The Office of General Counsel issued the following opinion on December 1, 2004, representing the position of the New York State Insurance Department.
Re: Total Loss Guarantee
May a used car dealer offer to sell the Total Loss Guarantee to its customers in New York State?
No, as structured, the issuance of a Total Loss Guarantee by an automobile dealer to its customers in New York State would violate N.Y. Ins. Law § 1102 (McKinney 2000).
A used car dealer in New York State sent a copy of a certificate titled, Total Loss Guarantee (the Guarantee") to the Department, which, it stated, it is considering offering for sale to its customers. The car dealer indicated that the Total Loss Guarantee is part of a "total loss program" but no additional information was provided beyond the Guarantee itself as to any other aspects of the program. Therefore, it is unclear whether there is an agreement between the dealer and a program administrator, or whether there is insurance backing up the program.
The Total Loss Guarantee
The following information is filled in at the top of each Total Loss Guarantee certificate when a sale is made: the names of the issuing dealer, the purchaser/lessee and his or her address, the vehicle make, model and VIN number, as well as the vehicle purchase price and purchase date.
The named issuing dealer undertakes, in the event of an unrecovered theft or a total loss due to physical damage to the vehicle, to replace the vehicle with a new vehicle of equal or greater value to the original vehicle, in that the dealer guarantees to pay the difference, up to $5,000, between the original purchase price of the vehicle and the actual cash value of the vehicle at the time of the loss and apply this sum towards the purchase or lease of the replacement vehicle.
The maximum term of the Guarantee is 60 months from the date of purchase. The Guarantee requires that comprehensive theft and physical damage coverage be in effect at the time of loss, and the dealer agrees to use its best efforts to replace the vehicle with the identical model with the identical equipment.
The Guarantee does not specifically address what is promised in the situation where the covered vehicle is leased and not purchased, although the Guarantee specifically covers lessees as well as purchasers. Moreover, nothing in the Guarantee limits the issuing dealers undertaking so as to prevent a situation where, in the context of its undertaking, the issuing dealer may not cover its overhead and expenses as to the replacement vehicle.
The name of a company, a New Jersey address, and a toll-free number appear at the bottom of the Guarantee certificate. The status of the named company is not specified therein and is not referred to anywhere in the body of the Guarantee itself.
Although the instant agreement is entitled a "guarantee" and contains language referring to the undertaking of the dealer thereunder 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.
The Guarantee is an undertaking by the named dealer to the owner/lessee that in the event of an unrecovered theft or a total loss due to physical damage to the vehicle identified on the certificate, to replace the vehicle with a new vehicle of equal or greater value to the original vehicle. The named dealer (a/k/a "issuing dealer") agrees to pay the difference, up to $5,000, between the original purchase price of the vehicle and the actual cash value of the purchaser/lessees vehicle at the time of the loss, and apply the sum of money towards the purchase or lease of the replacement vehicle. In effect, the obligation being assumed by the dealer under the Guarantee is an undertaking by it to provide a discount on the replacement vehicle. However, the Guarantee does not specify how this undertaking applies to leasing situations, where the vehicle is not purchased by the lessee.
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 Guaranty is not a guaranty, but is insurance, within the meaning of the Insurance Law. Whether the vehicle will be stolen or damaged in an accident is the triggering event under the Guarantee and either event would be beyond the control of either the issuing dealer or the purchaser/lessee. By promising to provide a monetary benefit to the lessee upon the unrecovered theft or constructive total loss of the vehicle, the dealer would be providing to the purchaser/lessee 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 issuing dealer would be acting as an insurer without a license and would be in violation of Section 1102.
The Department has previously taken the position 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 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 expenses. In other words, a dealer may agree in the discount to reduce its profit margin on the replacement vehicle but it may not agree to sell the replacement vehicle at a break-even or lower point. A more extended discussion may be found in an August 29, 2001 opinion posted on the Departments website as opinion 01-08-18.
In the instant situation, however, there is no explicit language in the Guarantee to limit the obligation of the issuing dealer in order to assure that the dealer will always cover its costs and expenses as to the replacement vehicle. Without such explicit language, the exception described in the previous paragraph does not apply.
Since the agreement between the dealer and the administrator was not provided, we do not herein opine as to whether it complies with the law. Please note that an administrator of the total loss program may not compensate the dealer. Also, there is no insurance available in New York that will reimburse the dealer for the discount it offers upon the full purchase price of the replacement vehicle because it is not a kind of insurance authorized in New York under N.Y. Ins. Law § 1113 (McKinney 2000).
For further information you may contact Associate Attorney Barbara A. Kluger at the New York City Office.