The Office of General Counsel issued the following opinion on July 13, 2004 representing the position of the New York State Insurance Department.
Re: Service Contract Provider Registration for Automobile Dealers
Must automobile dealers that sell vehicle service contracts for automobiles that they sell register with the Superintendent of Insurance as service contract providers?
The vehicle service contracts sold by the automobile dealers, under the facts specified below, constitute warranties and, therefore, the automobile dealers do not have to register with the Superintendent as service contract providers.
Certain automobile dealers that are currently registered with the Superintendent as service contract providers would like to know if they must continue to register in order to sell certain vehicle service contracts on vehicles that they sell to their customers. The automobile dealers are the obligors under these vehicle service contracts. However, should the automobile dealer fail to perform its obligation under the vehicle service contract, XYZ Insurance Company insures the automobile dealer's obligation to perform repairs by accepting claims for repair.
If the vehicle is within 40 miles of the selling dealer, the vehicle must be delivered to the selling dealer for repair. If the vehicle is more than 40 miles from the selling dealer, the customer must call the administrator, ABC Service Corporation, for instructions.
Based upon statements made to the Department, the administrator will instruct the customer to proceed to the nearest authorized repair facility. The administrator will then put the cost of repair on its VISA account. However, the selling dealer is obligated to pay the cost of covered repairs by reimbursing the administrator. ABC Service Corporation receives $80 per vehicle service contract from the selling dealer to provide this administrative service to the selling dealer. Under the vehicle service contract, the selling dealer is the sole obligor.
While the inquirer has provided copies of certain contracts between vehicle owners and obligor dealers, the Department was not provided with any agreements or contracts between dealers and the administrator. Therefore, the comments and legal opinions contained in this opinion letter are restricted to the limited role of the administrator as represented by the inquirer, namely that the administrator assumes no risk on claims made under the vehicle service contracts. Further, if the administrator is involved in the obtaining of the insurance or the adjusting of claims, then it is assumed, for the purpose of this opinion letter, that it is licensed accordingly as an agent, broker or public adjuster.
The contract states in material part:
Upon payment of the deductible amount per repair visit selected on the front of this extended service agreement and before the expiration of this extended service agreement, the Selling Dealer will make necessary repairs to components listed, included in the specific coverage selected, without additional charge to you. Replacement of any part may be made with new parts or with parts of like kind and quality at the time of breakdown, including re-manufactured or non-original manufacturers parts or used parts, at the option of the Selling Dealer. This service agreement covers failure to a covered component resulting from normal wear and tear.
* * * *
In the event of a breakdown of a covered component, you may be eligible for substitute transportation reimbursement. Such expense shall be limited to $30.00 per calendar day, a 5 day maximum, not to exceed $150.00 per occurrence. To qualify for reimbursement, the covered vehicle must be retained by the repairing facility overnight and the covered repair must exceed a minimum of four (4) hours labor, as defined in factory or accredited flat rate manuals. Reimbursement for substitute transportation shall not continue beyond the day on which repairs are completed and you are notified of completion. Valid rental agencies or automobile dealerships receipts will be required for reimbursement. In the event towing is required because of a breakdown of a covered component, towing costs not payable by insurance will be covered for up to $50.00.
The contract excludes coverage for a number of items, including, in pertinent part:
Any items not listed under the "What Is Covered" section of the specific plan you selected on the front of this agreement. Incidental or consequential damages or loss caused by breakdown of components (or otherwise) including property damage, personal injury, inconvenience, loss of vehicle use, damage to a covered part by a non-covered part and damage to a non-covered part by a covered part.
* * * *
Repairs required because of collision, abuse, or operation without proper lubrication or coolant, road conditions, misuse, negligence, racing, accidents, fires, floods, riots, acts of God, vandalism, upset, theft, lack of reasonable and proper maintenance, abuse through towing or improper load capacity, vehicles used for snowplowing, abuse through continued operation of an impaired vehicle, or any other losses normally covered by casualty insurance.
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
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 . . .
As can be seen from the above definition, service contracts and warranties are similar in that both relate to the nature or efficiency of a product, but there are distinctions between them. Whether there is a separate fee or not, has no bearing upon whether a particular agreement is a warranty or a service contract under the Insurance Law.
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). However, generally speaking, a contract that relates to the nature or efficiency of a product is a warranty if made by the manufacturer, seller, or other person in the chain of sale of that product and would not constitute the doing of an insurance business, regardless of whether a fee is charged for the contract. 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 or 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. However, 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).
Under the vehicle service contracts presented in this inquiry, coverage will be limited to repair or replacement of defective products and limited reimbursement for substitute transportation and towing, in the event of a breakdown of a covered component; the automobile dealer is within the chain of sale; and the contracts will be made as incidental to its primary business. Accordingly, the Department is of the opinion that the proposed agreement would constitute a warranty within the meaning of the Insurance Law, and that the automobile dealer would not be doing an insurance business and does not need to register as a service contract provider.
Please note that this opinion letter is based upon the vehicle service contracts provided and the verbal representations pertaining to the limited role of ABC Service Corporation. Any change in the facts could also change the analysis and conclusion of this opinion.
For further information you may contact Athan M. Shinas Special Counsel at the Albany Office.