The Office of General Counsel issued the following opinion on April 28, 2004, representing the position of the New York State Insurance Department.
Re: Proposed Home Warranty and Maintenance Program
Would the sale of the proposed "home warranty and maintenance program" (the "program") constitute the doing of an insurance business in New York?
As fully discussed below, certain aspects of the proposed program by the company would require licensing as an insurer and may not be offered for sale in New York except by an authorized insurer; certain aspects of the program, if modified to be limited to defects in materials or workmanship or wear or tear could be offered by a registered service contract provider; and certain aspects would not require either licensing as an insurer nor registration as a service contract provider. In addition, the company would be engaged in insurance adjusting and the company, and those persons engaged in such activities, would have to become licensed as public adjusters.
The inquirer requested the Department's opinion regarding a proposed "home warranty and maintenance program" that his company, ABC Home Services, would like to offer in New York. The inquirer states that the program is intended to take care of normal maintenance issues that are common with home ownership. The inquirer states that the coverage costs, which are paid on a monthly basis, are based upon the age and size of the home.
The materials that the inquirer submitted are 16 pages long and contain many different provisions. It is unclear whether the materials are intended to be the actual contract or is merely a summary of the provisions. Rather than summarize all of the provisions here, we will address them in the analysis below.
The issue is whether the proposed program involves the doing of an insurance business or constitutes a warranty, service contract, or maintenance agreement. As will be seen in the discussion below, certain portions of the program would be subject to different provisions of the Insurance Law and would have to be modified before it could be offered in New York. Assuming that the program was modified in accordance with this letter, ABC Home Services would also have to become registered as a service contract provider. In addition, with respect to other activities under the program, ABC Home Services and the persons actually engaged in those activities would have to become licensed as public adjusters.
N.Y. Ins. Law § 1101 (McKinney 2000 & Supp. 2004), 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;
N.Y. Ins. Law § 1102(a) (McKinney 2000 & Supp. 2004) prohibits any person, firm, association, corporation, or joint-stock corporation from doing an insurance business in New York unless authorized by a license in force pursuant to the Insurance Law, or exempted by the provisions of the Insurance Law from such requirement. Any person aiding an unauthorized insurer in doing an insurance business would be in violation of N.Y. Ins. Law § 2117(a) (McKinney 2000 & Supp. 2004).
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 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, or indemnification for repair, replacement or maintenance, 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, 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.
A service contract does not include a maintenance agreement, which is defined N.Y. Ins. Law § 7902(d) (McKinney 2000) to mean:
(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.
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). The making of a warranty constitutes 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, guarantor or surety.
Where there is no relationship to the product, service, or act as described above, the maker of the contract undertakes an obligation involving a fortuitous risk, and the contract is an insurance contract and constitutes the doing of an insurance business unless the contract is a service contract issued in accordance with N.Y. Insurance Law Article 79 (McKinney 2000 & Supp. 2003). N.Y. Ins. Law § 1101(b)(3-a) (McKinney 2000) provides, in pertinent part, that the marketing, sale, offer for sale, issuance, making, proposing to make or administration of a service contract pursuant to Article 79 shall not constitute the doing of an insurance business in this state. No person or other entity who is obligated under a service contract may issue, sell or offer for sale a service contract in New York unless it first registers with the Superintendent of Insurance as a service contract provider, pursuant to N.Y. Insurance Law § 7907 (McKinney 2000).
Rather than trying to address each and every coverage provided under the program, we have attempted to group together coverages with the same Insurance Law concerns. Some of the coverages are not itemized because they provide essentially the same kinds of coverage as the ones listed below, but with respect to different parts of the property.
The program would provide the following coverages:
- Water pumps-coverage in full.
- Sump pump-full replacement
- Heating/cooling system Leatherstocking will buy a maintenance contract from heating oil supplier when new system purchased. Will prorate replacement costs of system to the program purchaser.
- Electrical systems covered including ceiling fans, lighting fixtures, switches, etc. (Excludes bulbs, utility company lines, small appliances, computers, and other such equipment).
- Plumbing-all drain systems for leakage, breakage due to freezing or blockage; faucets covered for repair or replacement; toilet bowl covered for replacement; etc.
- Water lines covered for leakage, breakage and valve failure and freezing.
- Roofs-replacement of damaged shingles or roof penetrations. Full replacement of roof after 24 months
- Exterior of home--Repair of damaged siding or fascia. Total replacement of vinyl siding after 18 months of service, limited to once every 15 years.
- Windows and doors-accidental window breakage, damage from rot or mechanical damage.
- Interior walls-accidental damage to walls covered.
There is nothing in the program materials that the inquirer provided that indicates that any of the above coverages are limited to repair, replacement or maintenance, due to a defect in materials or workmanship or wear or tear. In fact, certain of the coverages clearly are not limited to defects or wear and tear; specifically, accidental damage of windows; damage from rot; mechanical damage; damaged siding, shingles, etc.
The program would have to be modified to exclude coverage for damage from any cause other than defect in materials or workmanship or wear or tear. In addition, if the program were so modified, since ABC Home Services does not appear to be the manufacturer, seller or distributor of any of the products, it would have to register with the Superintendent as a service contract provider in accordance with Article 79 of the Insurance Law.
Further, there are certain portions of the program that must be eliminated completely. These include:
- Payment of deductible (up to $1,000) under homeowners' policy when claim is submitted to the insurer for loss or damage to property.
- Payment to landlord for damage to rental units caused by vacating tenant.
ABC Home Services payment of the deductible under the homeowners policy would constitute the doing of an insurance business. Since homeowners policies typically do not cover damage from defect or wear and tear, the obligation to pay the deductible for damage to the property would be dependent upon the happening of fortuitous events and may not be covered under a service contract.
Similarly, the damage to rental units caused by vacating tenants is a fortuitous event. The offset of the tenant's security deposit does not overcome this objection since the deposit may not be sufficient to cover the cost of repairs. Such damage, accordingly, may not be covered under a service contract.
There are certain services under the program that would qualify as a maintenance agreement. These include:
- Septic system: pumping out of septic tank once every five years.
- Annual or bi-annual inspection of property.
- Exterior of home pressure-washed annually.
These provisions all provide for scheduled maintenance of property and do not provide coverage for damage. Accordingly, ABC Home Services may offer these services without being licensed as an insurer or registered as a service contract provider.
Lastly, there are additional concerns with those provisions of the program under which ABC Home Services would obtain estimates in event of damage, contact the insurer and negotiate the settlement. These activities would come within the definition of public adjuster, as provided, in pertinent part, in N.Y. Ins. Law § 2102(g)(2) (McKinney 2000 & Supp. 2004):
(2) "Public adjuster" means any person, firm, association or corporation who, or which, for money, commission or any other thing of value, acts or aids in any manner on behalf of an insured in negotiating for, or effecting, the settlement of a claim or claims for loss or damage to property of the insured in this state caused by, or resulting from, any of the risks as enumerated in paragraphs four, five, six, seven, eight, nine and ten and subparagraphs (B) and (C) of paragraph twenty of subsection (a) of section one thousand one hundred thirteen of this chapter, not including loss or damage to persons under subparagraph (B) of paragraph twenty of subsection (a) of such section or who, or which, advertises for, or solicits employment as an adjuster of such claims, and shall also include any person who, for money, commission or any other thing of value, solicits, investigates, or adjusts such claims on behalf of any such public adjuster.
ABC Home Services, as well as any person that actually engages in such activities, would have to become licensed as public adjusters, as provided in N.Y. Ins. Law § 2108 (McKinney 2000).
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.