OGC Opinion No. 07-06-12

The Office of General Counsel issued the following opinion on June 15, 2007, representing the position of the New York State Insurance Department.

RE: Service contracts for repair or replacement of tires or wheels due to road hazard damage

Question Presented:

Does the state of New York regulate tire road hazard “warranty” contracts?

Conclusion:

Yes. New York regulates tire road hazard “warranty” contracts, but not as insurance, provided that: (1) the contract or agreement is made by a registered New York service contract provider as a service contract pursuant to Article 79 of the N.Y. Insurance Law; and (2) the contract is made by or for the manufacturer or seller of the motor vehicle tire for repair or replacement of the tire or wheel as the result of damage arising from a road hazard.

Facts:

A New Hampshire-based business informed the Department that it was engaged in the selling and servicing of tire road hazard “warranty” contracts. These contracts were marketed through automobile dealerships, and provided for reimbursement for the costs of repair or replacement of tires damaged by road hazards. The contracts further provided for repair or replacement of rims and wheels if there was damage due to road hazard. The business inquired whether the State of New York regulates such contracts. If so, the business further inquired about the prerequisites to engaging in the practice of selling such contracts.

Analysis:

N.Y. Ins. Law § 7902(k) (McKinney 2006) is central to the inquiry presented. It defines a “service contract” as:

Prior to the enactment of Chapter 264 of the Laws of 2006 (now codified as Insurance Law § 1101(b)(3-a)), it was the Department’s position that the making of an agreement that provided road hazard coverage constituted the doing of an insurance business that could not be provided under a warranty. See General Counsel Opinion dated August 17, 2006. Unless authorized as an insurer in New York to write such coverage,¹ the maker of such an agreement would run afoul of Insurance Law § 1102.

However, with the enactment of Chapter 264, a service contract may provide coverage for tire damage arising from road hazards. Because Insurance Law § 1101(b)(3-a) (McKinney 2006) expressly provides that the making or selling of a service contract pursuant to Article 79 of the Insurance Law does not constitute the doing of an insurance business,² the making of a road hazard service contract no longer constitutes the doing of an insurance business so long as such contract is made pursuant to Article 79 by a registered service contract provider, and the contract is made by or for the manufacturer or seller of the motor vehicle tire.

The road hazard coverage may be sold either in conjunction with other coverage under a service contract, or on a stand-alone basis. However, if the maker of the contract is not registered with the Department as a service contract provider, the making of such an agreement continues to constitute the doing of an insurance business, in which case a manufacturer, seller or other person may not provide road hazard coverage, whether characterized as a warranty or otherwise, without becoming authorized as an insurer.

For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.

¹ Specifically, such coverage would constitute motor vehicle physical damage insurance as defined in N.Y. Ins. Law §1113(a)(19) (McKinney 2006).

² N.Y. Ins. Law § 1101(b)(3-a) provides, in pertinent part, that the marketing, sale, offer for sale, issuance, making, proposing to make or administration of a service contract pursuant to Article 79 shall not constitute the doing of an insurance business in this state.