The Office of General Counsel issued the following opinion on August 23, 2004, representing the position of the New York State Insurance Department.
Re: ABC Products, Inc. - XYZ Warranty and ABC Roadside Programs
1. May the "XYZ Warranty" program be marketed by ABC Products, Inc. and distributed by automobile dealers in New York State?
2. May the ABC roadside assistance program be marketed by ABC Products, Inc. and distributed by automobile dealers in New York State?
1. The "XYZ Warranty" program constitutes the doing of an insurance business by ABC Products, Inc., the obligor thereunder, who is not an authorized insurer in this State. Therefore, by marketing the program in New York State, ABC Products, Inc. would be acting in violation of N.Y. Ins. Law § 1102 (McKinney Supp. 2004). An automobile dealer distributing the program materials in New York would be assisting an unauthorized insurer, ABC Products, Inc., to do an insurance business in the State in violation of N.Y. Ins. Law § 2117(a) (McKinney Supp. 2004). However, if ABC becomes a registered service contract provider under Article 79 of the Insurance Law it could issue service contracts providing similar coverage to that of the XYZ "warranties," covering repairs, replacement or maintenance of automobile systems due to defects in materials or workmanship or wear or tear.
2. The Department has not objected to motor clubs providing certain emergency road services in New York. The proposed program, however, is not limited to those services.
An Associations automobile dealer member has been approached by ABC Products, Inc. ("ABC") to distribute the "XYZ Warranty" and ABC roadside assistance programs to the dealers customers in New York State. This Office has reviewed the various brochures and other materials describing these programs that the member has been approached to distribute to customers on behalf of ABC, the obligor under both programs. In addition, this Office has visited ABCs web site for further information as to ABC and its programs.
ABC has devised the "ABC Protection Plan" ("the Plan") by which it does business throughout North America. A major component of the Plan is ABCs development of several, "essential maintenance services," that it claims, " effectively remove harmful deposits, which accumulate on the inner surfaces and in the fluid systems of your car. These deposits have been proven to dramatically reduce the proper function of the lubricants and fuel in your vehicle, thus robbing you of power, performance and miles." The central feature of the Plan is what ABC calls "XYZ Warranty Program."
ABC also manufactures and distributes a line of lubricants, greases, chemicals and service equipment in the United States as well as in foreign countries. Its products are distributed through a network of independent distributors. According to the ABC web site there is no independent distributor in New York. The products are used in the course of the "essential maintenance services". The services are performed by participating automobile dealers and independent repair shops upon the following automobile systems: fuel/air induction, EGR, deposit control, engine flush, diesel injection, cooling system, transmission, drive line, power steering, brake flush, stop squeal brake, air conditioning and battery. ABC says that it stands behind these services.
A customer of an automobile dealer who uses ABC products will automatically, and without separate charge, be covered under the "XYZ Warranty" corresponding to the maintenance service performed on the vehicle and ABC roadside assistance programs. ABC has obligated itself to provide the benefits specified in each of these programs to the covered customers of the automobile dealer or independent repair shop. The participating automobile dealers and independent repair shops distribute the brochures describing the coverages afforded under the programs to their customers.
The programs are described in the informational brochures, the contract and on the web site, as follows:
There are several vehicle systems for which separate XYZ "Warranties" may be obtained. These are, as follows: cooling system, automatic transmission, power steering and engine. The underlying maintenance services and the warranties provided by ABC, other than engine oil service, are "good for" up to 24 months or 30,000 miles. The engine oil service is "good for" up to 4 months or 5,000 miles. Under these "limited warranties" ABC agrees to pay the deductible under the customers extended service contract, if any, and to pay for the repair or replacement of the covered system, up to different amounts for each of the services ranging from $1,500 - $3,000, should the vehicle break down because the ABC product applied during the maintenance service has failed to protect the lubricated components of the system. The warranty periods run for 7 years or 150,000 miles, but coverage is maintained only if the maintenance services are performed every 24 months or 30,000 miles or every 4 months or 5,000 miles on engine oil in order to maintain the engine "warranty". The brochure states that the limited warranty program is underwritten by the TUV Insurance Company.
As this program is described in the brochures, it excludes any claim resulting from collision, fire, theft, vandalism, contamination of fluids, act of God, misuse, abuse, negligence, or lack of normal maintenance required by the vehicle manufacturer.
The basis for all of these XYZ "warranties" seems to be ABCs assertion that its products are designed to enhance automotive engine performance by protecting the lubricated components of an automatic transmission and other components of an automobile, and that they do so. The coverage under the "limited warranty" is limited to the repair or replacement of the parts of the Automatic Transmission because the ABC Automatic Transmission Service and ABC 106 and ABC 310 additives have failed to protect the covered lubricated components.
ABC Roadside Assistance Programs
This is a 24-hour roadside assistance program that runs for a period of 4 months or 5,000 miles, whichever occurs first, from the date an ABC service is performed. In order for a customer to extend the coverage afforded under this program he or she must bring the vehicle back to a participating automobile dealer or participating independent repair shop for another "ABC essential maintenance service".
Under this program the customer does not pay for the first $75 of the cost for the services of towing, jump start, tire change, lock-out and delivery of gas or other fluids following an occurrence. An occurrence is defined as a breakdown of the covered vehicle from any cause. If the cost of a service covered under this program exceeds the $75 per occurrence limitation, the customer pays the rest of the cost. A service provider is dispatched following the customers call to the toll-free number appearing on the service card that is issued to him or her. We do not know what arrangement, if any, ABC has with the service providers.
N.Y. Ins. Law § 1101 (McKinney 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
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 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. 2004).
N.Y. Ins. Law § 1101(b)(3-a) (McKinney Supp. 2004) 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).
The "limited warranties" issued by ABC under this program do not constitute warranties under N.Y. Ins. Law § 1101(b)(3) but would constitute the doing of an insurance business. ABC could properly warrant the efficacy of its products as a result of the product's failure to perform properly. However ABC is neither issuing a warranty as to the covered system itself or the maintenance service, nor could it do so because it has not manufactured the system and it is not in the chain of distribution. ABC, by manufacturing products used to service the automobile, does not have sufficient control over the covered system so as to minimize, if not eliminate the element of chance or risk contemplated by § 1101(a). It may not simply be assumed that the damage is a consequence of the ABC product's failure that could be covered by a warranty; the damage must actually result from a defect (i.e. a failure of the product to perform as represented) in the ABC product.
Accordingly, this program constitutes the doing of an insurance business by ABC under the Insurance Law. It purports to cover any damage to the covered system not subject to the stated exclusions -- even though the damage would have occurred whether or not the ABC product was introduced by means of the maintenance service into the system. Therefore, a fortuitous event, within the meaning of the Insurance Law, may be covered. As a practical matter, it may be impossible to discern whether or not a particular breakdown in the covered automobile system is caused by the failure of the ABC product or by some other, fortuitous, cause. Since ABC is not licensed as an insurer it would be acting in violation of N.Y. Ins. Law § 1102.
However, please note that if ABC became registered in New York State as a service contract provider under Article 79 of the Insurance Law, it could issue service contracts in New York providing similar coverage to that afforded under the XYZ "warranties," covering repairs, replacement or maintenance of the system due to defects in materials or workmanship or wear or tear. In that case, the issuance of the service contracts would not constitute the doing of an insurance business.
ABC Roadside Assistance Program
As to the ABC Roadside Assistance Program, it is not a warranty under the Insurance Law because it covers expenses resulting from a breakdown from any cause which includes fortuitous events such as collisions. It does not warrant the ABC products used in the vehicles maintenance as a breakdown may have no relation at all to an ABC product or service. Although ABC does not characterize itself as a motor club, it provides services that are similar to those offered by a motor club.
While motor clubs are not subject to licensure or regulation by the Department, if any of the services provided by a motor club constitute doing an insurance business in this state, those services may be offered only by an authorized insurer in accordance with the Insurance Law and Regulations. The Department has issued Circular Letter No. 2 (1979), which contains guidelines describing how motor clubs may provide certain benefits in New York. The Department has not objected to a motor club providing towing or roadside assistance services so long as it follows those guidelines, with one exception. A motor club may not obtain a master or group policy for towing, emergency, trip interruption or legal services, as described in item 2 of the Circular Letter, as such a policy would constitute group property/casualty insurance of a kind not authorized under the Insurance Law. Moreover, a motor club may not provide lock-out coverage, which ABC proposes to do.
In assisting in the marketing and distribution of an illegal insurance contract, in New York State, an automobile dealer would be enabling ABC Products, Inc., an entity not authorized to do an insurance business in New York, to do such business in New York in violation of N.Y. Ins. Law § 1102 (McKinney 2000). Such an automobile dealer would thereby be acting either as an agent for or otherwise aiding such unlicensed or unauthorized insurer to do an insurance business in this State in violation of N.Y. Ins. Law § 2117(a) (McKinnney Supp. 2004).
In addition, TUV Insurance Company may not issue an insurance policy by which it underwrites the XYZ "Warranty" program in New York because under the Insurance Law an insurer may not write a policy upon illegal insurance.
For further information you may contact Associate Attorney Barbara Kluger at the New York City office.