OGC Opinion No. 08-08-10

The Office of General Counsel issued the following opinion on August 27, 2008, representing the position of the New York State Insurance Department.

RE: Jane Doe Protection Program Agreement

Questions Presented:

1. Does the Paint Repairs services coverage constitute insurance, or may it be written as a service contract?

2. Does the Headlight Reconditioning repair services coverage constitute insurance, or may it be written as a service contract?

3. Does the Fabric/Leather/Vinyl repair services coverage constitute insurance, or may it be written as a service contract provision?

4. Does the Other Interior: Stain Repair services coverage constitute insurance, or may it be written as a service contract?

5. Does the Other Interior: Dashboard Cracks repair services coverage constitute insurance, or may it be written as a service contract?

6. Does the Environmental repair services coverage constitute insurance, or may it be written as a service contract?

7. Does the Alloy Wheel Chip Repair services coverage constitute insurance, or may it be written as a service contract?

May John Doe and its technicians offer Agreement Holders who have purchased a Jane Doe Agreement a discount on John Doe technician repair costs for damages that are not covered under the Jane Doe Agreement?

Conclusions:

1. The coverage afforded under the Jane Doe Agreement for Paint Repairs services obligates ZZZ Warranty Corporation (“ZZZ”) to provide the Agreement Holder with paint repair services for damages, some of which are due to the happening of an external fortuitous event. Therefore, its issuance in New York State as part of the Jane Doe Agreement constitutes the doing of an insurance business for which licensure as an insurer by ZZZ is required.

2. The coverage afforded under the Jane Doe Agreement for Headlight Reconditioning repair services obligates ZZZ to provide the Agreement Holder with removal of the yellow or cloudy condition of a headlight. It extends only to damage to headlights resulting from wear and tear, and therefore may be provided under a service contract by a registered service contract provider.

3. The coverage afforded under the Jane Doe Agreement for Fabric/Leather/Vinyl repair services obligates ZZZ to provide the Agreement Holder with repair services for damage to interior coverings that is due to rips or tears of a limited size. Insofar as such damage may occur due to the occurrence of an external fortuitous event, its issuance in New York State as part of the Jane Doe Agreement constitutes the doing of an insurance business for which licensure as an insurer by ZZZ is required.

4. The coverage afforded under the Jane Doe Agreement for Stain Repair services obligates ZZZ to provide the Agreement Holder with stain removal services for damages to interior coverings not excluded from coverage. Insofar as such damage may occur as the result of the occurrence of an external fortuitous event, its issuance in New York State as part of the Jane Doe Agreement constitutes the doing of an insurance business for which licensure as an insurer by ZZZ is required.

5. The coverage afforded under the Jane Doe Agreement for Dashboard Cracks repair services obligates ZZZ to provide the Agreement Holder with repairs to remedy dashboard cracks of a small, specified, size caused only by damage resulting from wear and tear. Therefore, it is a coverage that may be provided in a service contract issued in New York State by a registered service contract provider.

6. The coverage afforded under the Jane Doe Agreement for Environmental repair services obligates ZZZ to provide the Agreement Holder with repairs to painted metal portions of the automobile covered - i.e., which coverage extends only to a new automobile - for damage caused by environmental forces. Environmentally-caused damages, such as those caused by acid rain, result from external fortuitous events. Therefore, the issuance of the agreement in New York State constitutes the doing of an insurance business for which licensure as an insurer by ZZZ is required.

7. The coverage afforded under the Jane Doe Agreement for Alloy Wheel Chip Repair services obligates ZZZ to provide the Agreement Holder with repairs of the painted alloy of factory-installed wheels where the original painted alloy becomes delaminated over time. Excluded from such coverage are repairs to dented, cracked or bent wheels. Insofar as the coverage is limited to damage resulting from wear and tear, caused by the layers of paint on the wheels separating, and not damage due to causes external to the nature of the wheels themselves, this constitutes a coverage that may be provided under a service contract by a registered service contract provider.

8. Yes. John Doe and its technicians may offer a discount to Agreement Holders on the cost of repairs they perform that are not covered under the Jane Doe Agreement, provided that the discounted fee charged to the Agreement Holder for each repair covers the cost of rendering the service, including a reasonable overhead.

Facts:

The company, John Doe, markets the Jane Doe Protection Program through automobile dealerships that sell the Jane Doe Agreements to customers at the time of vehicle sale. The Department has a copy of the Jane Doe Agreement, and in the following analysis reviews whether each of the various coverages afforded under the Jane Doe Agreement constitutes the doing of an insurance business, or whether it may be offered as coverage under a service contract.

The Jane Doe Agreement provides that ZZZ Warranty Corporation (“ZZZ”), as the administrator/obligor, agrees to provide repairs to the Agreement Holder for specified repairs to the holder’s automobile. The covered repairs are to be done by John Doe technicians. The services provided are divided into categories that are identified in the Jane Doe Agreement as “service groups” and include paint repairs; headlight reconditioning; fabric/leather/vinyl repairs; dashboard cracks repair; stain removal; environmental damage repairs; and alloy wheel chip repair. ZZZ is not licensed as an insurer, nor is it registered in New York State as a service contract provider.

Paragraph 10 of the Jane Doe Agreement, styled “Exclusions and Conditions”, specifically excludes coverage for damages caused by the following: 1) any repair resulting from collision, fire, theft, vandalism, riot, war, civil commotion, explosion, lightning, earthquake, hurricane, tornadoes, freezing, windstorm, water or flood, acts of God, salt, and environmental damage (other than those specifically covered under the environmental services group); 2) any service required as a result of misuse, abuse, negligence or not protecting the vehicle from further damage; 3) any liability for property damage, or for injury to or death of any persons arising out of the operation, maintenance or use of the vehicle; 4) unverified information provided by the Agreement Holder, an issuing dealer or a repair facility; and 5) damages due to rust and corrosion.

To make a claim, the Agreement Holder must contact ZZZ, which then makes an appointment on the Agreement Holder’s behalf for service either at the location of the issuing dealership or at the location of a John Doe technician. The term of a Jane Doe Agreement is chosen by the applicant, and may run from one to five years. For most covered services, the maximum number of service visits covered under the Jane Doe Agreement is limited to two for each year the Agreement is in effect. For example, a one-year agreement entitles the Agreement Holder to two service visits, while a four-year agreement entitles the Agreement Holder to eight service visits over the life of the Jane Doe Agreement.

Paragraph 8 of the Jane Doe Agreement does not provide any specific coverage. Rather, it is an undertaking by John Doe and its technicians to offer the Agreement Holder a substantial discount from the cost of repairs for damages that are not otherwise covered under the Jane Doe Agreement.

The Jane Doe Agreement states that ZZZ’s obligations are insured under a service contract reimbursement insurance policy issued by the ABC Company.

In drafting the Jane Doe Agreement, the inquirer has been mindful of the relevant provisions of the Insurance Law and prior opinions of the Insurance Department’s Office General Counsel (“OGC”) regarding paintless dent repair and other similar programs. The inquirer states that John Doe intends for the Jane Doe Agreement to comply with the law and OGC’s opinions. Therefore, it is OGC’s understanding that John Doe does not intend the Jane Doe Agreement to constitute the doing of an insurance business. The inquirer provided an analysis of certain provisions of the Jane Doe Agreement, and concluded, based on a review of two OGC opinions dated July 23, 2007 (Opinion No. 07-07-19) and September 5, 2007 (Opinion No. 07-09-02) that the covered repair services result from damages due to “wear and tear’ and thus are service contract coverages, not insurance. However, the inquirer acknowledges that some of the covered services may constitute the doing of an insurance business in New York.

Analysis:

N.Y. Ins. Law § 1101(a)(1) (McKinney 2000) is central to the query. That statute defines “insurance contract” as follows:

Insurance Law § 1101(a)(2), in turn defines a “fortuitous event” as “an 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.”

Insurance Law § 1102 prohibits any person or corporation from doing an insurance business without a license. The “doing of an insurance business” is defined in Insurance Law §1101(b)(1)(A) to include “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(b)(3-a) exempts the sale of service contracts from the definition of doing an insurance business. Insurance Law § 7902 (k) defines a “service contract” as follows:

The inquirer asserts that the services covered under the Jane Doe Agreement are not for damages that occur upon the happening of a fortuitous event—and which, therefore, would constitute insurance--but rather for damage caused by wear and tear, which may be provided under a service contract. The inquirer refers to OGC Opinion No. 07-07-19 (July 23, 2007) and cites that section of the opinion that describes “wear and tear” as the “inevitable deterioration of an object that may or may not break down over time through regular use, regardless of ordinary care and maintenance.”

The inquirer’s reading of the July 23, 2007 OGC opinion, however, does not take into account other aspects of what constitutes “wear and tear”. The opinion describes “reasonable use” of property to “include expected treatment from the user of the property but does not include damage caused to the vehicle by external forces. Applying this definition to an automobile, “wear and tear” includes wear naturally caused by the use of the automobile, but does not include damage resulting from external forces…” (Opinion 07-07-19, July 23, 2007). External forces can be man-made or environmental; the operative element is that—unless intentionally caused by one of the parties—they are beyond the control of both parties to the agreement and are, therefore, for purposes of the Insurance Law, “fortuitous events”. An agreement or contract that covers damages caused by fortuitous events constitutes the doing of an insurance business in New York pursuant to Insurance Law § 1101, except to the extent otherwise provided therein.

It is a common misunderstanding that contracts providing coverage against defects are never fortuitous. In fact, absent exercise of control over a product by the obligor, an agreement providing coverage for defects is fortuitous with respect to the obligor under the contract (79 Opinion of Attorney General 153 (1949)). The element of control in such contracts is an essential distinction between contracts that are warranties and those that, but for the service contract exception, would constitute insurance, as borne out by numerous opinion letters of this Department prior to the 1997 enactment of the service contract law^{1. See, e.g., OGC Opinions No. 94-23 (April 4, 1994) and No. 94-34 (June 1994).}

Moreover, unlike the case for a warranty, a service contract as defined in Insurance Law §7902(k), may provide coverage for damage resulting from certain outside fortuitous events. One such provision is for “accidental damage from handling”, which means damage from handling in the normal and customary use of the product (here, the automobile). Coverage for accidental damage from handling may only be provided if incidental to coverage for defects in materials or workmanship. See OGC Opinions No. 06-03-04 (March 8, 2006) and No. 07-07-19 (July 23, 2007). A service contract may also provide coverage for other outside fortuitous events, such as power surges and road hazards (under certain circumstances.) However, in all such cases, if the obligor is not registered as a service contract provider, the making of the agreement would constitute the doing of an insurance business, which requires licensure as an insurer.

With the above as background, each of the coverages provided under the Jane Doe Agreement are described and discussed separately below.

1.) Paint Repairs

The Jane Doe Agreement provides coverage for paint repair services as follows:

The Paint Repairs coverage specifies that scuffmarks must be due to wear, and that black-out trim painting is limited to black parts that have faded over time. Other than the foregoing limitations upon coverage as to the causes of covered damages, the general exclusions that are contained in the Jane Doe Agreement apply to coverage for paint repairs.

The inquirer asserts that paint repairs result from basic use of the automobile, are minor and caused by environmental rather than man-made causes, and fit within the definition of “wear and tear” set forth in the July 23, 2007 OGC opinion. The inquirer also argues that faded areas of the exterior of an automobile that need reblacking as the result of exposure to the sun over a period of time would constitute “wear and tear” and thus could be covered by a service contract. Fading caused by repeated exposure to the sun is an example of wear naturally occurring over the course of time caused by the reasonable use of the vehicle.

The fact that a repair may be “minor” or “small” has no bearing on the legal analysis of whether it is due to ordinary wear and tear or arises from the happening of a fortuitous event. Even if the damage caused to an automobile by a stone chip, acid rain, tree sap, or a car wash only causes a small amount of damage, if it is caused by the happening of an outside fortuitous event, the coverage provided is in the nature of insurance. “While the degree and extent of damage may be less than the level of damage usually covered under an insurance policy, the Insurance Law draws no distinction with respect to such factors or the amount of the benefit provided under the agreement. The Insurance Law is concerned merely with whether the event is beyond the control of the contract holder and the service provider.” (Opinion No. 07-07-19)

Although some repairs under this coverage may arise out of damage due to ordinary wear and tear, others do not. A small loss of paint may be due to a “ding” or a “ping” caused by a passing motor vehicle kicking up a small stone or rock from the road into the covered vehicle, which is an example of a fortuitous event outside the control of ZZZ and the Agreement Holder. As stated above, a service contract may only provide coverage for accidental damage from handling that is incidental to a permissible service contract coverage. The Paint Repairs coverage does not provide coverage for defects in workmanship and materials, but rather constitutes the doing of an insurance business for which ZZZ would have to be licensed as an insurer. (OGC Opinion No. 07-09-02, September 5, 2007)

2.) Headlight Reconditioning

The Jane Doe Agreement provides coverage for headlight reconditioning as follows:

The inquirer asserts that headlight yellowing is “due to wear and tear and time.” Sun exposure and road debris are all common causes of yellow or cloudy headlights. This condition can occur on automobiles with plastic lenses, which are lighter than glass lenses, and made of a porous material that expands when exposed to heat or when the headlights are on. Once expanded, exposure to the elements cause the lenses to oxidize, which then leads to lens discoloration. The degradation of the lens occurs over time.

Because headlight yellowing and clouding is caused by degradation and wear that occurs naturally over time through ordinary use of the vehicle, the coverage afforded under the Jane Doe Agreement for headlight reconditioning services does not constitute the doing of an insurance business and could be offered under a service contract if ZZZ registers in New York as a service contract provider.

3.) Fabric/Leather/Vinyl

The Jane Doe Agreement provides coverage for fabric/leather/vinyl repairs as follows:

The inquirer suggests that the covered damages to fabric, leather and vinyl interiors are due to wear and tear and are within the control of the owner, and are caused by repeated entries and exits from the vehicle that arise from ordinary use of the vehicle.

Although rips, tears or separation of material can be the result of wear and tear caused by an individual’s repetitive sitting and movement over time either into or out of a car seat, a rip or tear or separation of material could occur because a buckle from a passenger’s clothing digs into or catches on the seat fabric. The latter example would be a fortuitous event, within the meaning of such term as used in the Insurance Law.

Coverage for accidental damage from handling may be covered in a service contract, but only if such damage is incidental to a permissible service contract coverage. (OGC Opinion No. 07-09-02, September 5, 2007). The fabric/leather/vinyl repair does not provide coverage for defects in workmanship and materials. Therefore, this coverage constitutes insurance, the issuance of which in New York constitutes the doing of an insurance business for which ZZZ has to first be licensed as an insurer (OGC Opinion dated April 30 2008; OGC Opinion 04-02-22, February 20, 2004).

4.) Stain Repair

The Jane Doe Agreement provides coverage for stain repair (stain removal) as follows:

As with the Fabric/Leather/Vinyl coverage, the inquirer asserts that a stain repair (removal) is necessitated by wear and tear, which is within the control of the vehicle’s owner, and caused by getting into and out of the vehicle “and generally occupying the car…” However, more typically, a stain will happen due to a cause outside of the control of the vehicle’s owner which therefore constitutes a fortuitous event. For instance, a passenger may be unaware of a cut to his/her arm, hand or leg that is bleeding onto the seat, causing a stain. That would be an example of damage caused by a fortuitous event beyond the control of ZZZ and the Agreement Holder. Because the stain repair coverage includes coverage for damages caused by outside fortuitous events, the coverage constitutes an insurance contract. Its issuance in New York would be the doing of an insurance business for which ZZZ would have to become licensed as an insurer in New York.

5.) Dashboard Cracks

The Jane Doe Agreement provides coverage for dashboard crack repair as follows:

The inquirer states that dashboard cracks are minor damages that are easy to repair and are “due to exposure to the elements, specifically the sun and temperature changes between winter and summer.” But noted above, the fact that the repair to be made is “minor” or “small” has no correlation to whether the coverage provided is or is not due to a fortuitous event. The Insurance Law does not make distinctions based on the extent of the damage.

However, damage in the nature of a small crack to an automobile dashboard caused only by repeated exposure over time to sun and temperature changes is an example of deterioration caused by normal use of a motor vehicle. Damages caused by fortuitous events, such as collision, vandalism and freezing are specifically excluded under the general exclusions section of the Jane Doe Agreement and are applicable to dashboard crack coverage. Thus, subject to such exclusion, this coverage could be offered under a service contract, if ZZZ becomes registered in New York State as a service contract provider.

6.) Environmental

The Jane Doe Agreement provides coverage for repairs due to environmental damage as follows:

The absence of clear coat, or loss of gloss, is a condition, and may result from environmental damage that is beyond the substantial control of either ZZZ or the Agreement Holder. Therefore, such damage constitutes a fortuitous event and not a defect. Clear coat loss can be caused by external forces, such as an automatic car wash, tree sap, acid rain, bird droppings or insects damaging the vehicle. Damages caused by external forces are not inherently the result of wear and tear naturally caused by use of the automobile. The coverage for environmental repairs thus is insurance, for which licensure as an insurer by ZZZ is first required.

7.) Alloy Wheel Chip Repair

The Jane Doe Agreement provides coverage for alloy wheel chip repairs as follows:

Car paint peeling, or delamination, is caused by the loss of adhesion between the layers of coating that make up the painted surface. Such a separation of the different layers of paint on the painted alloy of a factory wheel would occur not from causes external to the alloy wheel, but rather from the nature of the wheel itself as to how it is constructed. Given that dents, cracks and bent wheels are specifically excluded from the coverage, it is OGC’s understanding that in using the phrase “delamination over time,” the Jane Doe Agreement is covering only a process of wear and tear that occurs as the result of repeated stresses from ordinary use of the vehicle upon which the wheel is attached, or defects in materials and workmanship.

Insofar as this coverage is limited to damage resulting from wear and tear, and excludes damage due to outside fortuitous events, the coverage afforded under the Jane Doe agreement for alloy wheel chip repair services does not constitute the doing of an insurance business, and may be offered under the Jane Doe Agreement as a service contract coverage, as long as ZZZ first becomes registered in New York State as a service contract provider.

8.) Discount for repairs for damages not covered under the Jane Doe Agreement –

The inquirer asserts that the $50 discount off the cost of non-covered repairs is similar to discounts given by restaurant/entertainment books, “where a restaurant hopes to get a customer by way of selling two for one coupons.”

The inquirer has indicated that John Doe technicians who perform the repairs will bear the costs of the discount offered on repairs to damages that are not covered under the Jane Doe Agreement. For damage caused by fortuitous events that are not covered by the Jane Doe Agreement, John Doe technicians may offer such a discount to Agreement Holders without it constituting the doing of an insurance business, provided that the fee actually charged by John Doe’s technicians, taking into account the discount, covers the actual “cost of rendition”, meaning the cost of the repair, including labor and material costs, and reasonable overhead expenses. (OGC Opinion No. 08-03-13, March 19, 2008; OGC Opinion No. 07-04-01, April 2, 2007; OGC Opinion dated September 1, 1998). The cost of rendition also includes ensuring an adequate profit margin; thus, a technician may reduce his or her profit margin with a discount, but cannot agree to repair the vehicle at break-even or a lower point. (OGC Opinion No. 4-02-22, February 20, 2004)

However, if by offering this discount, the money charged for the repair to the Agreement Holder does not cover the cost of rendition of the repair service (including reasonable overhead), then the obligor would be doing an insurance business without a license in violation of Insurance Law §1102. (OGC Opinion No. 08-03-13, March 19, 2008).

* * * *

In conclusion, some of the coverages afforded under the Jane Doe Agreement constitute the doing of an insurance business and may not be sold in New York without the appropriate insurance license. (OGC Opinion 05-03-30, March 22, 2005) Other coverages do not constitute the doing of an insurance business and may be provided under a service contract by a registered service contract provider. ZZZ could enter into a contract containing those provisions that may be written as a service contract, provided that ZZZ becomes registered in New York State as a service contract provider under Insurance Law § 7907.

In addition, in order for the reconstituted contract to be sold in New York, the agreement must be further amended to include all the required provisions for service contracts specified in Article 79. Under Insurance Law §§ 7903(e) and 7905(n), service contracts must require the provider to allow the service contract holder (i.e., agreement holder) to return the service contract within at least 20 days of the date of mailing or, within at least ten days if delivered at the time of sale, for a refund. Insurance Law § 7905(n) also requires the Jane Doe Agreement to contain a provision stating that a ten percent penalty per month shall be added to refunds not made within 30 days of the return of the contract to the provider.

Pursuant to Insurance Law § 7905(k), every service contract must contain a provision stating the terms and conditions regarding termination of the service contract by the parties. The current Jane Doe Agreement does not contain a provision addressing cancellations by the Agreement Holder. The service contract must also contain a provision regarding all the obligations of the service contract holder (i.e., Agreement Holder), “such as the duty to protect against any further damage and any requirement to follow owner’s manual instructions.” (Insurance Law § 7905(l)). Moreover, while the Jane Doe Agreement is printed in very small type that is difficult to read, § 7905(a) requires that “the entire service contract shall be printed or typed in easy to read type....”

ZZZ Warranty Corporation is not currently registered as a service contract provider pursuant to Article 79 of the Insurance Law. Nor is ZZZ licensed as an insurer in New York. Given those circumstances, ZZZ’s sale of the Jane Doe Agreement would violate § 1102.

Furthermore, New York automobile dealers who sell the Jane Doe Agreement would be acting as insurance agents or brokers or otherwise aiding an unlicensed insurer in violation of Insurance Law § 2117. The statute, in relevant part, reads as follows:

In addition, automobile dealers who sell the Jane Doe Agreement are acting as agents or brokers, and unless they are licensed as such, they are acting in violation of Insurance Law § 2102, which provides, in pertinent part, the following:

For further information you may contact Senior Attorney Susan S. Htoo at the Albany Office.

¹ Warranties themselves may constitute the doing of an insurance business if done as a vocation. See §1101(b)(1)(B)

² The inquirer states that “cuts” and “punctures” are covered damages under the fabric/leather/vinyl coverage; however, we point out that the actual terms of the Jane Doe Agreement do not include those damages. The analysis contained in this opinion addresses the coverage for fabric/leather/vinyl repair services as set forth in the Jane Doe Agreement itself.