OGC Opinion No. 08-04-01
The Office of General Counsel issued the following opinion on April 1, 2008, representing the position of the New York State Insurance Department.
RE: Auto Repair Discount Certificate
Question Presented:
Would the discount certificate program proposed by RST Auto Club constitute the doing of an insurance business, for which licensing is required?
Conclusion:
Yes, the discount certificate program proposed by RST Auto Club would constitute the doing of an insurance business, for which licensing is required.
Facts:
The Office of General Counsel issued an opinion on April 2, 2007 in response to a previous inquiry the inquirer had submitted to the Department, wherein the inquirer reported that a New York auto dealership (“Dealer”) asked the inquirer to develop and administer a membership program that would provide the Dealer’s customers with discounted pricing on auto repairs made to Dealer-leased vehicles by the Dealer’s owned-and-operated repair shop. The “repair contract” the inquirer sent with his previous inquiry provided in part:
In the event such repair costs, as determined by the customer’s physical damage insurer, shall exceed $1,000, the deductible amount (no greater than $1,000) of the customer’s physical damage insurance policy shall be waived by the dealer, provided the amount paid to the dealer for repairs does not exceed minimal amount required by dealer to earn its customary profit.
The inquirer also reported that the lender would issue the membership contracts and collect the $10 monthly membership fee, which was expected to cover the program’s operating costs. The inquirer reported further that the Dealer would not be reimbursed for the discounts it provided. The inquirer did not explain why the lender would be the stated contract provider, whether the lender is liable for the Dealer’s obligations to the customers under the contract, or how the Dealer’s charges would be presented to the customers’ insurers.
The April 2, 2007 Office of General Counsel opinion, replying to the inquirer’s initial inquiry, stated that “[t]o the extent that the agreement would result in the Dealer not covering its cost of rendering the services, including overhead expenses, the program would constitute the doing of an insurance business and the Dealer would have to become licensed as an insurer. Moreover, this exception does not extend to the lender in the scenario . . . present[ed], because the lender is not providing the repair services . . . . [I]n order for the program to come within the exception to doing an insurance business, the legal obligation to render discounted repair services must remain solely with the Dealer at all times.”
The present inquiry, containing additional facts, asks whether the modified proposition would be acceptable to the Department. The inquirer reports that the membership program, “RST Auto Club,” (“Club”) would provide members a $1,000 discount certificate for auto repairs undertaken by an auto dealer. The inquirer writes that “the customer will be invoiced the full amount of the dealer’s cost of the repair, which must be paid directly by the customer, or by the customer’s “physical damage” insurer (or routed through the Club).”
In a telephone conversation with the Department’s Office of General Counsel on March 19, 2008, the inquirer stated that only an auto dealer that owns and operates an auto repair shop could participate in the discount program, and that the auto dealer-repair shop (“Dealer”) would assume the cost of the $1,000 discount. The inquirer stated that the membership program would not be operated or administered by a lender, and that no lenders were involved in the Club in any way. The inquirer described the manner in which a member would redeem the certificate as follows: an auto lessee or purchaser who joined the Club would be presented with a $1,000 discount certificate, which could only be used for auto repair work costing more than $1,000. A member needing auto repair would redeem the certificate by having the auto repaired by the Dealer from whom the auto was leased or purchased. The member would give the $1,000 discount certificate to the Dealer, who in return would give the member an invoice indicating the after-discount cost (i.e., if repair work cost $1,300, the member would receive an invoice for $300). The Dealer would not be reimbursed the $1,000 that it had foregone in the transaction.
Analysis:
N.Y. Ins. Law § 1101 (McKinney 2006) is germane to this inquiry. That statute defines the doing of an insurance business, and reads in relevant part as follows:
(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.
* * * *
(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;
The additional facts provided to the Department do not make the modified discount program any less problematic. The facts confirm that the legal obligation to render discounted repair services remains solely with the Dealer. As such, the transaction constitutes insurance under Insurance Law § 1101, because it obligates the Dealer to confer a pecuniary value upon the customer upon the happening of a fortuitous event (namely, the occurrence of physical damage to the leased vehicle.) The Office of General Counsel Opinion dated April 2, 2007 states that “a service plan where the pre-paid fee is a membership fee, and where certain services occasioned by the happening of a fortuitous event are offered by the provider of the services for an additional fee per service (even if such charge is less than the usual fee for such service), does not constitute the doing of an insurance business that requires a license, so long as the additional fee covers the cost of rendering the service, including reasonable overhead.” However, the transaction that described here could result in the Dealer assuming the cost of rendering services, and therefore does not satisfy the cost-of-rendition requirement.
Insurance Law § 1102(a) requires anyone doing an insurance business in New York to be licensed, unless otherwise exempted from this requirement by the Insurance Law. No exemption from licensing applies here. Thus, the Dealer would have to become licensed as an insurer in order to participate in the discount certificate program.
Although not asked to opine about other benefits offered by the Club, the Office of General Counsel deems it necessary to address the pamphlet attached to the inquiry describing other Club programs. Circular Letter No. 2 (1979) contains guidelines describing benefits motor clubs may offer. The Department has not objected to a motor club providing towing or roadside assistance services so long as the Club follows those guidelines, with one exception. Contrary to item 2 of the Circular Letter, a motor club may not obtain a master or group policy for towing, emergency, trip interruption or legal services, as such a policy would constitute group property/casualty insurance of a kind not authorized under the Insurance Law. See OGC Opinions dated January 13, 2003 and January 29, 2007.
For further information you may contact Associate Attorney Sally A. Geisel at the New York City Office.