OGC Opinion No. 07-09-15
The Office of General Counsel issued the following opinion on September 17, 2007, representing the position of the New York State Insurance Department.
RE: Marketing an Extended Warranty Program
Does a company need an insurance broker’s license to market an extended warranty program in New York?
The answer depends upon whether the extended warranty program constitutes the doing of an insurance business. Since the parties involved have not finalized the extended warranty program’s terms and conditions, the Insurance Department lacks sufficient information at this time to determine whether the extended warranty program constitutes the doing of an insurance business and whether the future company therefore needs an insurance broker’s license in order to market the extended warranty program.
The inquirer reports that she is a consultant for a future company. The company’s sole purpose will be to market what the inquirer refers to as an “extended warranty program” (the “Program”) for new restaurant equipment sold in New York. The Program’s terms and conditions have not been finalized. The inquirer further states that for a one-time fee, the Program will extend the original manufacturer’s warranty for a certain period. A third party, in association with the dealer selling the new restaurant equipment, will offer the Program, and a national insurance carrier will back it.
The inquirer has not provided sufficient information to enable the Department to determine whether the Program constitutes the doing of an insurance business and, therefore, whether the future company needs an insurance broker’s license to market the Program. Thus, this opinion addresses only generally, warranties, service contracts, and the doing of an insurance business.
N.Y. Ins. Law § 1101 (McKinney 2006) sets forth definitions and states in pertinent part:
(a) In this article: (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….
The Insurance Law and the regulations promulgated thereunder do not define the term “warranty.” However, a warranty generally relates in some way to the nature or efficiency of the product sold. See Ollendorff Watch Co. v. Pink, 279 N.Y. 32, 36 (1938). Typically, a warranty is a statement by the manufacturer or seller that a product is free of defects and will perform the functions for which it is sold. See NILS INSource Glossary at http://insource.nils.com/gloss/GlossaryTerm.asp?tid=6040. A product warranty is a promise to repair or replace the product, or to refund the purchase price if the purchaser discovers a defect under normal conditions of use. See id.
Insurance Law § 7902(k) defines a “service contract” 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 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. Such term shall also mean a contract or agreement made by or for the manufacturer or seller of a motor vehicle tire for repair or replacement of the tire or wheel as the result of damage arising from a road hazard.
Any person or entity obligated to provide service under a service contract may not issue, sell, or offer for sale a service contract in New York unless he, she, or it first registers with the Superintendent of Insurance as a service contract provider pursuant to Insurance Law § 7907. See OGC Opinion 03-07-32 (July 29, 2003).
Warranties and service contracts are similar in that both relate to the nature or efficiency of a product. But in order to be a warranty, the contract maker 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 risk contemplated by Insurance Law § 1101(a). See OGC Opinion 01-07-06 (July 13, 2001). Where there is no relationship or act, the contract maker undertakes an obligation involving a fortuitous risk, and the agreement is an insurance contract that constitutes the doing of an insurance business. See id.
Thus, in the situation presented here, if the third-party that is offering the Program in association with dealer does not have a relationship to the restaurant equipment or does not engage in an act that imparts such knowledge, then the third-party is undertaking an obligation that involves a fortuitous risk, and the Program would be insurance. However, note that Insurance Law § 1101(b)(3-a) provides that the marketing, sale, offering for sale, issuance, making, proposing to make, or the administration of a service contract pursuant to Article 79 of the Insurance Law does not constitute the doing of an insurance business in New York.
The mere charging of a fee does not convert a warranty into a service contract. See OGC Opinion 01-07-06 (July 13, 2001). If the contract is a warranty, and the warrantor does not make warranties as a vocation but as merely incidental to any other legitimate business or activity, then even though the warrantor charges a fee, the contract remains a warranty and is not a service contact. See id. However, where the contract is not a warranty because the contract maker has not exercised the requisite control over the property, or if the contract maker would be doing an insurance business by making the warranty (which would occur if the contract maker is not in the chain of sale), then the contract maker must register as a service contract provider. See id.
Furthermore, Insurance Law § 2101(c) defines an “insurance broker” and states in relevant part that:
(c) In this article, “insurance broker” means any person, firm, association or corporation who or which for any compensation, commission or other thing of value acts or aids in any manner in soliciting, negotiating or selling, any insurance or annuity contract or in placing risks or taking out insurance, on behalf of an insured other than himself, herself or itself or on behalf of any licensed insurance broker, except that such term shall not include:
* * *
(4) any service contract provider or any administrator or person designated by a service contract provider who in this state markets, sells, offers for sale, issues, makes, proposes to make or administers service contracts pursuant to article seventy-nine of this chapter…. (Emphasis added.)
Therefore, any person who markets a service contract in New York does not need an insurance broker’s license. Insurance Law § 2101(q) defines a “person” as “an individual or a business entity.”
Thus, whether the future company for which the inquirer is a consultant needs an insurance broker’s license in order to market in New York what the inquirer refers to as an “extended warranty program,” depends upon whether the Program is insurance. Since the parties have not finalized the Program’s terms and conditions, the Department is unable to advise whether the Program constitutes insurance, and thus, whether the future company needs an insurance broker’s license in order to market the Program.
For further information you may contact Assistant Attorney Joana Lucashuk at the New York City Office.