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The Rogak Report: 01 Sept 2005 ** Warranty vs. Insurance **

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  • Lawrence Rogak
    HEATING OIL SPILL CLEANUP SERVICE IS A WARRANTY, NOT INSURANCE Petro Inc. v. Serio, NYLJ 09/01/05 (Supreme Court, New York County) (RAMOS, j) Petro sells
    Message 1 of 1 , Sep 1, 2005
      HEATING OIL SPILL CLEANUP SERVICE IS A WARRANTY, NOT INSURANCE

      Petro Inc. v. Serio, NYLJ 09/01/05 (Supreme Court, New York County)
      (RAMOS, j)

      Petro sells heating fuel oil in seven states along the East Coast
      including New York, and offers customers of its automatic heating
      fuel oil delivery plan to subscribe, for an additional fee, to a
      program entitled "Clean Up for Accidental Release to the
      Environment," also known as the "Care Program." Under the Care
      Program, subscribers are provided with inspection, maintenance and
      repair of heating fuel oil systems, in an effort to minimize the risk
      of fuel oil spills, and are additionally provided with cleanup
      services of up to $100,000 in the event that there is a heating fuel
      oil spill onto a subscriber's property.

      The Insurance Department notified Petro that the Program amounted to
      an insurance contract, and therefore, Petro was in violation of
      Insurance Law for providing insurance coverage without a license.
      Petro brought this action seeking a declaratory judgment that it was
      not required to obtain an insurance license for offering the Care
      Program because it does not constitute insurance coverage.

      Insurance Law §1101 states,

      "Insurance contract" means any agreement or other transaction where
      one party, the "insurer", is obligated to confer benefit of pecuniary
      value upon another party, the "insured" or "beneficiary", dependant
      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.

      The Department claimed that the Care Program meets this definition of
      an insurance contract because it obligates Petro to "confer [a]
      benefit of pecuniary value upon another party [the subscribing
      customer]", by absorbing up to $100,000 in cleanup costs, and
      furthermore, Petro's duties under the Program are dependant on the
      happening of a fortuitous event, an accidental heating fuel oil spill
      on a subscribing customer's property. In contrast, Petro argued that
      the Care Program is not an insurance contract subject to regulation
      by the Department on the grounds that the Care Program constitutes a
      service contract or a warranty within the meaning of Insurance Law
      §1101(b)(3-a), and is therefore exempted from regulation.

      Insurance Law §1101(b)(3-a) states,

      . . . a service contract pursuant to article seventy-nine of this
      chapter or warranty, service contract or maintenance agreement
      conditioned upon or otherwise associated with the sale or supply of
      heating fuel shall not constitute doing an insurance business in this
      state. NY CLS Ins §1101(b)(3-a).

      Insurance Law Article 79, §7901, states that "this article [Article
      79] shall not apply to . . . warranties, service contracts and
      maintenance agreements that are conditioned upon or otherwise
      associated with the sale or supply of heating fuel." NY CLS Ins §7901.

      Finally, Insurance Law §7901(k) states that "as used in this article
      [Article 79]" a "service contract" means,

      . . . 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 materials or workmanship
      or wear and tear, with or without an 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.

      Article 79 is the only article in the Insurance Law which provides a
      definition for "service contract," otherwise stating that the
      definition of "service contract" provided under Insurance Law §7902
      (k) is to govern all references made to "service contracts"
      throughout the article. While Insurance Law §7901(b)(4) provides that
      service contracts related to the sale of heating fuel oil are
      otherwise removed from the ambit of regulation of service contracts
      under Article 79, in order to qualify as a service contract eligible
      for this exemption, the agreement at issue must therefore first meet
      the definition of "service contract" under Insurance Law §7902(k).

      Alternatively, Insurance Law §1101(b)(3-a) consists of two clauses
      which contain a reference to a "service contract," and the clauses
      are separated by the word "or." Taking the two clauses together,
      stated the Court, the statute can be interpreted to read that a
      service contract can be exempt from insurance regulation on two
      alternative grounds: under the first clause, as a "service contract"
      pursuant to Article 79, or, under the second clause, as a service
      contract that is related to the sale or supply of heating fuel oil.

      In a letter from sponsoring Assemblyman Farrell to Governor Pataki's
      office, he states,

      "This bill [2000 Amendment] clarifies the Legislature's intent to
      exclude fuel oil company warranties, service contracts and
      maintenance agreements from operation of the Insurance Law . . .
      Such contracts may provide for the maintenance of equipment as well
      as clean up services . . . . this provides an effective means for the
      fuel oil supplier to promptly detect a fuel oil leak . . . such fuel
      oil service contracts, thus, provide both an effective means to
      prevent or contain spillage or leaks as well as increased protection
      to the citizens of New York . . . . . . if such contracts were not
      made available by fuel oil suppliers, it is unlikely that any cleanup
      services would or could be performed by the fuel oil purchaser in the
      event of an oil leakage or spill. . . . if the fuel oil purchaser
      were required to purchase an insurance contract to cover maintenance
      and cleanup costs, it would significantly add to the cost of owning a
      fuel oil unit."

      Senior Assistant Majority Leader Velella wrote, in the legislative
      history, that "the Legislature's intent was not to include
      maintenance agreements issued by companies that deliver fuel oil or
      propane because issuance of such agreements was only ancillary to
      their primary business of delivering oil."

      "Thus," held the Court, "by definition, these service contracts were
      not to be considered as insurance and therefore exempt from the
      provisions of the law. This bill merely clarifies the original
      legislative intent that warranties, service contracts and maintenance
      agreements associated with sale or supply of heating fuel are exempt
      from the service contracts law."

      "The most logical interpretation of these letters" from the
      Legislature, stated the Court, "is that to be exempt from regulation,
      the agreements at issue necessarily have to first qualify as a
      warranty, maintenance agreement or service contract."

      "Accordingly, the court concludes as a matter of law that in order to
      qualify as a service contract under Insurance Law §1101(b)(3-a), the
      agreement must meet the definition of 'service contract' under
      Insurance Law §7902(k)."

      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 materials or workmanship
      or wear and tear, with or without an 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 also include
      contracts to repair, replace or maintain residential appliances and
      systems.

      "Because the Care Program's coverage of up to $100,000 far exceeds
      the costs of most customer's fuel oil system, comprised of tanks and
      pipes, the Care Program does not constitute a service contract under
      Insurance Law §7902(k), and therefore, the Program is necessarily not
      entitled to the statutory exemption for service contracts related to
      the sale of heating fuel oil under Insurance Law §1101(b)(3-a)."

      But is the Care Program a warranty? "Under the first prong of the
      inquiry developed by courts to determine whether a service and
      maintenance plan constitutes a warranty contract or an insurance
      contract subject to regulation, dubbed the 'substantial control'
      test, the court determines whether the provider's liability for loss
      under the plan at issue is triggered by the happening of a fortuitous
      event. Under the substantial control test, an event is deemed
      fortuitous if its occurrence is beyond the substantial control of
      either party. Determination of whether coverage is dependant on
      fortuitous events is generally an issue of law for the court to
      decide. Furthermore, plans providing for the replacement or
      maintenance of parts not actually manufactured or sold by the
      coverage provider, often termed 'third party product' warranties, are
      generally considered insurance contracts and not warranties, because
      the actual service provider is a third party to the transaction
      between the seller of the product and the consumer, and therefore the
      provider's coverage obligation is seen as unrelated to the quality or
      efficiency of the product being manufactured or sold, and thus the
      plan is deemed to be the assumption of losses caused by fortuitous
      events."

      In Gerenstein v. Weiner, 9 Misc2d 259, 260 (NY App Term 1957), an
      agreement providing for the servicing of neon signs covering the
      replacement of parts not manufactured or sold by the servicing
      company for a monthly fee was held to be an insurance contract
      because the provider's liability was not related to defects in
      quality but was the assumption of a fortuitous risk.

      "'Third-party product' warranties may still be considered warranty
      contracts for the purposes of insurance regulation exemption,
      however, as long as there is a sufficient relationship between the
      service provided by the third party provider and the quality of the
      product sold by another, and the service provider's liability is
      otherwise not dependent on the happening of fortuitous events."

      Petro argued that its inspections, maintenance and repair of a
      customer's heating fuel oil system under the Care Program prevents
      and limits oil spills. Further, Petro argues that although the
      Program does not exclude every fortuitous event imaginable, the
      Program only incidentally involves risks arising from fortuitous
      events. In the event that Petro is unable to prevent a heating fuel
      oil spill, whether due to a service error, or wear and tear, Petro
      provides for cleanup under the Care Program by sending its own
      technicians or contracting out the work.

      "Accordingly, Petro has substantial control over the types of events
      that would otherwise subject it to liability, because the purpose of
      its routine inspections and maintenance of a customer's heating fuel
      oil system and monitoring of the customer's oil usage after
      installation, is to detect defects that, if left undetected, would
      ultimately lead to an oil spill. Additionally, the services provided
      by Petro have a substantial relation to the heating fuel oil it
      sells, because it ensures that its product, heating fuel oil, does
      not spill onto a customer's property, causing environmental and
      property damage. Given that the inspection, maintenance and repair
      services Petro provides under the Care Program is substantially
      related to the quality of the heating fuel oil systems itself, Petro
      has at least partially met the requirements of the 'substantial
      control' test."

      Petro additionally maintained that the majority of heating fuel oil
      spills are not caused by "acts of God," but rather by wear and tear
      in heating fuel oil systems. Petro argued that in the seven years
      since the Care Program's inception, out of roughly 1,750 heating fuel
      oil spills, including at least 59 such occurrences in New York alone,
      not one spill was the result of a catastrophic act of nature, or 'act
      of God.' Because Petro has since included an express exclusion
      for "acts of God" to the Care Program, "the court is satisfied that
      Petro is not subjecting itself to liability for unforeseen risks..."

      "The court rejects the Department's argument that the Care Program
      embraces a level of fortuity not tolerated in Insurance Law in the
      absence of a regulated insurance contract, including its
      dissatisfaction with the recently added exclusion for 'acts of God,'
      because, as the Department argues, the Program still does not exclude
      fortuitous events such as damage accidentally or intentionally caused
      by a third party or by an animal."

      In In re Feinstein, 36 NY2d 199, the Court of Appeals held that plans
      for prepaid legal services operated through a welfare trust fund and
      a local bar association for the benefit of union members did not
      constitute insurance, in part, because the rendition of legal
      services was not generally triggered by fortuitous events, although
      some degree of fortuity is indeed involved in the need for legal
      services. As the Feinstein court noted, "terms like fortuitousness in
      the law, as with the word accident, have always caused conceptual
      difficulties . . . in this area it is easy to slip into
      metaphysical . . . distinctions." "While Feinstein's holding was
      subsequently narrowed to apply primarily to the rendition of prepaid
      legal services, See State v. Blue Crest Plans, Inc., 72 AD2d 713, 714
      (1st Dept 1979), its comment on the difficulty in adhering to a rigid
      definition of fortuity buttresses Petro's argument that a relatively
      minimal degree of fortuity in a service plan will otherwise not
      render a warranty contract an insurance contract."

      "Therefore, as the court has found that the Care Program meets
      the 'substantial control' test, in that Petro has substantial control
      over the happening of events that would trigger its liability, the
      Care Program is a warranty contract, and under Insurance Law §1101(b)
      (3-a), will not be considered to be 'doing an insurance business,' as
      it is a ' . . . warranty . . . conditioned upon or otherwise
      associated with the sale or supply of heating fuel . . . ' That the
      exclusions contained in the Care Program, for, inter alia, 'acts of
      God,' in addition to damages caused by war or revolution, and by the
      customer's negligence or recklessness, do not cover every conceivable
      act which could result in damage does not otherwise render Petro's
      liability dependent on the happening of fortuitous events, because
      the Program's minimal embrace of fortuity is reasonable. Accordingly,
      the Care Program is exempt from insurance regulation under Insurance
      Law §1101(b)(3-a) as a warranty contract that is associated with the
      sale of heating fuel oil."

      "Given the benefits identified by the Legislature as a basis for
      drafting a statutory exemption to these agreements, the court finds
      that the equities tip in favor of allowing the continued availability
      to the subscribing public agreements such as the Care Program.
      Therefore, the court declines to enjoin Petro from issuing contracts
      under the Care Program."

      "Finally, the Court is mindful that in finding that Petro is not in
      violation of Insurance Law as a basis for denying the motion for
      preliminary judgment, Petro is entitled to a declaratory judgment to
      that effect."

      The court therefore "adjudged and declared that the Care Program is
      not a contract of insurance under the New York Insurance Law."

      Larry Rogak
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