The Office of General Counsel issued the following informal opinion on July 17, 2001, representing the position of the New York State Insurance Department.
Re: Reimbursement Insurance for Fuel Oil Dealers Service Contracts; Residential Environmental Protection Insurance
1. May an insurer in New York write an insurance policy covering obligations of a fuel oil dealer under service contracts issued by the dealer?
2. May an insurer in New York write an insurance policy covering obligations of a fuel oil dealer to its customers under residential environmental service agreements of the kind described herein issued by the dealer?
1. Yes, insurance covering obligations of a fuel oil dealer under service contracts issued by the dealer would be substantially similar to service contract reimbursement insurance.
2. No, insurance covering obligations of a fuel oil dealer under residential environmental service agreements may not be written and the agreements would constitute the doing of an insurance business without a license.
The inquirer asked whether its company could provide insurance covering the obligations incurred by fuel oil dealers under service contracts. While the inquirers question was general in nature, the inquirer referred specifically to issuing "residential environmental protection" policies that would indemnify fuel oil dealers for the costs of investigation, removal, remediation, neutralization or immobilization of contaminated soil, surface water, groundwater, or other contamination, for which the fuel oil dealer is responsible under a contract with its customer. The policy also covers a fuel oil dealers liability for bodily injury or property damage (including defense to the dealer) to a third party resulting from a release of fuel oil because of a defect in the customers fuel oil system.
Insurance Covering Obligations Under Fuel Oil Dealer Service Contracts
N.Y. Ins. Law § 1113(a)(28) (McKinney 2000) defines service contract reimbursement insurance as follows:
(28) "Service contract reimbursement insurance" means insurance issued to a provider pursuant to article seventy-nine of this chapter whereby the insurer agrees, for the benefit of service contract holders, to discharge the obligations and liabilities of such provider under the terms of the service contracts issued by such provider, including the return of unearned provider fees upon any termination or cancellation of service contracts, in the event of non-performance of any such obligations or liabilities by such provider. Such insurance may also include insurance issued to a provider to indemnify the provider for losses sustained by reason of the performance of such provider's obligations under service contracts issued pursuant to article seventy-nine of this chapter.
A service contract is defined, in pertinent part, in N.Y. Ins. Law § 7902(k) (McKinney Supp. 2000) to mean:
a contract or agreement, for a separate or additional consideration, for a specific duration, to perform the repair, replacement or maintenance of property due to a defect in materials or workmanship or wear or 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
When Article 79, which governs service contracts issued in New York, was first enacted in 1997, service contracts issued by fuel oil dealers were covered within the scope of the article. However, in 1998, N.Y. Ins. Law § 7901(b)(4) (McKinney 2000) was added providing that Article 79 does not apply to "warranties, service contracts and maintenance agreements that are conditioned upon or otherwise associated with the sale or supply of heating fuel." Although part of the amendment was unnecessary since 7901(b)(1) and (2) already provided that Article 79 did not apply to express or implied warranties, or maintenance agreements, the amendment successfully removed service contracts issued by fuel oil dealers in connection with the sale or supply of heating oil from regulation under Article 79.
However, the 1998 amendment did not accomplish the ultimate goal of the legislation, which was to remove service contracts and warranties issued by fuel oil dealers from regulation under the Insurance Law completely. This was accomplished by a subsequent amendment to the Insurance Law, when Section N.Y. Ins. Law § 1101(b)(3-a) (McKinney 2000, as amended by Chapter 486 of the Laws of 2000)
(3-a) Notwithstanding the foregoing, the marketing, sale, offer for sale, issuance, making, proposing to make or administration of a service contract pursuant to article seventy-nine of this chapter or warranty, service contract or maintenance agreement conditioned upon or otherwise associated with the sale or supply of heating fuel shall not constitute doing an insurance business in this state.
The 1998 amendment had successfully removed service contracts issued by fuel oil dealers from the ambit of Article 79 but it had a presumably unexpected consequence. Inasmuch as service contract reimbursement insurance (SCR insurance) is available only to insure service contracts within the meaning of Article 79, removing fuel oil dealer service contracts from Article 79 also removed insurance covering those contracts from within the scope of SCR insurance. Nor can insurance covering these contracts be written under any other kind of insurance authorized under § 1113.
However, N.Y. Ins. Law § 1113(a)(30) (McKinney 2000) provides:
(30) "Substantially similar kind of insurance," means such insurance which in the opinion of the superintendent is determined to be substantially similar to one of the foregoing kinds of insurance and thereupon for the purposes of this chapter shall be deemed to be included in that kind of insurance.
We conclude that insurance covering service contracts, as that term is defined in § 7902(k), issued by fuel oil dealers is substantially similar to SCR insurance. The service contracts would have been insurable under SCR insurance but for the amendment removing the service contracts from regulation under Article 79. The amendment was intended merely to eliminate the Superintendents supervision of such service contracts, not to remove the ability of a New York authorized insurer to insure those contracts. Additionally, while the original sole purpose of SCR insurance was to satisfy the financial responsibility requirements of Article 79 (which in any case no longer apply to fuel oil dealer service contracts), § 1113(a)(28) was amended in 1999 to permit insurance issued to a provider to indemnify the provider for losses sustained by reason of the performance of the provider's obligations under service contracts issued pursuant to article seventy-nine of this chapter.
Since insurance covering fuel oil dealer service contracts is substantially similar to SCR insurance, the rules and regulations that apply to SCR are thereby applicable to these insurance policies. Specifically, this would mean that the policies must contain the provisions that Article 79 may require for SCR insurance policies; that the policies are exempt from Article 23 rate and form filing requirements; and the policies may be placed with an excess line insurer in accordance with the rules and regulations applicable to excess line insurance.
Residential Environmental Service Agreements and Doing an Insurance Business
The inquirers specific inquiry related to residential environmental service agreements issued by fuel oil dealers. Under the terms of the sample agreement that the inquirer provided to us, the dealer would pay "cleanup costs" required of the customer by a governmental entity for fuel oil released from the customers fuel oil system as the result of a "defect" in the fuel oil system. "Cleanup costs" is defined as "the necessary expenses incurred in the investigation, removal, remediation, neutralization or immobilization of contaminated soil, surface water, groundwater, or other contamination." "Cleanup costs" also included a sublimit for "expenses associated with the site restoration of property moved (not including the fuel oil system), modified or in some way amended during the course of cleanup and includes reseeding and installation of nursery grade landscaping." The sample agreement further provides for up to $100,000 for cleanup costs resulting from a single "defect." The term "defect" was not defined in the sample agreement, but a reading of the exclusions under the contract makes it clear that the contract covers release of oil from virtually any cause other than negligence or intentional act of the homeowner, or resulting from war.
There are several reasons why an insurer may not insure an agreement like the sample residential environmental service agreement. First of all, it is not a service contract within the meaning of
§ 7902(k). Under the definition, a service contract may cover incidental expenses, those expenses may not exceed the purchase price of the property that is the subject of the service contract. The residential environmental service agreement principally covers incidental expenses, namely those associated with the cleanup of the oil, and does not primarily cover repair, replacement or maintenance of property due to a defect in materials or workmanship or wear or tear. Hence, an insurer may not write SCR covering such contracts.
Nor is there any other kind of authorized insurance that may be written covering such agreements. However, the more fundamental reason why an insurer may not insure such agreements is that the fuel oil dealer, in making the agreements, would be doing an insurance business.
N.Y. Ins. Law § 1101 (McKinney 2000), provides, in pertinent part:
(a)(1) "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.
(2) "Fortuitous event" means any 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.
(3) "Contract of warranty, guaranty or suretyship " means an insurance contract only if made by a warrantor, guarantor or surety who or which, as such, is doing an insurance business.
(b)(1) 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
As stated earlier, § 1101(b)(3-a) provides that the marketing, sale, offer for sale, issuance, making, proposing to make or administration of a warranty, service contract or maintenance agreement conditioned upon or otherwise associated with the sale or supply of heating fuel shall not constitute doing an insurance business in this state. The amendments that removed fuel oil dealer service contracts from regulation under the Insurance Law do not provide authority for fuel oil dealers to engage in other kinds of insurance business. Rather, to be exempt under § 1101, the contract would have to be a service contract, warranty, or maintenance agreement, as those terms are used in the Insurance Law. If the contract is not exempt, and would otherwise come within the definition of insurance quoted above, then the fuel oil dealer would be doing an insurance business without a license, in violation of N.Y. Ins. Law § 1102 (McKinney 2000).
The next question is whether the proposed coverage is a maintenance agreement. N.Y. Ins. Law § 7902(d) (McKinney 2000) defines "maintenance agreement" as follows:
(d) "Maintenance agreement" means a contract of limited duration that provides for scheduled maintenance of property, other than contracts providing for the repair or replacement of such property due to a defect in materials or workmanship or wear and tear.
Under a maintenance agreement, the maker of the agreement is obligated to perform regularly scheduled maintenance of property, such as regularly scheduled oil changes for an automobile. The sample agreement clearly does not provide regular maintenance, but provides coverage in the case of an extraordinary loss.
The final question is whether the contract would be a warranty. While the Insurance Law does not define "warranty", a warranty 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. Ollendorf Watch Co., Inc. v. Pink, 279 N.Y. 32, 17 N.E.2d 675 (1938). Service contracts and warranties are similar in that both relate to the nature or efficiency of a product, but there are distinctions between them. In order to be a warranty, the maker of the contract 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 chance or risk contemplated by N.Y. Ins. Law § 1101(a). Where there is no relationship or act, the maker of the contract undertakes an obligation involving a fortuitous risk, and the agreement is an insurance contract and constitutes the doing of an insurance business.
There is nothing in the sample agreement that limits the nature of the fuel oil dealers obligation to defect in materials or workmanship or the breakdown of a particular product. While the dealer reserves the right to inspect the fuel oil system, this does not create the relationship to the product or service necessary to minimize, if not eliminate, the element of chance or risk contemplated by § 1101(a). Even though the contract speaks in terms of "defect", damage from any number of outside events, including damage from water seepage, lightning, etc. may be covered. Moreover, the contract covers principally or exclusively liabilities of the customer, and not repair or replacement costs for a particular product. The agreement is equivalent to a liability insurance policy in everything but name only, down to other insurance exclusion clauses.
In summary, an insurer may issue insurance to fuel oil dealers that is substantially similar to service contract reimbursement insurance, but may not insure obligations under the sample residential environmental service agreement, or other agreements by which the dealer would be doing an insurance business without a license.
For further information, you may contact Principal Attorney Paul A. Zuckerman at the New York City office.