The Office of General Counsel issued the following opinion on May 7, 2004, representing the position of the New York State Insurance Department.
Re: Proposed Manufacturers Extended Warranty For a Non-Consumer Product
1) Does the New York Insurance Law distinguish between an extended warranty (a warranty that is sold for an additional fee in addition to the standard manufacturers warranty that comes with the product) or a service contract on a consumer product and a non-consumer product?
2) Would the sale of the proposed manufacturers extended warranty constitute the doing of an insurance business in New York or require registration of the manufacturer as a service contract provider?
1) The New York Insurance Law does not treat extended warranties or service contracts on non-consumer products any differently than on consumer products.
2) The making of the proposed extended warranty by the manufacturer of the product would not constitute the doing of an insurance business in New York. Nor would the manufacturer have to register as a service contract provider.
The Departments opinion was requested regarding a proposed extended warranty that would be sold by ABC Corporation (the "Company"), a manufacturer of non-consumer industrial and vehicle terminals. The Company desires to offer its non-consumer customers in New York the option of purchasing an extended warranty on essentially the same terms as the Companys standard warranty but extends the term an additional one or two years for an additional charge.
The Companys industrial terminals are input/output devices that allow the user to control or monitor an industrial machine or process, either through a keypad or a touchscreen. The vehicle terminals are mounted in trucks or other commercial vehicles and provide the user interface for data communications between the driver and the dispatcher. The terminals are sold to other companies that integrate the terminals into larger systems or directly to companies that install the terminals on their own industrial machines.
The copy of the extended warranty that was attached to the inquiry clearly states that coverage is provided only for defects in the products materials and manufacturing and excludes coverage for physical damage to the surface of the product, including scratches or cracks on the touchscreen or outside case; normal wear items; and damage caused by the device or system to which the product is attached.
Confirmation was requested that the proposed warranty is not subject to regulation under the Insurance Law. It was stated that since the Companys product is not intended for personal, family or household purposes, the sale of the extended warranty would not require compliance with consumer protection laws.
The New York Insurance Law does not make distinctions between warranties or service contracts covering consumer and non-consumer products. Our analysis applies equally to both.
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.
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).
In this case, the proposed agreement is clearly a warranty because coverage is limited to defects and the agreement is made by the manufacturer as incidental to its other legitimate business or activity. The charging of a fee does not convert a warranty into a service contract.
This opinion is limited to interpretation of the New York Insurance Law, and no opinion is rendered as to the applicability of any other law to the proposed agreement.
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.