The Office of General Counsel issued the following informal opinion on November 12, 2002, representing the position of the New York State Insurance Department.
Re: Registration Requirements for Service Contract Administrators.
Questions Presented:
1. Does New York require service contracts or extended warranties to be dealer or administrator obligor, or may they be offered either way?
2. May the insurance company for the service contracts be a risk retention group formed pursuant to the federal Liability Risk Retention Act 15 U.S.C. §§ 3901, et seq. ("LRRA")?
3. Are there any special state requirements for wording in service contracts?
Conclusions:
1. As discussed below, an automobile dealer would not have to register as a service contract provider in regard to such contracts covering vehicles sold by the dealer. However, a third party obligor would have to register.
2. A risk retention group may not be used to satisfy the financial responsibility requirements under Article 79.
3. New York requires certain minimum provisions in service contracts. These requirements may be found in N.Y. Insurance Law Article 79 (McKinney 2000 & Supp. 2002) and N.Y. Comp. Codes R. & Regs. tit. 11 Part 390 (2001) (Regulation 155).
Facts:
The inquirers company is a Colorado domiciled marketer and administrator of insured automotive vehicle service contracts, which the inquirer referred to also as "extended warranties". These contracts are sold by automobile dealers and through the internet to owners of new and "pre-owned" vehicles. The inquirer wanted to know how New York law generally applies to his company.
Analysis:
Generally speaking, under the New York Insurance Law, a contract or agreement 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, 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. 2001-2002). When a separate fee is charged for such a contract, it is sometimes referred to as an "extended warranty".
If any other person makes a contract providing similar coverage, it would constitute the doing of an insurance business unless the person registers as a service contract provider and complies with N.Y. Ins. Law Art. 79 (McKinney 2000 & Supp. 2001-2002). A contract issued by a registered service contract provider is referred to as a "service contract." Hence, the inquirers company, if it was the obligor under the contracts, would have to register as a service contract provider.
As a requirement of registration, a service contract provider must assure the faithful performance of the provider's obligations to its contract holders by complying with one of the three methods for demonstrating its financial responsibility as provided in N.Y. Ins. Law § 7903(c) (McKinney 2000). Section 7903(c)(1) contains the insurance policy method for demonstrating financial responsibility. It provides, in pertinent part, as follows:
(c) In order to assure the faithful performance of a provider's obligations to its contract holders, each provider who is contractually obligated to provide service under a service contract shall comply with one of the following three paragraphs of this subsection:
(1) insure the performance of all its obligations under all service contracts pursuant to a service contract reimbursement insurance policy issued by an insurer authorized to issue service contract reimbursement insurance in this state or procured by an excess line licensee pursuant to section two thousand one hundred eighteen of this chapter
It is the position of this Office that a policy of insurance provided by a risk retention group formed under the LRRA would not satisfy the above requirements. A full discussion of the reasons may be found in an opinion by the undersigned, dated October 30, 2002, on the Insurance Departments website. The Departments website address is http://www.ins.state.ny.us/nyins.htm.
The inquirers final question relates to the specific terms of a service contract. Both Article 79 and Regulation 155 contain relevant provisions that govern the provisions of service contracts and can be found on the Departments website. From the home page, click on the link entitled "Statutes, Opinions, Regulations and Circular Letters." Regulation 155 may be found under "Recent Final Adoptions-2001."
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.