OGC Opinion No. 10-02-03
The Office of General Counsel issued the following opinion on February 12, 2010, representing the position of the New York State Insurance Department.
RE: Gap Waiver
Questions Presented:
1. Must a bank offer a gap waiver for a motor vehicle retail installment contract after the contract is assigned to the bank by a motor vehicle dealer creditor?
2. May a bank, after the assignment of a motor vehicle installment contract without a gap waiver, require a debtor to sign an addendum to the assigned retail contract that waives the bank’s obligation, as the holder of the contract, to offer a gap waiver to the debtor?
3. Is the debtor responsible for the gap amount if a gap waiver is not offered at the time of sale?
4. May a bank require the creditor to make a gap waiver offer to a debtor instead of itself?
Answer:
1. Yes. A gap waiver must be offered if the bank is a holder of the motor vehicle retail installment contract subject to the provisions of N.Y. Personal Property Law (“PPL”) § 302(A) (McKinney Supp. 2002).
2. No. Pursuant to PPL § 302(A)(3), a holder bank must offer a gap waiver to a debtor absent signed declinations from every insurer offering gap insurance. Therefore, a requirement by the holder for a debtor to sign an addendum to a motor vehicle retail installment contract that would relieve the holder of the obligation of offering a gap waiver is improper.
3. This question should be directed to the New York State Banking Department for clarification.
4. This question should be directed to the New York State Banking Department for clarification.
Facts:
The inquiry is of a general nature without reference to particular facts. The inquirer asks about a bank (“holder”) that has purchased and is the assignee of a motor vehicle retail installment contract between an automobile dealer (“creditor”) and its customer (“debtor”).
Analysis:
By way of general background, a gap waiver is an agreement whereby a creditor or lessor agrees to waive the debtor’s or lessee’s obligation for the difference between the gap amount 1 and the actual cash value of the property.
The offering of a gap waiver is not considered the “doing of an insurance business” if three conditions are met. Insurance Law § 1101(b) (McKinney 2006) sets forth the conditions for a 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.)
Insurance Law § 1113 (a)(26) authorizes and defines gap insurance, including the two kinds of motor vehicle gap insurance, in pertinent part as follows:
"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. (Emphasis added.)
Gap insurance provides coverage for the gap amount – i.e., the difference between the actual cash value of a vehicle at the time of loss, and the amount owing on the lease or loan at that time. The Insurance Law does not set forth a requirement that gap insurance or a gap waiver be offered to motor vehicle buyers. However, PPL Article 3 applies to motor vehicle retail installment contracts. 2 PPL § 302(A), which defines the obligations that a creditor has to a debtor with regard to the offering of gap waivers/insurance, reads in pertinent part as follows:
1. If the retail instalment 3 contract provides that the buyer shall be responsible upon a total loss of the vehicle occasioned by its theft, confiscation or physical damage for the gap amount as defined in paragraph fifty-two of subsection (a) of section one hundred seven of the insurance law, the holder 4 , prior to the execution of the contract, shall by a notice on a separate document conspicuously disclose that fact and the obligations for which the buyer would remain liable in the event of a theft, confiscation or total loss of the vehicle. If the holder is required under subdivision two of this section to offer to waive its contractual right to hold the buyer liable for the gap amount in the event of a total loss of the vehicle occasioned by its theft or physical damage, the notice shall also: (a) state that for a separate charge disclosed in the notice the holder will waive its contractual right to hold the buyer liable for the gap amount in the event of a total loss of the vehicle occasioned by its theft or physical damage; (b) contain a provision informing the buyer that he or she may, as an alternative to purchasing a waiver, be able to purchase insurance covering the gap amount from an insurance company which has been licensed by the superintendent of insurance to write motor vehicle debtor gap insurance in this state; and (c) contain a provision permitting the buyer to indicate whether he or she wants the holder to waive its contractual right to hold the buyer liable for the gap amount in the event of a total loss of the vehicle occasioned by its theft or physical damage. The notice shall be signed by the buyer….
2. If the retail instalment contract provides that the buyer shall be responsible upon a total loss of the vehicle occasioned by its theft or physical damage for the gap amount, the holder, prior to the execution of the agreement, shall offer to waive its contractual right to hold the buyer liable for the gap amount in the event of a total loss of the vehicle occasioned by its theft or physical damage, only if motor vehicle creditor gap insurance coverage is available to the holder and such coverage is obtained from a property/casualty insurance company….
3. A holder shall not be obligated under subdivision two of this section to offer to waive its contractual right to hold the buyer liable for the gap amount if, during the current calendar year or during the odd-numbered calendar year immediately preceding the calendar year in which the agreement is entered into, the holder has received motor vehicle creditor gap insurance declination notices or other evidence of unavailability from every insurance company whose name appears on the insurance department compilation of insurance companies which during that calendar year were authorized to write motor vehicle creditor gap insurance in this state…. (Emphasis added.)
Thus, PPL § 302A(1) provides that no retail installment contract may be conditioned upon the buyer obtaining motor vehicle debtor gap insurance. PPL § 302A(2) further provides that if the retail installment contract holds the buyer responsible for the gap amount, then the holder must offer a gap waiver to the buyer, but only if motor vehicle creditor gap insurance is available to the holder of the contract from a New York authorized insurer, and the holder has obtained such coverage. Finally, PPL § 302A(3) provides that the holder is not required to offer the gap waiver only if it has obtained declination notices or other evidence of unavailability of insurance from every insurer authorized to write gap insurance in this state, during the current calendar year or during the odd-numbered calendar year immediately preceding the calendar year in which the agreement is entered into.
I. The Bank Must Offer GAP Waiver
In response to the first query, which asks whether a bank must offer a gap waiver on a motor vehicle retail installment contract assigned to it by a creditor, the bank must make such an offer, if the creditor has not already done so, because if the bank purchases a retail installment contract as assignee (also called an indirect loan), it becomes a holder within the meaning of the PPL. See Office of General Counsel (“O.G.C.”) Opinion No. 08-03-07 (March 11, 2008); O.G.C. Opinion No. 95-43 (June 27, 1995).
Please note, however, that the PPL is not applicable to banks in certain circumstances. If a bank or other financial institution originates a loan, and does not sell the property to a retail buyer, then the bank is not a “holder” pursuant to the PPL. In that situation, the bank would not be obligated to offer a gap waiver to a buyer. However, such a circumstance is unlikely, because in almost all cases the retail seller also originates the loan, or the loan is contemporaneous with the sale. See O.G.C. Opinion No. 08-04-22 (April 15, 2008).
II. The Holder May Not Require A Debtor To Sign An Addendum Relieving the Holder’s Obligation To Offer The Debtor A Gap Waiver.
The second query asks whether an assignee holder may require a debtor to sign an addendum to a retail installment contract that would relieve the holder’s responsibility to offer a gap waiver. But PPL § 302A(3) requires a holder, in this case a bank, to offer such a gap waiver, if it has not already been offered, absent declination notices from authorized insurers that offer gap insurance.
III & IV. The Remaining Queries Are Not Properly Answered By This Office.
The remaining queries ask whether the debtor is responsible for the gap amount if a gap waiver was not offered at the time of sale; and if the holder is required to offer a gap waiver, whether the holder may require the creditor to make a gap waiver offer to the debtor instead. These questions should be directed to the New York State Banking Department for clarification.
For further information you may contact Associate Counsel Alexander Tisch at the New York City Office.
1 Insurance Law § 107(a)(52)(B)(i) defines the “gap amount” in a loan or other credit transaction on the purchase of personal property as: 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 the 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 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.
2 PPL Article 9-A contains similar provisions that apply to motor vehicle lease contracts, and there are similar requirements for non-motor vehicle retail installment contracts in PPL Article 10 and non-motor vehicle lease contract in N.Y. General Business Law § 339-w.
3 The PPL uses the spelling “instalment” rather than the preferred spelling of “installment.”
4 Pursuant to PPL § 301(10), a “holder” of a retail installment contract means the retail seller of the motor vehicle under or subject to contract, or if the contract is purchased by a financing agency or other assignee, the financing agency or other assignee.