OGC Opinion No. 06-03-04

The Office of General Counsel issued the following opinion on March 8, 2006, representing the position of the New York State Insurance Department.

Re: Sale of tire and rim service plans

Questions

1) May the tire and rim service plan, (hereinafter the Plan), be sold in New York State to vehicle purchasers by an automobile dealer?

2) May an automobile dealer with dealership locations in New York and Connecticut refer its New York customers to the Connecticut dealership location where they can purchase the Plan which, under New York law, constitutes insurance but which may be sold in Connecticut as something other than insurance by someone without an insurance license?

Conclusions

1) No. The Plan may not be sold in New York State by an automobile dealer insofar as it constitutes an insurance contract and doing of an insurance business under N.Y. Ins. Law § 1101 (McKinney 2000, Supp. 2006).

2) No. The automobile dealer would thereby be aiding and abetting the Plan, an insurer not licensed or authorized to do an insurance business in New York, to do business here in violation of N.Y. Ins. Law § 2117 (McKinney Supp. 2006) insofar as the coverage being afforded constitutes insurance in New York State.

Facts

The inquirer sent the Department the Plan's sales brochure for the Plan. It contains the Plan's Registration Form, which, on its reverse side, contains the terms of the Plan agreement. Also enclosed is a copy of the Services Agreement between the International Corporation and the Dealer. The Services Agreement is between a Vendor, as agent of the International Corporation, and a Dealer who agrees thereunder to market the Plan to vehicle buyers in return for paying the Dealer money incentives for sales. The Dealer thereunder agrees to purchase Plans according to an attached price schedule. The International Corporation agrees therein to provide paintless dent removal ("PDR") services under the Plan program, the agreement for which is contained in Exhibit A which is attached thereto.

The two versions of the Plan agreement that the inquirer has presented to the Department are not identical. However, the essential benefit under both versions is that the obligor agrees to make PDR repairs to the covered vehicle. PDR is described in the agreements as a process and a PDR Panel Repair covers the removal of dents and dings within an area located on a single panel of the covered vehicle that does not exceed the size of the Plan card, which is stated to be 3.25" X 2".

Under the terms of the version of the Plan agreement, which is contained on the reverse side of the Plan's Registration Form, the obligor is a financial institution, a registered service contract provider in New York, and the Plan Administrator is also a registered service contract provider in New York. The financial institution's obligations thereunder are insured by a policy issued by an Insurance Company. The financial institution agrees therein to make up to a stated number of PDR panel repairs to the covered vehicle for a stated period of time, depending upon the length of the Plan term purchased, as to certain dings and dents. The coverage is stated not to extend to dings or dents that have punctured the metal or have resulted in visible paint damage. In order to obtain service under the Plan, the vehicle owner must contact the Dealer or call the Plan Administrator. The Registration form the inquirer provided lists various state's special requirements/disclosures, but New York is not one of the states listed.

Exhibit A to the Plan's Services Agreement contains the second version of the agreement, which is entitled, "Service Plan, Terms and Conditions." This version contains terms and conditions that are similar, but not identical to, those in the Plan agreement contained on the back of the Registration form. Under this version, the International Corporation, which is not registered in New York as a service contract provider, is the obligor and it agrees to provide for the removal of certain dings and dents from the Buyer's Vehicle by the PDR process. It, unlike the Plan agreement on the reverse side of the Registration form, identifies the Service Corp. (which is not a registered service contract provider in New York) as having obtained service contract reimbursement policies for the international corporation, to insure performance under the Agreement. The insurer identified therein, as to New York agreements, is Insurance Company, which is authorized as an insurer in New York. In order to obtain service under the Plan the Vehicle Owner must contact the Dealer or visit any participating Plan location for service.

Tire and Rim Service Plans –

The inquirer stated that a dealer member of the inquirer's association who has locations in New York State and Connecticut wishes to sell tire and rim service plans to vehicle owners. The dealer understands that the Department had opined that certain tire and rim service plans constitute the doing of an insurance business under N.Y. Ins. Law § 1101 (McKinney 2000) and they cannot be sold in New York State without an insurance license. The dealer wanted to know whether, as to such tire and rim service plans, he may refer customers in the New York dealership location who are interested in such a service plan to the dealer's Connecticut location in order to effectuate a purchase. The inquirer informs us that the Plan is permitted to be sold in Connecticut without an insurance license because it is not considered to be insurance in Connecticut.

Analysis

The Service Plan-

The Plan's sales brochure indicates that the intention of the obligor under the Plan is to offer vehicle owners a service plan to cover them should their vehicle sustain small dings and dents in the course of the vehicle's ordinary use.

A "service contract" is defined in N.Y. Ins. Law § 7902(k) (McKinney 2000), in pertinent part, as follows:

Under Article 79 of the Insurance Law only service contract providers who are registered as such in New York may sell service contracts in New York.

Although the financial institution is a registered service contract provider in New York, the Plan is not a service plan and therefore financial institution is not exempt under N.Y. Ins. Law § 1101(b)(3-a) (McKinney Supp. 2006) from the doing of an insurance business.

Even those small dings and dents that are covered under the Plan, may be caused, not by ordinary wear and tear, but by the occurrence of a fortuitous event, such as damage from an external event, as defined in N.Y. Ins. Law § 1101. A service contract may not provide coverage for loss or damage arising out of an external cause except for the limited circumstances as provided for in N.Y. Ins Law § 7902(k) (McKinney Supp. 2006), which provides, in pertinent part, that a service contact may also provide coverage for the repair, replacement or maintenance of property for damage resulting from "accidental damage from handling." This Department has interpreted "accidental damage from handling" to mean accidental damage from handling in the normal and customary use of the product, here the automobile. However, coverage for accidental damage from handling may be made available only as an incidental coverage to coverage for defects. In the instant matter, no coverage is being afforded for defects, so that accidental damage from handling may not be covered.

The Plan is, instead, a contract of insurance within the meaning of N.Y. Ins. Law § 1101 and, as such, it may only be offered by an insurer that is authorized to do an insurance business in New York. Further, only a licensed insurance producer may sell these contracts in New York.

Referrals in New York to a Connecticut dealership location for the purchase of Tire and Rim Service Plans that constitute insurance in New York -

The Department has opined upon several tire and rim service plans as to whether or not their sale in New York constitutes the doing of an insurance business within the meaning of N.Y. Ins. Law § 1101 (McKinney 2000) or whether they may be sold as service contracts under N.Y. Ins. Law Art. 79 without an insurance license. The terms of each service plan vary and an analysis of each plan is necessary. However, as to those tire and rim service plans that do constitute insurance and may only be sold in New York by an insurance licensee, an automobile dealer in New York may not refer any of its customers whose vehicles are registered in New York to its dealership location in Connecticut specifically in order for them to purchase such a plan, even though the service plan may be legal to be sold in Connecticut by someone without an insurance license. Insofar as the vehicle to be covered is registered in New York, the automobile dealer would thereby be enabling the obligor under the tire and rim service plan to do business in New York, by making such a referral the dealer would be aiding and abetting an unauthorized insurer to do business in New York in violation of N.Y. Ins. Law § 2117 (McKinney 2000).

For further information you may contact Supervising Attorney Barbara A. Kluger at the New York City Office.