OGC Opinion No. 07-07-19

The Office of General Counsel issued the following opinion on July 23, 2007, representing the position of the New York State Insurance Department.

Paintless Dent Repair Program

Questions Presented:

1. Does the Paintless Dent Repair (PDR) program constitute the doing of an insurance business in New York?
2. Alternatively, does the PDR program constitute a maintenance agreement under the New York Insurance Law?
3. Alternatively, does the PDR program constitute a service contract providing coverage for wear and tear?

Conclusion:

1. Yes. The PDR program, as described in the facts below, constitutes the doing of an insurance business in New York.
2. No. The PDR program is not a maintenance agreement under the Insurance Law.
3. No. The PDR program is not a service contract providing coverage for wear and tear.

Facts:

The Department received an inquiry from an attorney for a New York registered service contract provider, which wishes to market a pre-paid “Paintless Dent Repair” Maintenance Plan. In his analysis, he stated as follows:

The pre-paid plan provides the contract holder with a single registered vehicle, regular examination and removal, if necessary, of up to two (2) dents measuring a maximum of 4” in diameter/length on the vehicle’s repairable areas, every two (2) months or 2,000 miles, through existing Paintless Dent Repair techniques.

PDR repairable areas are defined as all exterior vertical painted sheet metal body panels, including fenders, doors, quarter panels, and the rear left panel on minivans, wagons, and sport utility vehicles.

PDR is a process developed by automobile manufacturing production teams that use specialized hand tools to permanently remove door dings and minor dents in repairable areas by returning the metal to its original shape. The PDR technicians must have access to the dings or dents to be able to use the tools required for repair. Damage or very sharp dents greater than 4” in diameter/length will most likely require body shop repairs, and are excluded from coverage under this plan. The plan only provides for examination and repair of dings or dents through existing paintless dent repair techniques, which do not allow for paint touch up or use of any body fillers. This scheduled maintenance plan is for the specific purpose of maintaining a dent free vehicle, during the term selected, thus allowing the consumer to retain a higher re-sale value for their vehicle upon sale or trade.

The selling dealer will perform scheduled maintenance exams and provide the contract holder two (2) pre-determined maintenance examinations of the vehicle every two (2) months or 2,000 miles. In addition, the maintenance schedule does not include pre-existing damage, paint damage, collision damage, damage to the hood, roof or trunk, or dents measuring more than four inches (4”) in length or diameter. To guarantee faithful performance, the responsibility of the agreement is insured.

The attorney asserted that the types of dents and pings that would be covered under this plan are not the types of damage covered under a physical damage insurance policy. He requested confirmation that the proposal would not violate the Insurance Law. In essence, you are asking the Department to reconsider OGC Opinion 06-03-04, which concluded that such a plan would constitute the doing of an insurance business.

Analysis:

Question 1: Doing an insurance business

The first question was whether the PDR program described above constitutes the doing of an insurance business in New York. N.Y. Ins. Law § 1101 (McKinney 2006) is relevant to this inquiry. It defines the doing of an insurance business in New York, and reads in pertinent part as follows:

(a) In this article: (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.

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(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;

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(E) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this chapter.

It was argued that, while dings or dents may be caused by fortuitous events, they usually are not because they are “caused by normal exposure to parking lots, adjacent vehicles, door collisions, or even leaning on the vehicle. In analyzing the causes of these damages, it is apparent a vehicle owner has control over door-to-door contact, leaning on the vehicle, and prevention of extensive parking lot damage.”

A ding or dent covered under the PDR Program differs from other damage to the vehicle only in the degree of the damage inflicted, not in the nature of the event causing the damage. Whether a pebble or a rock damages the vehicle, the event is equally fortuitous. While the degree and extent of damage may be less than the level of damage usually covered under an insurance policy, the Insurance Law draws no distinction with respect to such factors or the amount of the benefit provided under the agreement. The Insurance Law is concerned merely with whether the event is beyond the control of the contract holder and the service provider. In this case, the events that are cited, unless intentionally caused by the contract holder, are outside the control of the parties and therefore fortuitous.

Also cited was Petro, Inc. v. Serio, 9 Misc. 3rd 805, 804 N.YS.2d 598 (from 2005), for the proposition that a contract need not eliminate all fortuity to be exempt from New York insurance regulation. Petro involved a heating fuel oil company that permitted customers of its automatic heating fuel oil delivery plan to subscribe, for an additional fee, to a program under which the subscribers were provided with inspection, maintenance and repair of heating fuel oil systems and were additionally provided with cleanup services of up to $100,000 in the event that there was a heating fuel oil spill onto a subscriber's property.

In Petro, the court concluded that Petro (the company) had substantial control over the types of events that would subject it to liability, because it undertook routine inspections and maintenance of a customer's heating fuel oil system and monitoring of the customer's oil usage after installation for the purpose of detecting defects that, if left undetected, would ultimately lead to an oil spill. 9 Misc. 3rd 805 at 818; 804 N.YS.2d 598 at 609. Additionally, the court concluded that the services provided by Petro bore a substantial relationship to the heating fuel oil Petro sold, because Petro ensured that its product (i.e., heating fuel oil) did not spill onto a customer's property causing environmental and property damage. Ibid. Given that the inspection, maintenance and repair services Petro provided under the program were substantially related to the quality of the heating fuel oil system itself, the court found that Petro had at least partially met the requirements of the "substantial control" test. Ibid. The court further noted that, while there were some losses due to fortuitous events that might be covered under the program, the Program's minimal embrace of fortuity was reasonable, since most losses that would occur were the result of a breakdown in the oil system and not outside events, such as lightning or intentional destruction by an unrelated person. Ibid. Therefore, the court concluded that Petro’s program constituted a warranty and was thereby not insurance under the Insurance Law.

While the Department believes that the Petro court misconstrued the Insurance Law in concluding that the program was a legitimate warranty, the PDR program in any event differs significantly from the Petro program. Therefore, reliance on Petro is misplaced. First, Petro argued successfully that its contract was principally a warranty and the fortuitous events covered under the agreement were incidental to the overall agreement. Here, however, the PDR program is not a warranty, since it does not provide coverage for defects in materials or workmanship. Furthermore, even if the PDR program could be construed as a warranty, in order to satisfy the exception under Insurance Law §1101(b)(1)(B), it would have to be incidental to the maker’s other legitimate business or vocation - a requirement that did not apply to Petro, which, as a supplier of heating fuel, is instead subject to the warranty exception under Insurance Law § 1101(b)(3-a). The facts as described herein thus do not support a conclusion that the PDR program meets the “incidental” requirement, because the program’s maker provides no other service or product to a program purchaser.

Question 2: Maintenance Agreement 

The next question was whether the PDR program constitutes a maintenance agreement, which would be specifically excluded from the definition of insurance under Insurance Law § 1101(b)(3-a). However, the PDR program does not come within the operative definition of “maintenance agreement,” which is set forth in Insurance Law § 7902(d). That provision states:

(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.

Although maintenance agreements were excluded from the definition of doing an insurance business when the service contract law was enacted, the exclusion was redundant because a contract that merely provides for scheduled maintenance does not come within the Insurance Law § 1101 definition of insurance. Scheduled maintenance involves work regularly done in order to ensure the continued functionality of property, and is designed to forestall future damage from ordinary use of the property. It therefore does not include repair of damage resulting from a fortuitous event. For instance, an agreement to change an automobile’s oil every three months or 3,000 miles constitutes scheduled maintenance. However, while the PDR plan provides for an inspection every two months or 2,000 miles, it includes coverage to repair two dents or dings. Although the inspection is conducted on a regular basis and itself is not doing an insurance business under the Insurance Law, the inspection does nothing to prevent dings and dents from occurring in the future; it merely locates those that have occurred in the past, since the last inspection. Thus, the PDR program does not come within the Insurance Law’s definition of a maintenance agreement.

Question 3: Service Contract

Lastly, it was asked whether the PDR program constitutes a service contract providing coverage for wear and tear. Insurance Law § 1101 excludes service contracts made by a registered service contract provider from the definition of doing an insurance business. Insurance Law § 7902 defines “service contract” as follows:

(k) "Service contract" means a contract or agreement, for a separate or additional consideration, for a specific duration to perform the repair, replacement or maintenance of property, or indemnification for repair, replacement or maintenance, due to a defect in materials or workmanship or wear and 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, and may also provide for the repair, replacement or maintenance of property for damage resulting from power surges and accidental damage from handling. Service contracts may also include contracts to repair, replace or maintain residential appliances and systems. Such term shall also mean a contract or agreement made by or for the manufacturer or seller of a motor vehicle tire for repair or replacement of the tire or wheel as the result of damage arising from a road hazard.

The Insurance Law does not contain a definition of “wear and tear.” Accordingly, its ordinary dictionary definition would apply. Black’s Law dictionary (8th ed. 2004), defines “wear and tear” as: “Deterioration caused by ordinary use; the depreciation of property resulting from its reasonable use.”

“Reasonable use” of property includes expected treatment from the user of the property but does not include damage caused to the property by external forces. Applying this definition to an automobile, “wear and tear” includes wear naturally caused by the use of the automobile, but does not include damage resulting from external forces, such as the case with respect to dents and dings.

The inquirer referenced Weeks Marine v. Picone, Inc., 1998 U.S. Dist. LEXIS 15053 (S.D.N.Y. Sept. 23, 1998) as follows: “"Wear and tear" is the deterioration in condition or depreciation in value by ordinary and reasonable use of the object. See Black's Law Dictionary 1429 (5th ed. 1979).” However, under the Conclusions of Law section in the case, the term is given a more narrow definition: “I conclude that the term ordinary “Wear and Tear”, as used in this contract, has the following meaning: The deterioration in the condition of the vessel measured from the vessel's condition at the inception of the charter, due to the ordinary and reasonable use of the vessel as evaluated with reference to the intended use and age of the vessel.” 1998 U.S. Dist. LEXIS 15053 (S.D.N.Y. Sept. 23, 1998) at 18-19. This statement makes clear that the judge intended that her definition of the term was for use only “in this contract” and was not meant to be a general definition for “wear and tear.”

Wear and tear” is the inevitable deterioration of an object that may or may not naturally break down over time through regular use, regardless of ordinary care and maintenance. The Department is of the view that the PDR program does not provide protection for the motor vehicle’s deterioration, and thus does not come within the meaning of “wear and tear” as used in Article 79.

The inquirer further noted that while the Department previously opined that tire and wheel road hazard protection came under the definition of doing an insurance business (See General Counsel Opinion No. 06-08-13 dated August 17, 2006; General Counsel Opinion No. 07-06-12 dated June 15, 2007; and General Counsel Opinion No. 05-03-30 dated March 22, 2005), effective July 26, 2006, the definition of service contract was amended to include tire and wheel road hazard programs. He likened the PDR program to such a program and assert that the PDR program should come within the exemption provided for tire and wheel programs.

However, the legislative exemption was narrowly tailored to apply only to tire and wheel hazards, and to exempt contracts providing the coverage from the doing of an insurance business. The legislative history demonstrates that broader amendments were considered but rejected. Thus, the limited exception for tire and wheel road hazards underscores that it does not apply to programs providing coverage for other hazards, such as the ding and dent PDR program, and a broad reading of the statute is not justified. Accordingly, the PDR program does not come within the definition of a service contract.

In summary, the PDR program would constitute the doing of an insurance business in New York, and the obligor under such an agreement would need to become licensed as an insurer pursuant to Insurance Law § 1102.

For further information you may contact Asst. Dep. Supt. & Counsel Paul A. Zuckerman at the New York City Office.

¹ Black’s Law Dictionary discusses the term with regard to leased real property and does not attempt to apply it to “wear and tear” generally.