The Office of General Counsel issued the following opinion on September 30, 2005, representing the position of the New York State Insurance Department.
Re: Wireless Telephone Repair Contract.
1. Would an agreement where a wireless telephone company charges a fee to perform the repair, replacement, or maintenance of a customers wireless communications equipment during and following the manufacturer's warranty be considered a warranty under New York Law?
2. Does the fact that wireless communications equipment is rented or leased rather than purchased have any impact on whether the agreement is a warranty?
3. What does the phrase "indemnity payments for incidental damages" mean as set forth in N.Y. Ins. Law § 7902(k)?
4. Could the replacement of wireless communication equipment be considered an indemnity payment if the payment does not exceed the purchase price of the property serviced?
Please note that without having the precise details of the agreement, we are unable to answer the specific questions that the inquirer presented and provide a general discussion below.
The inquirer's firm represents ABC, Inc. (ABC), a sales agent of a national cellular telecommunications company. The telecommunications company, provides wireless cellular equipment to ABC so that it can sell the equipment and services to the public. The telecommunications company, through its sales agent ABC, desires to offer its customers the opportunity to purchase protection on their cellular telephones and related equipment. They ask general questions to clarify differences between a warranty, service contract, and insurance contract.
First, the fact that the replaced telephone is leased or rented rather than purchased does not affect whether the agreement is a warranty, service contract, or insurance contract.
New York Insurance Law § 1101(a) (McKinney 2005), in pertinent part, defines an "insurance contract" as:
(1) . . . 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.
The Insurance Law does not define a "warranty". However, 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 due to a defect in materials or workmanship. 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 2005) as:
. . . 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 and 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 and warranties both relate to the nature or efficiency of a product, but there are distinctions between them. A warrantor 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 the element of chance or risk contemplated by N.Y. Ins. Law § 1101(a). A service contract provider, on the other hand, does not need to have a relationship to the product or service and typically is a third party, unrelated to the product. The making of a warranty constitutes the doing of an insurance business if done as a vocation and not as an incidental business activity as a warrantor. Office of General Counsel Opinion No. 05-03-30 (2005).
In this case, the telecommunications company undertakes to repair, replace or maintain the wireless equipment that it has leased, sold, or manufactured, due to wear and tear or defect in material or workmanship, then the agreement would be a warranty. If the telecommunications company undertakes to cover defects on equipment that it did not sell, lease, or manufacture, then it would have to register as a service contract provider. If the telecommunications company undertakes to replace a product due to a fortuitous event, such as theft or damage from external causes or where it did not have control over the product and did not register as a service contract provider, then it would be conducting an insurance business and would have to be licensed pursuant to N.Y. Ins. Law § 1102. N.Y. Ins. Law § 1102(a) (McKinney 2005) prohibits any person, firm association, corporation, or joint-stock corporation from doing an insurance business in New York unless licensed pursuant to the Insurance Law.
As to the inquiry regarding an indemnity payment for incidental damages under § 7902(k), such payments may be made by a service contract provider where such damages are caused by a defect in material or workmanship of the product covered under the service contract. Please note that this provision does not limit the cost to repair or replace the product that itself is subject to the service contract, but only resulting damages. Please take further note that a service contract may not provide for only such incidental damages but must first provide coverage for the product itself.
The inquirer may not be aware of an amendment made to a New York State Insurance Law that allows a wireless communications equipment vendor to offer insurance without being separately licensed as an insurer. Section 2131(d) of the N.Y. Insurance Law (McKinney 2005) as amended by chapter 426 of the laws of 2005, is amended to read as follows:
(d) The rental vehicle company, wireless communications equipment vendor or franchisee licensed pursuant to subsection (a) of this section may act as agent for an authorized insurer only in connection with the rental of motor vehicles or the sale or offering for sale of wireless communications equipment and only with respect to the following kinds of insurance:
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(2) with respect to wireless communications equipment vendors, insurance issued to cover the loss, theft, mechanical failure, or malfunction of, or damage to, wireless communications equipment offered as either an individual policy issued to the consumer or as a group property and casualty policy under which certificates or other evidence of coverage are issued to individual consumers who enroll in the program, provided however, that said insurance shall not extend to wireless services or service contracts governed by article seventy-nine of this chapter.
Under § 2131(a) of the N.Y. Ins. Law, the Superintendent may issue to a wireless communications equipment vendor a limited license authorizing the licensee, known as a "limited licensee", to act as an agent with reference to insurance listed in § 2131(d). Accordingly, a limited license would allow a wireless communications equipment vendor to act as a sales agent with respect to the sale or offering of a wireless communications equipment for insurance issued to cover the loss, theft, mechanical failure, or malfunction of, or damage to, wireless communications equipment. This insurance may be issued as an individual policy to a consumer or as a group property/ casualty policy. Section 2131(b) discusses the prerequisites for issuance of a limited license.
For further information you may contact Principal Attorney Paul A. Zuckerman at the New York City Office.