The Office of General Counsel issued the following informal opinion on December 12, 2001, representing the position of the New York State Insurance Department.
Re: Warranty Reimbursement
May an insurer offer a policy to reimburse a warrantor for the costs it incurs under its warranty contracts?
Yes, this coverage would be substantially similar to service contract reimbursement insurance. N.Y. Ins. Law § 1113(a)(28), (30) (McKinney 2000).
An authorized property/casualty company would like to provide a policy that would reimburse the manufacturer of powerboat motors for the costs it incurs under the warranties that it issues to purchasers of its motors.
The first determination that must be made is whether the underlying contract issued by the powerboat motor manufacturer is a warranty or a service contract.
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 . . .
While the Insurance Law does not define "warranty", in general, 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).
A service contract is defined, in pertinent part, in N.Y. Ins. Law § 7902(k) (McKinney 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 . . . .
As can be seen from the above, 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; except that N.Y. Ins. Law § 1101(b)(3-a) (McKinney 2000) provides that 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.
Prior to the enactment of Article 79, the Department concluded that the making of warranties by a manufacturer, seller, or other person in the chain of sale did not constitute the doing of an insurance business, regardless of whether a fee was charged for the warranty. After the enactment of Article 79, the Department opined that where the maker charges a fee for a warranty, as is the case with an "extended warranty", such an agreement is a service contract and the maker must be registered as a service contract provider. Upon reconsideration in July 2001, the Department opined that the mere charging of a fee does not convert a warranty into a service contract. If the contract is a warranty, and the warrantor does not make warranties as a vocation but as merely incidental to any other legitimate business or activity of the warrantor, then, even though a fee is charged, the contract remains a warranty and is not a service contract. However, where the contract is not a warranty, because the maker has not exercised the requisite control over the property, or if the maker would be doing an insurance business in making the warranties (as would be the case with a person that is not in the chain of sale), then the maker of the agreement would have to register as a service contract provider.
Under the facts presented, because the manufacturer has the requisite relationship to the product to minimize or eliminate the element of chance or risk, and does not make warranties as a vocation but as merely incidental to its other legitimate business of manufacturing powerboat motors, the manufacturer is issuing warranties rather than service contracts. Thus, the coverage you describe would be warranty reimbursement insurance, a kind of insurance that is not authorized under N.Y. Ins. Law § 1113(a)(McKinney 2000).
However, N.Y. Ins. Law § 1113(a)(30) (McKinney 2000) does provide for "Substantially similar kind of insurance " which is defined as:
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.
N.Y. Ins. Law § 1113(a)(28) (McKinney 2000) defines "Service contract reimbursement insurance" as:
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 providers obligations under service contracts issued pursuant to article seventy-nine of this chapter.
The first sentence of the current definition of "service contract reimbursement insurance", quoted above, was added to the New York Insurance Law in 1997 as N.Y. Ins. Law § 1113(a)(28). That component of "service contract reimbursement insurance" coverage is a promise by the insurer, for the benefit of service contract holders, to discharge the obligations and liabilities of the service contract provider, in the event that the provider does not perform. In 1999, the second sentence in the definition of "service contract reimbursement insurance" section was added. This amendment allows an insurer to indemnify the service contract provider for losses sustained by reason of the providers performance under the service contracts issued. According to the Memorandum in Support, New York State Senate, ch. 198, this was done to make reimbursement insurance more available, which, in turn it was hoped, would make it easier for service contract providers to comply with the law. It, therefore, follows that it was the intent of the legislature that a policy of "service contract reimbursement insurance" would offer either the first component of the coverage, described in the first sentence of the definition, or both components of the coverage, as described in both the first and second sentences of the definition. It was not the intent of the legislature to allow the second component of the coverage to be offered on its own.
Therefore, it is the opinion of this Office that the policy you propose, which would reimburse a warrantor for the costs it incurs under its warranty contracts, would be substantially similar to the "service contract reimbursement insurance" only if the proposed policy also offered the coverage described in the first sentence of the definition.
In accordance with N.Y. Ins. Law § 2302(a)(7) (McKinney 2000), which excepts service contract reimbursement insurance from compliance with N.Y. Ins. Law §§ 2301-2351 (McKinney 2000), rate and form filings would not be required for this policy. However, the policy must be in compliance with the requirements of N.Y. Ins. Law §§ 7901-7913 (McKinney 2000), which pertain to service contracts, as well as with the requirements of N.Y. Comp. Codes R. & Regs. tit. 11, §§ 390.0-390.13 (2001). It should be reported as service contract reimbursement insurance on your Annual Statement.
For further information you may contact Supervising Attorney Joan Siegel at the New York City Office.