The Office of General Counsel issued the following opinion on August 24, 2004, representing the position of the New York State Insurance Department.

Re: Pet Health Warranty Contract

Questions Presented:

1. Does the making of the proposed contract by a pet store ("retailer") constitute a warranty in regard to animals sold by the retailer or "the doing of an insurance business" in New York?

2. If claims under the proposed contract are submitted to a third party administrator ("TPA") for review and payment, must the TPA obtain any licenses from the State of New York?

3. If the TPA assumes the risk under the warranty, must it obtain any license(s)?

Conclusions:

1. Such an agreement would constitute a warranty merely incidental to the other legitimate business of the retailer and would not constitute doing an insurance business.

2. Since the warranty is not insurance, the administrator does not need to be licensed.

3. If the TPA assumed the risk under the warranty, it would be acting as an insurer and would need to secure the necessary license.

Facts:

The Pet Health Warranty Contract ("the contract") provides that the retailer warrants that the animal is "fit" for sale. The New York "Pet Lemon Law" requires that the retailer make such a guarantee. To take advantage of it, the purchaser must obtain a veterinary certification that the animal is unfit within 14 days of purchase. The veterinarian must certify such animal to be unfit for purchase due to illness, a congenital malformation that adversely affects the health of the animal, or the presence of symptoms of a contagious or infectious disease. N.Y. General Business Law § 753 (McKinney 1996 and Supp. 2004). If the animal is adjudged to be "unfit", the purchaser may immediately recover either (1) a refund of the purchase price, (2) a replacement animal and/or (3) reimbursement for reasonable veterinary fees up to the purchase price of the animal.

The contract extends the protection offered by the Pet Lemon Law for one year from the date of purchase of the animal, and congenital malformation coverage is extended for an additional two years for a total of three years. It does not change the requirement that the cause of the animal's "unfit" condition must have originated on or before the date of delivery to the purchaser. The contract also requires that the purchaser have the animal initially examined by a veterinarian within 14 days of purchase. The "coverage" offered by the contract would be for a condition that exists at the time of purchase but has not manifested itself at the time of the initial examination.

The retailer will maintain a bank account for the payment of claims. The TPA will process out of that account only. The TPA will be paid based upon the volume of actual activity it performs on behalf of the retailer. The TPA will not assume any risk and its compensation will not be linked to claims experience in any way.

Analysis:

N.Y. General Business Law Article 35-D (McKinney 1996 and Supp. 2004) regulates the "Sale of Dogs and Cats" in New York State. It requires that animals sold by a pet dealer be fit for purchase. The purchaser must obtain a veterinary certification that the animal is unfit within 14 days of purchase, and return the pet to the seller within three business days of obtaining such certification in order to take advantage of the guarantee.

The New York Insurance Law distinguishes between non-insurance warranties and warranties that constitute insurance contracts. N.Y. Ins. Law § 1101(a) (McKinney 2000 and Supp. 2004) reads as follows:

The statute further provides that the 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, constitutes the doing of an insurance business in the state. The above provision applies whether such a transaction is effected within New York State or by mail from outside New York. N.Y. Ins. Law §1101(b)(1) (McKinney 2000 and Supp. 2004).

Generally speaking, under the New York Insurance Law, a contract or agreement to replace property, or indemnify for repair, replacement or maintenance, due to a defect in the product sold, when made by the seller or manufacturer of property, is considered to be a warranty whether or not a separate fee is charged for the contract. Such warranties, when made by a manufacturer or seller, generally do not constitute the doing of an insurance business in New York under N.Y. Ins. Law §§ 1101 and 1102 (McKinney 2000 & Supp. 2004). When a separate fee is charged for such a contract, it is sometimes referred to as an "extended warranty".

Once it is determined that a contract is one of warranty, it is necessary to look to various factors, including the nature of an agreement, the scope of the obligations undertaken, the maker of the agreement and its "relationship" to the product and the degree of "control" over the product. These factors are assessed to determine if a particular contract is an insurance contract, or if it is truly a warranty. Then, it is necessary to determine if the maker of the warranty, by issuing the contract, was doing an insurance business.

The provisions of the contract extend the statutory protection of the Pet Lemon Law as a warranty by the retailer. The protection is extended to twelve months from the date of purchase of the animal. The protection offered is against a condition or conditions that existed at the time the animal was purchased from the retailer.

Although the animal is not a manufactured product, the retailer may warrant that the pet is healthy and free from congenital conditions as of the date of delivery; and such contract would not constitute the doing of an insurance business.

The contract refers to a "Warranty Administrator" as the party to whom claims should be submitted. The Insurance Department does not regulate or license TPA’s. However, where the TPA engages in any activity involving either the doing of an insurance business, acting as an agent, broker or adjuster, or aiding an unauthorized insurer, such activities would come within the restrictions of the New York Insurance Law.

The inquirer’s specific concern was with regards to whether the TPA could adjust claims without being licensed as an adjuster. Since the contract is not insurance there would be no licensing requirement because the definition of an adjuster under the New York Insurance Law, whether an independent adjuster or public adjuster, is limited to persons or entities acting on behalf of an insurer (independent adjuster) or an insured (public adjuster), N.Y. Ins. Law § 2101(g)(McKinney 2000). If the contract is not insurance, there is no insurer and no insured. Thus, the TPA could "adjust" claims without being required to obtain any license from the Insurance Department.

However, this result would change if insurance were sold to the retailer by the TPA to indemnify the retailer (the TPA would be acting as an agent or broker), or if the TPA were actually to assume the risk under the contract (the TPA would be acting as an insurer). In either circumstance, the TPA would need to obtain the appropriate license.

Finally, please note that any agreement between the retailer and the TPA making the amount of the TPA's compensation dependent on the loss experience under the extended warranty contracts would also be an assumption of risk by the TPA. The TPA would need to be licensed as an insurer.

For further information you may contact Associate Attorney Samuel Wachtel at the New York City Office.