OGC Opinion No. 08-05-15
The Office of General Counsel issued the following opinion on May 30, 2008, representing the position of the New York State Insurance Department.
RE: ABC Insurance Company - “Wireless Protector” Program
Question Presented:
Is ABC Insurance Company’s (“ABC”) “Wireless Protector” program permissible under the New York Insurance Law and regulations promulgated thereunder?
Conclusion:
No. As discussed below, certain aspects of ABC’s “Wireless Protector” program do not comply with the New York Insurance Law and the regulations promulgated thereunder.
Facts:
ABC, a New York-authorized insurer, submitted a rate and form filing to the New York State Insurance Department’s (“Department”) Property Bureau for wireless coverage that ABC wishes to offer in New York. The filing is a resubmission of a prior filing that the Department previously had rejected.
ABC proposes to offer its wireless coverage to wireless carriers and retailers who will in turn offer the coverage “free-of-charge” to customers who purchase the wireless carrier’s or retailer’s extended service contract.1 ABC seeks to offer four levels of coverage. Each level of wireless coverage will cover losses not covered under the wireless carrier’s or retailer’s service contract or extended warranty, including loss of the wireless equipment due to theft or burglary. The wireless carrier or retailer will serve as the master policyholder, and will pay the premiums.
The inquirer states in his memorandum addressed to the Deputy Superintendent who oversees the Department’s Property Bureau, that wireless carriers and retailers will “reference the availability of non-contributory insurance benefits as part of their marketing of wireless equipment or extended service contracts.” The inquirer further states that wireless carriers and retailers will inform customers “at a basic level about insurance the wireless carrier/retailer would purchase to complement the customers’ extended service contract benefits.”
The inquirer also notes in the memorandum that in the 2007-2008 legislative session, members of the Senate and the Assembly are sponsoring S.5433/A.7971, the purpose of which is “to permit a group policyholder of wireless communication equipment insurance to pay the premium on behalf of consumers,” and “to clarify that paying the premium for the consumer and allowing coverage for a loss due to maintenance and accidental handling does not violate” N.Y. Ins. Law § 2324 (McKinney 2006). This bill reads as follows:
AN ACT to amend the insurance law, in relation to allowing coverage for the benefit of group certificate holders to be purchased by the group policyholder
The People of the State of New York, represented in Senate and Assembly, do enact as follows:
Section 1. Subsection (e) of section 2324 of the insurance law is amended to read as follows:
(e) This section shall not apply to any policy or contract of reinsurance nor to any contract or policy of life insurance, accident insurance or health insurance which is subject to the provisions of section four thousand two hundred twenty-four of this chapter, nor to any contract or policy issued pursuant to section three thousand four hundred forty-nine of this chapter, nor to any contract or policy of marine insurance, other than contracts or policies of automobile insurance, or of marine protection and indemnity insurance, nor to any insurance contract, or rate of insurance in connection with any insurance contract either against loss or damage to, or legal liability in connection with, any property located wholly outside of this state or any activity carried on outside of this state or any motor vehicle or aircraft principally garaged and used outside of this state.
§ 2. Subsection (e) of section 3449 of the insurance law is relettered subsection (f) and a new subsection (e) is added to read as follows:
(e) Coverage purchased by the group policyholder for the benefit of the group certificate holders shall be permitted.
§ 3. This act shall take effect immediately.
The inquirer reports that he has discussed ABC’s wireless coverage with a member of the Assembly, who suggested that this legislation might be unnecessary in view of the inquirer’s description of the wireless coverage. The Assembly member suggested that the inquirer speak with the Department first to determine the Department’s position.
The inquirer and other representatives of ABC met with the Department, and the Department expressed some concerns about the substance of the proposed legislation. This opinion is limited to a discussion of ABC’s proposed wireless coverage.
Analysis:
Pursuant to Insurance Law § 2131, an insurer may offer, and a wireless communications equipment vendor that obtains a limited license pursuant to that section may sell, a wireless communications equipment insurance policy that covers “the loss, theft, mechanical failure, or malfunction of, or damage to, wireless communications equipment.” In addition, an insurer may offer the wireless communications equipment insurance policy on a group basis, “under which certificates or other evidence of coverage are issued to individual consumers who enroll in the program.” See Ins. Law § 2131(d)(2). Thus, ABC may offer, and a licensed wireless retailer or carrier may sell, ABC’s wireless coverage pursuant to Insurance Law § 2131.
However, the wireless coverage must be offered independent of the purchase of a wireless carrier’s or retailer’s service contract or extended warranty, and the wireless customer must pay the premium. In accordance with the express language of Insurance Law § 2324, authorized insurers, licensed insurance agents and brokers, and their employees and representatives are prohibited from directly or indirectly offering rebates, inducements or any valuable consideration to an insured or an insured’s employee (other than an article of merchandise not exceeding fifteen dollars in value) in connection with the sale of most property/casualty insurance, when the rebates, inducements, or valuable consideration are not specified in the insurance policy or contract. Section 2324 states in relevant part that:
(a) 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….2
In the situation presented here, to offer so-called “free” wireless insurance coverage with the purchase of a wireless carrier’s or retailer’s service contract or extended warranty would violate Insurance Law § 2324, because it would constitute an inducement to prospective wireless customers to purchase the service contact or extended warranty. See OGC Opinion 01-11-07 (Nov. 7, 2001); OGC Opinion 04-08-03 (Aug. 3, 2004). Moreover, the inducement flows both ways, because there is no “free” insurance in the sale of a commodity or service.
Ollendorff Watch Co., Inc. v. Pink, 279 N.Y. 32 (1938), is instructive. There, the Ollendorff Watch Co., Inc. had delivered to watch purchasers a certificate and agreement in which the watch company agreed to replace the purchaser’s watch if lost in the United States or Canada within one year from the date of purchase due to a burglary or robbery. See 279 N.Y. at 35. The watch company offered the certificate and agreement “free-of-charge,” and alleged that it did not add any charge to the sales price of its watches for the certificates and agreements. Id. In relevant part, the New York Court of Appeals noted:
The fact that the insurance comes out of the proceeds of all the income of the watch company cannot hide the reality of the transaction. The price which the purchaser of the watch pays is not only for the watch but for everything which the seller gives him. The seller would not give him the insurance if he did not buy the watch. The price he pays for the watch is the inducement for the insurance the same as the certificate of insurance is an inducement for the purchase.
279 N.Y. at 37. The same rationale applies to the circumstances presented by this opinion.
Moreover, because the Insurance Law does not regulate the purchase price of a validly issued extended warranty, and given that Article 79 of the Insurance Law and N.Y. Comp. Codes R. & Regs. tit. 11, Part 390 (2001) (Regulation 155) do not regulate the amount of a service contract’s purchase price, customers here would, in actuality, pay for the cost of the wireless insurance coverage premium by paying an inflated purchase price for the wireless carrier’s or retailer’s service contract or extended warranty, or the wireless equipment itself. Therefore, marketing the wireless coverage as “free” could be deceptive and misleading to customers. See Ins. Law Article 24 and OGC Opinion 08-03-09 (Mar. 12, 2008) (stating that the principles enunciated in 11 NYCRR § 215 (Regulation 34) and 11 NYCRR § 219 (Regulation 34-A), which apply to advertisements of accident and health insurers, life insurers, and annuities, provide appropriate guidelines for all New York-authorized insurers).
Furthermore, 11 NYCRR § 153.9 (Regulation 135) applies to group and quasi-group property/casualty insurance policies, and states that:
No insurer shall provide coverage in regard to a group or quasi-group program if:
(a) the purchase of any good or service from the group or sponsoring entity is a condition of purchasing insurance by a group member or quasi-group participant; or
(b) the purchase of insurance by a group member or quasi-group participant is a condition of purchasing any good or service from the group or sponsoring entity.
Thus, 11 NYCRR § 153.9 prohibits an insurer from providing coverage pursuant to a group or quasi-group insurance policy if the purchase of insurance is contingent upon the purchase of any good or service, or if the purchase of any good or service is contingent upon the purchase of insurance. Here, receipt of the free wireless coverage is contingent upon the customer purchasing the wireless carrier’s or retailer’s service contract or extended warranty, which is an impermissible tie-in sale that violates 11 NYCRR § 153.9.
In addition, ABC’s wireless coverage may also run afoul of Insurance Law § 2131, which nowhere contemplates the receipt of wireless coverage “free-of-charge” upon the purchase of a wireless carrier’s or retailer’s service contract or extended warranty. For example, Insurance Law § 2131(e) prohibits the issuance of wireless coverage unless, at every location where wireless communications equipment agreements are executed, there are brochures or other written materials readily available to prospective customers that, among other things: state that the wireless customer need not purchase the insurance in order to lease the wireless equipment; set forth the wireless coverage’s price, deductible, benefits, exclusions, and conditions; and disclose that the wireless customer may cancel the wireless coverage at any time and will be entitled to a refund of any of the unearned premium.3 These express requirements of the statute are inconsistent with the provision of “free-of-charge” coverage.
In sum, ABC currently has two options for offering its wireless coverage in compliance with the Insurance Law and the regulations promulgated thereunder. First, ABC may, pursuant to Insurance Law § 2131, offer wireless coverage on a group basis that includes coverage, as permitted under section 2131(d)(2), for mechanical failure or malfunction, or electrical damage from handling, which would otherwise be covered under the wireless carrier’s or retailer’s service contract or extended warranty. Alternatively, ABC may, pursuant to Insurance Law § 2131, continue to offer wireless coverage on a group basis that covers those losses not covered under the wireless carrier’s or retailer’s service contract or extended warranty. However, in both situations, the wireless coverage must be offered on an optional basis, and the insured must pay the insurance premium. ABC may not tie the wireless coverage to the purchase of the wireless carrier’s or retailer’s service contract or extended warranty, and may not offer the wireless coverage “free-of-charge.”
For further information, you may contact Attorney Joana Lucashuk at the New York City office.
1 It is unclear whether the “extended service contract” to which the inquirer refers is actually a service contract issued by a registered service contract provider, or an extended warranty made by the wireless carrier or manufacturer. However, for the purpose of this opinion, the analysis is the same in either case.
2 Insurance Law § 4224(c) sets forth similar language that pertains to life insurance, accident and health insurance, and annuities.
3 Under Insurance Law § 2131(f), an insurer must submit these brochures to the Superintendent for the Superintendent’s review.