OGC Opinion No. 09-09-01
The Office of General Counsel issued the following opinion on September 1, 2009 representing the position of the New York State Insurance Department.
RE: Service Contracts
Questions Presented:
1) May a manufacturer’s wholly-owned subsidiary, which is a registered service contract provider, issue a warranty on the manufacturer’s products?
2) Under the facts presented, does the contemplated agreement constitute a service contract under Article 79 of the Insurance Law, where there is no separate charge for the agreement?
Conclusions:
1) No. Under the facts presented, the subsidiary may not issue a “warranty” on the manufacturer’s product because the agreement is not in fact a warranty and, even if the subsidiary had a relationship to the product such as wholesaler, distributor, or other party in the direct chain of sale, or does some act, such as an inspection, that imparts knowledge of the product to the extent of minimizing, if not eliminating, the element of risk contemplated by N.Y. Ins. Law § 1101(a) (McKinney 2006), the subsidiary would be making the contract as a vocation and not as merely incidental to another legitimate business or activity.
2) No. The proposed agreement would not constitute a service contract under Article 79 of the Insurance Law because there is no separate charge for the agreement.
Facts:
The inquirer reports that he represents a New York State-registered service contract provider (the “Subsidiary”), which is the wholly-owned subsidiary of the manufacturer of the products that the Subsidiary covers under its service contracts. The products are appliances manufactured by the parent. The inquirer further states that the Subsidiary, in its capacity as a service contract provider, uses the net worth option, including a guarantee from its parent, the manufacturer, to demonstrate its financial responsibility as required by Insurance Law § 7903(c).
The inquirer states that “the manufacturer along with its subsidiary service contract provider are contemplating a consumer offer in which should a consumer purchase one of the manufacturer’s products, the consumer would receive the choice between a free service contract on the product or a free accessory to the product.” These agreements would extend the manufacturer’s warranty covering the appliance beyond its term. The inquirer further states that “[t]he only ‘compensation’ in this transaction is with the sale of the appliance itself.” The manufacturer would pay a commission to the dealer when it makes the sale of the appliance and, under the proposed offer, the consumer could choose to receive an agreement issued by the Subsidiary. The consumer who chooses the agreement would not pay any money or give any consideration for the agreement to the Subsidiary.
The inquirer asks whether the contemplated agreement constitutes either a warranty or a service contract, the issuance of which would not constitute the doing of an insurance business within the meaning of Insurance Law § 1101.
Analysis:
Insurance Law § 1101(a)(1) is relevant to the inquiry. That statute defines an “insurance contract” as follows:
"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.
Insurance Law § 1101(a)(2) defines a fortuitous event as “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 § 1101(b)(1) defines the doing of an insurance business, and reads in relevant part as follows:
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; . . . .
Insurance Law § 1101(b)(3-a) further states that “the marketing, sale, offer for sale, issuance, making, proposing to make or administration of a service contract pursuant to article seventy-nine of [the Insurance Law] . . . shall not constitute the doing of an insurance business in this state.” Thus, certain warranties – such as those issued by persons for whom the issuance of the warranty is not its vocation but is merely incidental to another legitimate business or activity – as well as service contracts issued pursuant to Article 79 of the Insurance Law do not constitute the doing of an insurance business.
1. Warranty
The inquirer’s first question asks whether the subsidiary, a registered service contract provider, may issue a “warranty” on the manufacturer’s products.
Although the Insurance Law does not define the term “warranty,” a warranty generally relates in some way to the nature or efficiency of a product or service. Commonly, the warrantor agrees to repair or replace a product that fails to perform properly, such as a contract covering a defect in materials or workmanship, or a contract otherwise covering the breakdown of the product. See Ollendorf Watch Co., Inc., v. Pink, 279 N.Y. 32, 17 N.E.2d 675 (1938). In order to be a warranty, the contract maker must have a relationship to the product or service, or do some act that imparts knowledge of the product or service to the extent of minimizing, if not eliminating, the element of risk contemplated by Insurance Law § 1101(a). See Opinion of the Office of General Counsel (“OGC Opinion”) No. 01-07-06 (July 13, 2001). Where there is no relationship or act, the contract maker undertakes an obligation involving a fortuitous risk, and the agreement is an insurance contract that constitutes the doing of an insurance business. Id. However, even if the contract is a warranty, it will still constitute the doing of an insurance business if done as a vocation and not as merely incidental to any other legitimate business or activity of the warrantor. Ins. Law § 1101(b)(1)(B).
A manufacturer, distributor, seller, or other person in the chain of sale of a product may issue a warranty because it has exercised such control over the product so as to minimize, if not eliminate, the element of chance or risk contemplated by Insurance Law § 1101(a). See OGC Opinions 04-07-05 (July 13, 2004) and 01-07-06 (July 13, 2001). In those instances, such a warranty is not insurance within the meaning of Insurance Law § 1101 because the making of warranties by such a person (even for an additional charge) is merely incidental to another legitimate business or activity – namely; the manufacture, distribution, or sale of the product. See OGC Opinions 07-09-15 (September 17, 2007) and 04-07-05 (June 13, 2004).
Here, however, the Subsidiary does not have a relationship with the product that minimizes risk solely by virtue of its relationship with the manufacturer. See OGC Opinion No. 99-123 (September 13, 1999) (NILS). To be sure, even if the Subsidiary did have a relationship such that the contract would constitute a warranty, the making of such a contract would nonetheless violate Insurance Law § 1102 because the Subsidiary – whose business is issuing service contracts – would be making the contract as a vocation and not as merely incidental to another legitimate business or activity, unless the agreement constituted a service contract pursuant to Article 79 of the Insurance Law.
2. Service contract
The inquirer also asks whether the manufacturer’s and Subsidiary’s proposal for the manufacturer to offer to include the Subsidiary’s agreements with the sale of the manufacturer’s appliance at no extra charge to the consumer would disqualify the agreement from constituting a service contract under Article 79 of the Insurance Law.
Insurance Law § 7903(k), is relevant to this inquiry. That statute defines “service contract” as follows:
"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, and may also provide for the repair, replacement or maintenance of property for damage resulting from power surges and accidental damage from handling. Service contracts may also include contracts to repair, replace or maintain residential appliances and systems. Such term shall also mean a contract or agreement made by or for the manufacturer or seller of a motor vehicle tire for repair or replacement of the tire or wheel as the result of damage arising from a road hazard. (Emphasis added.)
As to whether the proposed agreement would provide for a “separate or additional consideration,” the inquirer states that it is “[t]he position of the [manufacturer] and subsidiary . . . that there is compensation inherent within the original transaction. In other words, when a consumer elects to purchase a unit, it purchases such knowing that there is a free accessory or free service contract associated with the purchase. This is initially considered by the consumer’s purchase and thus compensation for the service contract/accessory is inherent within the purchase of the unit itself.”
OGC disagrees. Although the cost of the agreement is built into the purchase price to the consumer for the purchase of the appliance, under Insurance Law § 7903(k), a necessarily element of a service contract is that the consideration for the service contract be separate or additional, and not an unidentifiable portion of the purchase price of the product. See OGC Opinion No. 02-03-25 (March 26, 2002). Under Article 79, the service contract must state both the total purchase price for the contract, see Ins. Law § 7902, and permit the service contract holder to return the service contract for a full refund of the purchase price, see Ins. Law 7904. Thus, the requirement for a separate or additional consideration is not a mere technicality, but reflects a substantive consumer protection.
* * * * *
In that the proposed agreement here would not constitute either a warranty that is not an insurance contract, or a service contract pursuant to Article 79 of the Insurance Law, it would constitute the doing of an insurance business, which requires that the Subsidiary be licensed as an insurer by the Department. 1
For further information you may contact Senior Attorney Brenda M. Gibbs at the Albany Office.
1 To be sure, although the making of the contracts may constitute the doing of an insurance business, not all kinds of insurance may be written in New York. See Ins. Law § 1113. This opinion does not address whether Subsidiary could, in fact, become licensed as insurer in New York to write the proposed contracts.