The Office of General Counsel issued the following opinion on February 7, 2005, representing the position of the New York State Insurance Dept
Re: Auto Dealers/Gap and Credit insurance
Questions Presented:
1. May an automobile dealer sell credit life or gap insurance to its customers, and offer frequent flyer miles as an incentive?
2. Are extended service agreements, road hazard protection and dent protection considered to be insurance?
Conclusions:
1. An automobile dealer that is not licensed as an insurance agent or broker may make group credit life insurance available to its customers, but may not sell individual credit life insurance. An automobile dealer that is not licensed as an insurance agent or broker may not sell gap insurance but may offer a gap waiver, as it does not constitute the doing of insurance business under certain circumstances. Authorized insurers, agents, brokers, and their representatives may not offer frequent flyer miles as an incentive to purchase insurance as it would constitute a prohibited inducement.
2. Extended service agreements providing protection against defects in materials or workmanship offered by manufacturers and sellers are generally considered warranties that require no licensing by the Department. However, when offered by third parties, such agreements would constitute insurance except if made by a registered service contract provider. Road hazard protection and dent protection are not warranties or service contracts; they are considered insurance, and therefore a license as an insurer is required to offer such coverages.
Facts:
The inquiry states that an automobile dealer would sell credit life insurance and gap insurance to its customers and offer frequent flyer miles as an incentive. The contract would be between the customer and a third party, not between the customer and the automobile dealer. (Since it is not clear from the initial inquiry or the Department's subsequent communications with the inquirer whether the inquiry concerns gap insurance or a gap waiver, this opinion will discuss both).
The inquiry also states that the automobile dealer would offer an "extended service agreement," road hazard protection and dent protection. The extended service agreement would offer extensive component coverage after the basic factory warranty expires and would be transferable if the vehicle is sold to another individual. This contract would also be between the customer and a third party, not the automobile dealer. The road hazard protection would offer coverage for a specific term and would provide for the replacement of tires and wheels due to road hazards. The dent protection would provide coverage for a limited term and would cover the repair of door dings.
Analysis
N.Y. Ins. Law § 1102 (McKinney 2000 & Supp. 2005) prohibits the doing of insurance business without a license subject to a penalty and provides:
(a) No person, firm, association, corporation or joint-stock company shall do an insurance business in this state unless authorized by a license in force pursuant to the provisions of this chapter, or exempted by the provisions of this chapter from such requirement. Any person, firm, association, corporation or joint-stock company which transacts any insurance business in this state while not authorized to do so by a license issued and in force pursuant to this chapter, or exempted by this chapter from the requirement of having such license, shall, in addition to any other penalty provided by law, forfeit to the people of this state the sum of one thousand dollars for the first violation and two thousand five hundred dollars for each subsequent violation. (Emphasis added)
In order to sell insurance in the State of New York, one must be licensed by the Department in accordance with N.Y. Ins. Law § 2102 (McKinney 2000 & Supp. 2005) which provides:
(a)(1) No person, firm, association or corporation shall act as an insurance producer or insurance adjuster in this state without having authority to do so by virtue of a license issued and in force pursuant to the provisions of this chapter.
N.Y. Ins. Law § 2101(McKinney 2000 & Supp. 2005) defines "insurance producer" as:
(k) In this article, "insurance producer" means an insurance agent, insurance broker, reinsurance intermediary, excess lines broker, or any other person required to be licensed under the laws of this state to sell, solicit or negotiate insurance.
Credit Life Insurance
An automobile dealer would need to be licensed as an insurance agent or broker to sell credit life insurance to its customers. However, an automobile dealer may make credit life insurance available to its customers provided the automobile dealer is the policyholder under a group credit life insurance policy. N.Y. Ins. Law § 4216 (McKinney 2000 & Supp. 2005) provides:
(b) Any life insurance company authorized to do business in this state may deliver in this state policies of group life insurance only as follows:
(3)(A) A policy issued to a creditor or vendor, or to a trustee or agent designated by two or more creditors or vendors, which creditor, vendor, trustee, or agent shall be deemed the policyholder. (Emphasis added)
In addition, N.Y. Comp. Codes R. & Regs tit 11, § 185.9 (McKinney 2001) provides that an insurer issuing group credit life insurance may only pay commissions for sale of the coverage to the agent or broker; and the policyholder may not be the agent or broker. Therefore, the automobile dealer can not receive any portion of the commissions. The regulation does allow for compensation for an automobile dealers action and reasonable costs in providing services on behalf of the insurer. Any such compensation should cover only the dealers actual expenses.
Gap Insurance
N.Y. Ins. Law § 1113 (a)(26) (McKinney 2000 & Supp. 2005) authorizes and defines gap insurance and the two kinds of motor vehicle gap insurance. It provides in pertinent part:
"Gap insurance" means insurance covering the gap amount which is payable upon the total loss of personal property, which is the subject of a lease or loan or other credit transaction occasioned by its theft or physical damage. The kinds of gap insurance are:
(A) "Motor vehicle lessor/creditor gap insurance" which insures the lessor, creditor, or the lessor's or creditor's assignee, under a motor vehicle lease or loan or other credit transaction pursuant to which the lessor, creditor, or, in the
absence of a waiver by the lessor or creditor, the assignee has waived the obligation of the lessee or debtor for the gap amount;
(B) "Motor vehicle lessee/debtor gap insurance" which insures the lessee or debtor under a motor vehicle lease or loan or other credit transaction pursuant to which the lessor, creditor, or the lessor's or creditor's assignee has not waived the obligation of the lessee or debtor for the gap amount.
N.Y. Ins. Law § 107(a)(52) (McKinney 2000) defines the "gap amount" as:
(52) "Gap amount" means:
(A) in the case of a lease of personal property, the difference, if any, between:
(i) the amount owed by the lessee, under the early termination provision of the lease, as of the date of a total loss of the leased property caused by its theft or physical damage, or the amount which would have been owed by the lessee had the lessor not waived such obligations; and
(ii) the sum of: (I) any unpaid rental payments and other unpaid charges, arising from the failure of the lessee to fulfill the lessee's obligations under the lease, that had accrued prior to the date of the loss; and (II) the actual cash value of the personal property as of the date of the loss. If the lessee is required under the lease agreement to maintain a physical damage insurance policy on the personal property which is the subject of the lease agreement, and that policy is in effect on the date of the loss, then "actual cash value" shall have the same meaning as under the physical damage insurance policy.
(B) In the case of a loan or other credit transaction on the purchase of personal property, the difference, if any, between:
(i) the amount owed by the debtor under the loan or other credit transaction as of the date of a total loss of the personal property which is the subject of the loan or other credit transaction agreement caused by its theft or physical damage, or the amount that would have been owed by the debtor had the creditor not waived such obligation; and
(ii) the sum of: (I) any unpaid payments and other unpaid charges, arising from the failure of the debtor to fulfill the obligations under the loan or other credit transaction agreement, that had accrued prior to the date of the loss; and (II) the actual cash value of the personal property as of the date of the loss. If the debtor is required under the loan or other credit transaction agreement to maintain a physical damage insurance policy on the personal property which is the subject of the loan or other credit transaction agreement, and that policy is in effect on the date of the loss, then "actual cash value" shall have the same meaning as under the physical damage insurance policy.
A gap waiver is an agreement under which the creditor agrees to waive the lessee or debtors obligation for the difference between the "gap amount" and the actual cash value of the property. An automobile dealer must be licensed as an insurance agent or broker to sell gap insurance on behalf of an insurer, but an automobile dealer may offer a gap waiver, as it is not considered doing insurance business as long as three conditions are met. N.Y. Ins. Law § 1101 (b) (McKinney 2000 & Supp 2005) provides for the gap waiver exemption:
(3) Notwithstanding the foregoing, the making of an agreement pursuant to which a lessor of personal property, a creditor making a loan or other credit transaction on personal property or, in the absence of a waiver by the lessor or creditor, the lessor's or creditor's assignee waives the obligation of the lessee or debtor for the gap amount, as such term is defined in paragraph fifty-two of subsection (a) of section one hundred seven of this chapter, shall not constitute, or be deemed to constitute, the doing of an insurance business if:
(i) the lessor or creditor or, in the absence of a waiver by the lessor or creditor, the assignee waives any and all obligations of the lessee or debtor for the gap amount and the lessee or debtor is discharged from any and all further obligations to pay the gap amount;
(ii) the waiver applies only in the event of a total loss of the personal property occasioned by its theft or physical damage;
(iii) in the event the lessor, creditor or assignee purchases lessor or creditor gap insurance, the charge to the lessee or debtor for the waiver does not exceed the cost of the lessor or creditor gap insurance coverage; provided, however, that nothing contained herein shall be construed to prohibit the lessor from including the charge for the waiver in the capitalized cost as that term is defined in subdivision eleven of section three hundred thirty-one of the personal property law. (Emphasis added)
However, with regard to motor vehicle retail lease agreements, N.Y. Pers. Prop. Law provides an exception to the N.Y. Ins. Law § 1101 (b)(3)(iii), which states that the creditor may not charge the debtor more than the cost of the creditors gap insurance for purchase of the gap waiver. N.Y. Pers. Prop. Law § 335(2) (McKinney 1992 & Supp. 2005) provides in pertinent part that the "offer may be made contingent upon payment by the lessee of a separate charge that shall not exceed the cost of lessor gap insurance covering the retail lease transaction plus an administrative fee not to exceed ten dollars." (Emphasis added) The N.Y. Pers. Prop. Law also contains other requirements that must be complied with in order for a dealer to offer a gap waiver.
Extended Service Agreements, Road Hazard Protection and Dent Protection
Doing an insurance business is set forth in N.Y. Ins. Law § 1101 (McKinney 2000 & Supp. 2005) which provides:
(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.
(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. (Emphasis added)
The terms of the agreement will be determinative, not the fact that an agreement is called an "extended service agreement." In this instance, the inquirer did not provide the Department with the specific terms of the "extended service agreement," so we are unable to make a determination with regard to the agreement. Generally extended service agreements providing protection against defects in materials and workmanship, when offered by manufacturers or sellers on products that they make or sell, are considered to be incidental to other legitimate business or activity of the manufacturer or seller. Therefore, the making of such agreements generally do not constitute the doing of an insurance business. An extended service agreement when offered by a third party (not the manufacturer or seller); is not a warranty, but generally constitutes insurance unless the provider is registered with the Department as a service contract provider in accordance with N.Y. Ins. Law Art. 79. N.Y. Ins. Law § 7902 (k) (McKinney 2000) provides:
"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 . (Emphasis added)
N.Y. Ins. Law § 7904 (McKinney 2000) provides in relevant part:
(a) No person shall act as a provider pursuant to this article without having first obtained an approval of a registration to do so from the superintendent.
Where there is no relationship to the product, service or act, and the maker undertakes an obligation involving a fortuitous risk, the contract is an insurance contract that constitutes the doing of insurance business unless the contract is a service contract issued in accordance with N.Y. Ins. Law Article 79.
The Department has opined that road hazard protection and similar protections, such as dent protection are neither warranties nor service contracts. Rather, they constitute insurance as they are contracts creating an obligation upon the occurrence of fortuitous events outside the control of either party. Unlike an agreement that protects against defects of parts and workmanship, agreements for events such as road hazards and dents protect against events totally outside the control of the manufacturer and seller. Therefore, any automobile dealer selling road hazard protection and dent protection on behalf of another who is not licensed as an insurer would be acting without a license in violation of N.Y. Ins. Law § 2102 (McKinney 2000 & Supp. 2005), and N.Y. Ins. Law § 2117 (McKinney 2000 & Supp. 2005), which prohibits one from acting as an agent for an insurer who is not licensed or authorized to do an insurance business.
Incentives: Frequent Flyer Miles
An automobile dealer who is not licensed as an agent, broker, or insurer may not sell or issue insurance policies. Certain incentives offered by insurers, agents, brokers or their representatives are prohibited. N.Y. Ins. Law § 2324 (a) (McKinney 2000 & Supp. 2005) prohibits inducements with respect to property/casualty insurance and provides in relevant part:
No authorized insurer, no licensed insurance agent, no licensed insurance broker, and no employee or other representative of any such insurer, agent or broker shall make, procure or negotiate any contract of insurance other than as plainly expressed in the policy or other written contract issued or to be issued as evidence thereof, or shall directly or indirectly, by giving or sharing a commission or in any manner whatsoever, pay or allow or offer to pay or allow to the insured or to any employee of the insured, either as an inducement to the making of insurance or after insurance has been effected, any rebate from the premium which is specified in the policy, or any special favor or advantage in the dividends or other benefit to accrue thereon, or shall give or offer to give any valuable consideration or inducement of any kind, directly or indirectly, which is not specified in such policy or contract, other than any article of merchandise not exceeding fifteen dollars in value which shall have conspicuously stamped or printed thereon the advertisement of the insurer, agent or broker . . . . (Emphasis added)
N.Y. Ins. Law § 4224 (c) (McKinney 2000 & Supp. 2005) also prohibits inducements with respect to life, accident and health insurance and provides in relevant part:
No such life insurance company and no such savings and insurance bank and no officer, agent, solicitor or representative thereof and no such insurer doing in this state the business of accident and health insurance and no officer, agent, solicitor or representative thereof, and no licensed insurance broker and no employee or other representative of any such insurer, agent or broker, shall pay, allow or give, or offer to pay, allow or give, directly or indirectly, as an inducement to any person to insure, or shall give, sell or purchase, or offer to give, sell or purchase, as such inducement, or interdependent with any policy of life insurance or annuity contract or policy of accident and health insurance, any stocks, bonds, or other securities, or any dividends or profits accruing or to accrue thereon, or any valuable consideration or inducement whatever not specified in such policy or contract. (Emphasis added)
Thus, offering frequent flyer miles as an incentive to purchase life, accident or health insurance, including group credit life insurance, is strictly prohibited. In addition, offering of frequent flyer miles as an incentive to purchase property/casualty insurance is prohibited as the frequent flyer miles do not constitute an article of merchandise not exceeding $15 in value bearing the insurers or the agents advertisement. These prohibitions, however, do not apply to the selling of gap waivers, warranties, or service contracts.
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.