Attorney General: George M. Reider, Jr., Commissioner of Insurance, 1996-013 Formal Opinion, Attorney General of Connecticut

Attorney General's Opinion

Attorney General Richard Blumenthal

September 3, 1996

George M. Reider, Jr.
Commissioner of Insurance
Oxford Centre
153 Market Street
Hartford, CT 06120

Dear Commissioner Reider:

Deputy Commissioner Gilligan requested our opinion as to whether the H.E.L.P. Program, as currently constituted, is insurance. The H.E.L.P. Program is a plan marketed as a contractual appendix to service agreements sold by fuel oil dealers to fuel oil customers. Two versions of the plan are marketed: one version provides for the clean up of the accidental release of oil on a customer's property caused by a leaking fuel oil tank: the other provides for the clean up and replacement of a defective tank. Both versions afford protection only if the customer, at the time the fuel oil dealer is notified of the spill, has a service contract with, and is purchasing all of his fuel oil from, the dealer who sold the plan. The customer must remain a customer of the oil dealer for at least one year following the date on which he notifies the dealer of the spill. Neither version of the plan pays for or indemnifies the customer for any decrease in property value caused by the spill or for environmental clean up required under law as a prerequisite to selling or transferring the property. In order to offer the H.E.L.P. plan to fuel oil customers, fuel oil dealers purchase a contractual liability and third-party liability insurance policy. The contractual liability coverage of these policies is provided to the dealer on a "service agreement appendix-issued-or-renewed basis."

By way of background, the Deputy Commissioner's letter states:
"In September of 1994 the Insurance Department was approached by Hagedorn & Company, an insurance agency, and American International Specialty Lines Insurance Company. Hagedorn had been offering, through oil dealers, a program providing clean up in the event of an oil spill from a leaking fuel oil tank. Their original program included clean up of the customer's property, neighboring property, tank replacement and property damage coverage. It was being sold by oil dealers who purchased a contractual liability policy from American International to cover their losses resulting from the service contracts they issued. This was known as the H.E.L.P. Program at the time.
Because there was no legitimate market for tank replacement and clean up, and we had received several inquiries from legislators supporting such a product, we worked with Hagedorn to trim the program to something that we determined was not insurance and could be marketed, but would still be meaningful to the public.
* * *
The program was trimmed to a contractual agreement whereby the oil dealer contracted with the customer to clean up an oil spill on the customers property and to replace the leaking tank that caused the spill. The liability provision for clean up to neighboring property and the property damage provision were eliminated. The oil dealer with whom the customer contracted provided automatic filling of the tank and was thereby better able to determine if the tank was leaking. The oil dealer purchased, at its own option, contractual liability coverage to protect against losses it may sustain as a result of its contracts with customers. As such, the program was determined not to be insurance.

For the following reasons, we accept your determination that the H.E.L.P. Program is not a contract of insurance subject to regulation by the Insurance Department.Endnote 1

I.

In determining whether the H.E.L.P. Program is subject to regulation as an insurance contract, we note at the outset that there are two definitions of "insurance" in the statutes, as well as a comprehensive definition of "doing an insurance business." The first is a general definition in Conn. Gen. Stat. 38a-1(10) which broadly defines insurance to mean

any agreement to pay a sum of money, provide services or any other thing of value on the happening of a particular event or contingency or to provide indemnity for loss in respect to a specified subject by specified perils in return for a consideration. In any contract of insurance, an insured shall have an interest which is subject to a risk of loss through destruction or impairment of that interest, which risk is assumed by the insurer and such assumption shall be part of a general scheme to distribute losses among a large group of persons bearing similar risks in return for a ratable contribution or other consideration.
In addition, Conn. Gen. Stat. 38a-319 provides that
[a]ny agreement in any form, which in effect provides for the indemnification of one person by another for injurious results to property from a future accident or other contingency, shall, to the extent of such provision for indemnification, constitute a contract of insurance within the meaning of the statutes concerning insurance, whether such indemnification is agreed to be by means of a money payment or by means of repair to or replacement of the property injured or any part thereof or by means of any work to be done upon such property; but the provisions of this section shall not apply to an agreement of any seller with a purchaser, guaranteeing workmanship and materials in connection with the sale of such property.

Conn. Gen. Stat. 38a-271, a part of the Unauthorized Insurers Act, also provides in pertinent part that

[a]ny of the following acts effected in this state by mail or otherwise is defined to be doing an insurance business in this state: (1) The making of or proposing to make, as an insurer, an insurance contract; (2) the making of or proposing to make, as guarantor or surety, any contract of guaranty or suretyship as a vocation and not merely incidental to any other legitimate business or activity of the guarantor or surety; (3) the taking or receiving of any application for insurance; (4) the receiving or collection of any premium, commission, membership fees, assessments, dues or other consideration for any insurance or any part thereof; (5) the issuance or delivery of contracts of insurance to residents of this state or to persons authorized to do business in this state; (6) directly or indirectly acting as an agent for or otherwise representing or aiding on behalf of another any person or insurer in the solicitation, negotiation, procurement or effectuation of insurance or renewals thereof or in the dissemination of information as to coverage or rates, or forwarding of applications, or delivery of policies or contracts, or inspection of risks, a filing of rates or investigation or adjustment of claims or losses or in the transaction of matters subsequent to effectuation of the contract and arising out of it, or in any other manner representing or assisting a person or insurer in the transaction of insurance with respect to subjects of insurance resident, located or to be performed in this state. The provisions of this subdivision shall not operate to prohibit full-time salaried employees of a corporate insured from acting in the capacity of an insurance manager or buyer in placing insurance in behalf of such employer; (7) the doing of or proposing to do any insurance business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of the general statutes relating to insurance; and (8) any other transactions of business in this state by an insurer.

Finally, we must add judicial definitions of insurance based on common law to the statutory mix.

In Day v. Walsh, 132 Conn. 5, 12, 42 A.2d 366 (1945), an action on a life insurance policy, the court listed the five essential elements, set forth in W. R. Vance, Handbook on the Law of Insurance at 2 (2d Ed. 1930), that distinguish insurance from similar transactions. These elements are repeated verbatim in the current edition.Endnote 2

The contract of insurance, made between parties called the insured and the insurer, is distinguishable by the presence of five elements:
(a) The insured possesses an interest of some kind susceptible of pecuniary estimation, known as an insurable interest.

(b) The insured is subject to a risk of loss through the destruction or impairment of that interest by the happening of designated perils.

(c) The insurer assumes that risk of loss.

(d) Such assumption is part of a general scheme to distribute actual losses among a large group of persons bearing similar risks.

(e) As consideration for the insurer's promise, the insured makes a ratable contribution to a general insurance fund, called a premium.

A contract possessing only the three elements first named is a risk-shifting device, but not a contract of insurance, which is a risk-distributing device; but, if it possesses the other two as well, it is a contract of insurance, whatever be its name or its form.

While the concept of insurance appears simple enough on its face, definitions can be extremely difficult to apply in individual cases. Couch on Insurance 3d, 1:12. Keeton & Widiss, Insurance Law 1.1(b).

The articulation of a generally applicable definition of insurance has proven to be a very difficult task. The crafting of a definition of insurance that is both precise enough to be of use in distinguishing among various transactions and broad enough to be viewed as generally applicable has been an elusive goal in major part because the basic concept of sharing risks has been employed for a vast array of purposes in many different types of cultures and economic contexts.

Keeton & Widiss, supra at 1.1(b).

In discussing statutory definitions in California and Massachusetts, Professor Keeton states:

Arguably these statutes should be read not as stating that every transaction having the stated characteristics is insurance but only as saying that no transaction is insurance unless it has these characteristics.... Reading these statutes instead as stating that all transactions having these characteristics are insurance would be to give them a meaning plainly inconsistent with the much narrower scope of regulation in practice.

Keeton & Widiss, supra at 8.3 fn. 1.

Controversies involving the scope of regulatory measures are made even more difficult by the fact that the cases are legion and often conflict. This is particularly evident in cases involving contracts for services and maintenance of goods. See, e.g., Transportation Guarantee Company Ltd. v. Jellins, 29 Cal.2d 242, 174 P.2d 625 (1946) (contract to keep truck in repair, to garage and fuel it, and cause it to be insured was not an insurance contract where the controlling object of the transaction was service, not insurance.); Boyle v. Orkin Exterminating Co., 578 SO.2d 786 (Fla. Dist. Ct. App. 4th Dist. 1991) (lifetime termite guaranty purchased by homeowners in connection with exterminator's treatment of home did not constitute a contract of insurance); GAF Corp. v. County School Bd., 629 F.2d 981 (4th Cir. 1980) (agreement by supplier of roofing materials to repair damage to roof held not insurance even though warranty extended to leaks caused by faulty workmanship unrelated to defects in materials since element of risk transference was a relatively unimportant part of what was essentially a warranty agreement accompanying sale of goods); cf. Ollendorf Watch Co. v. Pink, 279 N.Y. 32, 17 N.E.2d 676 (1938) (agreement by store selling watches to replace watch lost through certain hazards within one year of purchase held to be insurance); State ex rel. Duffy v. Western Auto Supply Company, 16 N.E.2d 256, 119 ALR 1236 (Ohio 1939) (guarantee issued with new automobile tires found to be illegal contract of insurance because agreement constituted "an undertaking to indemnify against failure from any cause except fire or theft and therefore covers loss or damage resulting from any and every hazard of travel, not excepting negligence of the automobile driver or another.").

Faced with the imprecision of statutory definitions and conflicting cases, Professor Keeton advises that we consider two fundamental questions in resolving disputes over "what is insurance."

(1) Did the specific transactions or the general line of business at issue involve one or more of the concerns at which the regulatory statutes were aimed?

(2) Were the elements of risk transference and risk distribution central to and relatively important elements of the transactions (or merely incidental to other elements that gave the transactions their distinctive character)?

* * *

[I]t seems clear that the insurance regulatory laws are not properly construed as aimed at establishing an absolute prohibition against the inclusion of any risk-transferring-and-distributing provisions in contracts for services or for the rental of goods. The presence of a minor element of risk transference and risk distribution does not conclusively demonstrate that the transaction should appropriately be classified as within the reach of insurance regulatory laws. The judgment should be based on the predominant characteristic of such transactions, the element that gives the transaction its fundamental nature.

Keeton & Widiss, supra at 8.3.

This appears to be the holding of the better reasoned cases. In Transportation Guarantee Co. Ltd. v. Jellins, 174 P.2d at 629, for example, the Court stated:

We are satisfied that a sound jurisprudence does not suggest the extension, by judicial construction, of the insurance laws to govern every contract involving an assumption of risk or indemnification of loss; that when the question arises each contract must be tested by its own terms as they are written, as they are understood by the parties, and as they are applied under the particular circumstances involved.

This analysis is also wholly consistent with traditional rules of statutory construction which require us to consider legislative intent and the purpose the statute is to serve.

"It is a fundamental principle of statutory construction that statutes are to be construed so that they carry out the intent of the legislature." State v. Parmalee, 197 Conn. 158, 161, 496 A.2d 186 (1985), quoting State v. Campbell, 180 Conn. 557, 561, 429 A.2d 960 (1980). Moreover, where the language of a statute is of doubtful or uncertain meaning, as is the case here, courts generally consider the legislative history and circumstances surrounding the enactment of the statute as well as the purpose and object of the legislation. Beloff v. Progressive Casualty Ins. Co., 203 Conn. 45, 55, 523 A.2d 477 (1989); State v. Parmalee, 197 Conn. at 161. Common sense must also be used when construing a statute, and it must be assumed that the legislature intended to accomplish a rational, not a bizarre result. Beloff v. Progressive Casualty Ins. Co., 23 Conn. at 58.

In applying these rules to the H.E.L.P. Program, it appears that while there is an element of risk transfer and indemnity within the meaning of Conn. Gen. Stat. 38a-1(10) and 38a-319, the Program may be viewed as being incidental to a contract for the sale of oil and service of equipment. We recognize that Conn. Gen. Stat. 38a-319 contains an express exemption for warranties of materials and workmanship in connection with the sale of goods, but such warranties have generally not been considered insurance contracts, and this exception may be viewed more as a demonstration of the capacity of a broad definition to encompass contracts which are not generally viewed as insurance than an exclusive exemption.

In addition, you have represented to us that the H.E.L.P. plan does not contemplate a general scheme to distribute losses, nor does it require ratable contributions from fuel oil customers who append the plan to their basic service contract. While fuel oil dealers may purchase insurance to indemnify themselves from losses they may incur subsequent to being notified by a customer of an oil leak, the customer himself merely extends his service contract to cover the clean up costs of oil leaks and the replacement of a defective tank, but only if that customer detects the leak and notifies the dealer while his contract is in place and only if he is ordering all of his fuel oil from the dealer with whom he has his service contract at the time he notifies the dealer of the leak. In addition, Deputy Commissioner Gilligan pointed out that losses under a H.E.L.P. plan are not spread out among a large group of persons in the same class as are losses under an insurance contract. According to Mr. Gilligan, even the largest oil dealers in Connecticut do not have customer bases which would compare with classes of persons typically covered by insurance policies. Furthermore, no distinction is made in the H.E.L.P. Program between customers whose oil tanks are above ground and those whose tanks are below ground. While the risk is far greater from an in-ground oil tank, there is no distinction in the rate paid. Accordingly, we accept your conclusion that while the risk of loss may pass to the fuel oil dealer, the essential elements of distribution of loss among a large group of persons and ratable premiums are absent here.

II.

We also concur in your conclusion that Conn. Gen. Stat. 38a-320 subjecting "home warranty contracts" and "home warranty service agreements" to the insurance laws does not apply to the H.E.L.P. Program.

Conn. Gen. Stat. 38a-320 provides:

(a) As used in this section and subsection (b) of section 38a-759, a "home warranty contract" or "home warranty service agreement" means any agreement whereby any person, firm, corporation or association promises or agrees to repair or replace any structural component, appliance in, or system or any part thereof of, a single or multiple-family dwelling of four or less units, necessitated by (1) wear and tear, (2) deterioration or inherent defect or (3) failure of an inspection to detect the likelihood of wear and tear, deterioration or such defect. The provisions of this subsection shall not apply to an agreement of any seller with a purchaser, guaranteeing workmanship and materials in connection with the sale of such property.

(b) A home warranty contract or home warranty service agreement as defined in subsection (a) of this section shall constitute a contract of insurance within the meaning of section 38a-319.

Deputy Commissioner Gilligan's letter states that the Insurance Department determined that this statute only pertains to contracts or agreements covering all structural components, appliances or systems within a home, and that it does not apply to agreements covering only a range or dishwasher or maintenance or repairs of a heating system.

We find this to be a rational reading of the statute. Were it otherwise, myriad agreements by servicemen guaranteeing the quality of repair work and contracts incidental to such repairs of dishwashers, drains, and thousands of other household objects would be subjected to the full rigor of regulation governing insurance companies, agents and contracts. Since the legislative history is not helpful, we can only repeat the admonition that common sense must be used when construing a statute, and it must be assumed that the legislature intended to accomplish a rational, not a bizarre, result. Beloff v. Progressive Casualty Ins. Co., 203 Conn. at 58. Moreover, it has long been the rule that courts should give great weight to the reasonable construction of a statute by the agency charged with its enforcement. Clark v. Securities Industry Ass'n, 479 U.S. 388, 403-04 (1987). The Connecticut Supreme Court has also held that an "agency's practical construction of the statute if reasonable is high evidence of what the law is." Cos Cob Volunteer Fire Co. No. 1, Inc. v. FOIC, 212 Conn. 100, 104, 561 A.2d 429 (1989), quoting, Anderson v. Ludgin, 175 Conn. 545, 556-57, 400 A.2d 712 (1978).

Accordingly, we conclude that the Insurance Department's finding that the H.E.L.P. Program is not a contract of insurance constituted a reasonable interpretation of the law.

Very truly yours,

RICHARD BLUMENTHAL
ATTORNEY GENERAL

John G. Haines
Assistant Attorney General

RB/JGH/bjg


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