OGC Op. No. 10-11-12
The Office of General Counsel issued the following opinion on November 24, 2010 representing the position of the New York State Insurance Department.
Re: Coverage for a Lost or Stolen Item
Does an agreement under which an entity obligates itself to compensate another for the loss or theft of property constitute a service contract?
No. An entity that obligates itself to compensate others for the loss or theft of property is not offering a service contract but rather doing an insurance business that requires a license from the Insurance Department.
The inquirer reports that she represents a client who wishes to engage in a business whereby he would compensate customers that own phylacteries in the event that they are lost or stolen. Phylacteries are religious items.
The inquirer asks whether the client would qualify as a service contract provider under the Insurance Law. A “service contract” is defined, in pertinent part, in N.Y. Ins. Law § 7902(k) as:
a contract or agreement, for a separate or additional consideration, for a specific duration, to perform the repair, replacement or maintenance of property due to a defect in materials or workmanship or wear or 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 . . . .
In this case the agreement would not qualify as a service contract because the agreement is not a contract to repair a product due to defects, but rather a contract to replace the item if lost or stolen.
However, the agreement would constitute insurance under the Insurance Law. Insurance Law § 1101 (b)(1), which defines the term “doing an insurance business,” is relevant to the inquiry. It defines the doing of an insurance business, in pertinent part, to include “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 . . . .”
Insurance Law § 1101(a)(1) defines an “insurance contract” as follows:
[A]ny 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.
Insurance Law § 1101(a)(2) defines “fortuitous event” as “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.” In this case the company would be conferring pecuniary value on the property owner — that is, the cost to replace the stolen or lost phalctery. Loss or theft of a phylactery constitutes a fortuitous event because the trigger for compensation is outside of the control of either party. Therefore, the company would be doing an insurance business under the New York Insurance Law. Under Insurance Law § 1102(a), no person, firm association, corporation or joint-stock company may do an insurance business in this state, unless licensed as an insurer or exempt from licensing under Insurance § 1108. Since none of the exemptions under § 1108 would apply here, the company would require a license as an insurer.
In sum, the proposed business would be considered an insurance business because the compensation would be triggered by a fortuitous event, over which neither party would have control. The agreement offered would not be considered a service contract since a service contract is a contract to repair or replace due to defects in the workmanship of the product, whereas the proposed plan would replace the item if it is lost or stolen.
For further information you may contact Senior Attorney Brenda M. Gibbs at the Albany Office.