OGC Opinion No. 09-01-09
The Office of General Counsel issued the following opinion on January 16, 2009 representing the position of the New York State Insurance Department.
RE: Vacation Rental Lease Agreement -Cancellation Option
Question Presented:
Does a provision in a vacation rental lease agreement constitute insurance if it affords the renter a full or partial refund of his or her security deposit where the renter cancels for any reason and the amount of the refund that is due is dependent only upon the timing of the cancellation?
Conclusion:
No. The cancellation option would not constitute an insurance contract because the trigger for the refund is not based upon the happening of a fortuitous event, but rather is substantially under the control of the renter, who may cancel for any reason. Therefore, the making of a lease agreement that includes the cancellation option would not constitute the doing of an insurance business within the meaning of N.Y. Ins. Law § 1101(b) (McKinney 2006).
Facts:
The inquirer reports that he represents a real estate agency that is engaged in the business of renting vacation properties on behalf of owners. The inquirer’s client proposes to include in its lease agreements a cancellation option that affords a renter who cancels a full or partial refund of his or her security deposit. The amount of the refund would depend upon the timing of the cancellation. The sample language that the inquirer provided to the Department seemingly provides that the renter may cancel the lease agreement for any reason. The inquirer asks whether the cancellation option constitutes insurance within the meaning of the New York Insurance Law.
Analysis:
Insurance Law § 1102(a) is germane to the query. That statute prohibits any person, firm, association, corporation or joint-stock company from doing an insurance business in this state, unless licensed as an insurer or exempted from licensing. Although Insurance Law § 1108 provides exemptions from this licensing requirement for certain entities, none of them applies to the situation presented here.
Insurance Law § 1101(b)(1), in turn, defines the term “doing an insurance business” in pertinent part as follows:
(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 . . . .
Insurance Law § 1101(a)(1) defines “insurance contract” as follows:
(a)(1) [A]ny 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.
Insurance Law § 1101(a)(2) defines “fortuitous event” as “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.”
In Opinion of General Counsel No. 87-60 (NILS), which addressed a trip cancellation and baggage program, the Insurance Department concluded that a “Cancellation Fee Waiver” that relieved a customer that cancelled a trip from cancellation penalties regardless of the reason for cancellation was not insurance. The Department reached that result because the cancellation could be based upon any reason, and thus was within the control of the customer and not based upon a fortuitous event. Circular Letter No. 24 (2006), to which the inquiry refers, affirms as much. And the same logic applies to the lease agreement cancellation option that the inquirer’s client has proposed here.
In sum, the cancellation option proposed by the inquirer’s client is not an insurance contract because a refund under the cancellation option is not based upon a fortuitous event, provided that the renter may cancel the lease agreement for any reason and he or she will receive the refund of all or part of the security deposit for the lease. 1
For further information you may contact Senior Attorney Brenda M. Gibbs at the Albany Office.
1 Although the phrase “cancellation policy” appears in the penultimate paragraph of the agreement, the Department recommends that another word be substituted for “policy” so as not to give the impression that the agreement is insurance.