a service contract provider must assure the faithful performance of the provider's obligations to its contract holders by complying with one of the three methods for demonstrating its financial responsibility as provided in N.Y. Ins. Law § 7903(c) (McKinney 2000 & Supp. 2004). Section 7903(c)(1) contains the insurance policy method for demonstrating financial responsibility. It provides, in pertinent part, as follows:
(c) In order to assure the faithful performance of a provider's obligations to its contract holders, each provider who is contractually obligated to provide service under a service contract shall comply with one of the following three paragraphs of this subsection:
(1) insure the performance of all its obligations under all service contracts pursuant to a service contract reimbursement insurance policy issued by an insurer authorized to issue service contract reimbursement insurance in this state or procured by an excess line licensee pursuant to section two thousand one hundred eighteen of this chapter
As more fully discussed in other opinions of this Department (see, for example, opinions dated May 17, 2002 and June 12, 2003), a service contract provider may not use a policy of insurance from a RRG not domiciled in New York to satisfy the financial responsibility requirement of § 7903.
A service contract provider that utilizes one of the other methods of proving its financial responsibility must include a statement substantially to the effect that "Obligations of the provider under this service contract are backed by the full faith and credit of the provider." N.Y. Ins. Law § 7905(c) (McKinney 2000).
New York law does not prohibit a service contract provider from securing separate insurance coverage for itself in another state. Whether a RRG domiciled in another state may issue the policy in the other state is a question for the appropriate regulatory body in that jurisdiction. The service contract may include a statement that the service contract provider has secured protection for itself under a separate insurance policy, even though the insurer may not be an authorized insurer in New York. However, no representation may be made that the policy provides coverage to the purchaser of the service contract, either directly or by cut-through, in the event the service contract provider fails to fulfill its obligations under the service contract.
The prior opinions referred to in this opinion may be found on the Department's website.
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.