The Office of General Counsel issued the following opinion on July 18, 2003, representing the position of the New York State Insurance Department.
Re: "Lease Price Guarantee" Program.
Is the proposed LPG program, where the issuing dealership guarantees that, in the event of an "unrecovered theft" or a "total loss" on a leased vehicle, it will replace the leased vehicle with "a new model year vehicle for a monthly lease payment equal to or less than the lease payment of the old vehicle" permissible in New York?
No, as structured, the program would violate N.Y. Ins. Law § 1102 (McKinney 2000).
The inquirer wanted to know whether the companys Lease Price Guarantee program would be permissible in New York. The company markets its program through automobile dealers. The primary "coverage" paragraph of the agreement reads as follows:
The above named dealer does hereby guarantee to the Lessee that in the event of an "unrecovered theft" or a "total loss" due to physical damage to the leased vehicle and subject to all conditions terms and provisions herein, it shall: REPLACE YOUR LEASED VEHICLE WITH A NEW CURRENT MODEL YEAR VEHICLE FOR A MONTHLY LEASE PAYMENT EQUAL TO OR LESS THAN THE LEASE PAYMENT OF THE OLD VEHICLE; WITHOUT ANY DOWN PAYMENT; WITHOUT ANY BANK ACQUISITION FEE; WITHOUT ANY SECURITY DEPOSIT AND FOR THE TERM OF THE ORIGINAL LEASE.
The agreement goes on to specify "CONDITIONS AND EXCLUSIONS". The issuing dealer and the lessee are the signatories. There is no indication that the aftermarket company is a party to the agreement. However, the inquirer did not submit the written agreement, if any, between the dealer and the aftermarket company.
Most significantly, none of the provisions of the agreement limit the issuing dealer's responsibility to prevent a situation where it will realize no profit on the leasing of the replacement vehicle.
Although the agreement refers to itself as a guarantee, the nomenclature used in the agreement is irrelevant in determining whether the contract is permissible under the Insurance Law. Rather, this Department analyzes the actual obligation under the contract to determine whether it constitutes insurance.
N.Y. Ins. Law § 1101(a) (McKinney 2000) provides, in part, the following definitions:
"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.
"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 event.
N. Y. Ins. Law § 1101 (b)(1) (McKinney 2000) provides that with certain exceptions:
. . . 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. . . :
(A) making, or proposing to make, as insurer, any insurance contract, including either issuance or delivery of a policy or contract of insurance 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.
Section 1102 provides that, unless specifically exempted, no one shall do an insurance business in this state unless authorized by a license in force pursuant to the Insurance Law. A guaranty is an undertaking that the amount contracted to be paid will be paid, or the services guaranteed will be performed. A guaranty relates directly to the substance and purpose of the transaction. See Ollendorf Watch Co. v. Pink, 279 N.Y. 32, 17 N.E.2d 676 (1938).
The coverage provided under the LPG agreement is not a guaranty, but is insurance, within the meaning of the Insurance Law. Whether the vehicle will be stolen or be damaged in an accident is the triggering event under the agreement and either event would be beyond the control of either the issuing dealer or the lessee. By promising to provide a monetary benefit to the lessee upon the unrecovered theft or constructive total loss of the vehicle, the company would be providing to the consumer a benefit of pecuniary value upon the happening of a fortuitous event, and such agreement would constitute a contract of insurance. Accordingly, under the proposed program, the company would be acting as an insurer without a license and would be in violation of Section 1102.
No information was provided about the insurance, if any, that would be obtained by the issuing dealer or any documents that would be executed between the issuing dealer and the aftersale company so no opinion can be given as to whether the aftermarket company would be violating the Insurance Law as well.
It should also be noted that a motor vehicle dealer that itself provides a discount to a consumer on a replacement vehicle dependent upon the total loss of a prior purchase would not be doing an insurance business within the meaning of N. Y. Ins. Law § 1101 (b) (McKinney 2000) so long as the discount price (or lease price) of the new vehicle (including any other discounts that the dealer may provide) covers the cost of the vehicle to the dealer, any labor or material cost borne by the dealer, and reasonable overhead expense, thus avoiding assumption of a risk of loss. In other words, a dealer may agree in the discount to reduce its profit margin on the new vehicle but may not agree to sell the vehicle at a break-even or lower point. A more extended discussion may be found in an August 29, 2001, opinion that may be found on the Departments website as opinion 01-08-18.
For further information one may contact Associate Attorney Sam Wachtel at the New York City Office.