Attorney General: Commissioner Susan F. Cogswell, Insurance Department, 2003-014 Formal Opinion, Attorney General of Connecticut

Attorney General's Opinion

Attorney General, Richard Blumenthal

September 23, 2003

Commissioner Susan F. Cogswell
Insurance Department
153 Market Street
Hartford, CT 06120

Dear Commissioner Cogswell:

You have asked whether certain vehicle identification number ("VIN") etching reimbursement products ("the Products") should be regulated as insurance under Title 38a of the Connecticut General Statutes. We have reviewed the three Products on which you base your question and we conclude, from the facts you have provided and the analysis that follows, that the Products are not "insurance" within the meaning of Conn. Gen. Stat. § 38a-1(10). However, although we have concluded that these three products do not meet the statutory definition of "insurance," the marketing of, sale of, and performance obligations embodied in these products are subject to applicable consumer protection laws, including the Connecticut Unfair Trade Practices Act's prohibition on unfair methods of competition and unfair and deceptive practices. See Conn. Gen. Stat. Sec. 42-110b.

Your letter describes VIN etching reimbursement products in general terms and then it provides the particular characteristics of each of the Products in question. You have defined VIN etching reimbursement products as "a service whereby consumers purchase the service of having VIN numbers etched on their vehicle and that the contract for this service includes a promise to reimburse the consumer if the vehicle is stolen." In your words, the question "focuses on vendors who offer to auto dealers the VIN Etching Reimbursement Product, specifically the promise to reimburse a certain amount if the vehicle is stolen."1

The term "insurance" is defined in Conn. Gen. Stat. § 38a-1(10) as follows:

(10) "Insurance" means 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.

This definition appears to be a codification of what the Connecticut Supreme Court embraced for the meaning of "insurance" in Day v. Walsh, 132 Conn. 5, 12, 42 A.2d 366 (1945), an action on a life insurance policy, when it 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 latest edition of Vance's treatise.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 straightforward, applying the foregoing definition can prove to be extremely difficult in a particular case. 1 Russ & Segalla, Couch on Insurance 3d, § 1:12 (1997); Keeton & Widiss, Insurance Law § 1.1(b) (1988).

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, at § 1.1(b).

With these general principles in mind, we now turn to each of the three Products to opine whether they constitute "insurance" under Connecticut law.

I. Foresight Services Group

Foresight Services Group ("Foresight") of Plano, Texas has proposed to market a VIN etching product in this state. Foresight would like to offer "Blue Steel Protection" products and warranties to auto dealers. It considers its product to be a "theft deterrent warranty" and calls itself a warrantor. The agreement it uses states: "The purchaser has read and understands the warranty with benefits and understands that this warranty is not an insurance policy."

Foresight charges a range of fees for the VIN etching, from $89 to $999, depending on the benefit desired. Foresight will provide the owner or lessee of the vehicle a cash benefit, ranging from $1,000 to $10,000, toward the purchase of a new vehicle from the original dealer, if the vehicle is stolen and not recovered within 30 days.

Some additional general principles are relevant for the analysis of Foresight's and the other two VIN etching products discussed below. First, the language used in the respective agreements is not solely determinative of whether they are insurance contracts.

The character of insurance is not to be determined by the character of the company writing it, the nomenclature used, or the manner or mode of affording insurance, but by the nature of the contract actually entered into or issued. . . .

The mere use of, or failure to use, specific words cannot alter the underlying nature of the contract, since the courts will look behind the terminology to ascertain what the parties intended to accomplish. Even the fact that the contract expressly states that it is not a contract of insurance is not controlling.

Couch on Insurance, 3d, supra, § 1:8. Thus, while Foresight expressly states its contract is not an insurance policy, this is not dispositive of the issue.

Similarly, while Foresight and the other two marketers of VIN etching products prefer to call these products "warranties," a warranty may or may not be insurance, depending on the warranty's terms and on the wording of any statutory definition of “insurance” being applied. Couch on Insurance, 3d, supra, § 1:20. We note that some states have specifically amended the relevant statutes to bring automobile dealers offering extended service contracts within the scope of state insurance regulators.3 Id.

Parsing the statutory definition in § 38a-1(10), the first thing required is the existence of an "agreement to pay a sum of money, provide services or any other thing of value." Under the facts you have presented, purchasers or lessees enter into agreements that will then pay a cash benefit ranging from $1,000 to $10,000. Next, the statutory definition requires that the provision of the "money" or "other thing of value" occur "on the happening of a particular event or contingency or to provide indemnity for loss in respect to a specified subject by specified perils." Foresight provides a cash benefit if the etched vehicle is stolen and not recovered within 30 days of the theft. The next element of the statutory test is that there be an agreement to pay the "money" or "other thing of value" "in return for a consideration." Automobile purchasers or lessees pay from $89 to $999 for Foresight's VIN etching service.

Conn. Gen. Stat. § 38a-1(10) addresses three additional elements of a contract for insurance. First, the "insured shall have an interest which is subject to a risk of loss through destruction or impairment of that interest." There is no question that the purchaser or lessee of the etched motor vehicle has an interest in the motor vehicle. Second, the risk of loss (theft) must be assumed by the insurer. Foresight has agreed to pay a cash benefit to the vehicle's owner or lessee in the event of a theft. The third and final requirement is that the "assumption [of the risk] 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." This requirement meets the "normal definition” of “insurance," as explained by one writer:

. . . as the spreading and distribution of risk in a manner in which the purchaser of insurance accepts a small but certain loss (the premium payment) in return for protection against a larger but contingent loss (in which case the insurance coverge [sic] is triggered). . . .

. . . Insurers are able to offer this product by virtue of spreading the risk of the contingent loss (e.g., fire, hurricane, flood) among a large group of policyholders. More important, the group (or "risk pool") of policyholders must be sufficiently large and variegated that the pool of policyholders as a whole is not too greatly damaged by any one incident or series of related incidents.

J. W. Stempel, Law of Insurance Contract Disputes, §1.02 (2d ed. Supp. 2002).

The Foresight VIN etching service does not appear to meet this final requirement. Based upon the information you have furnished us, there is no evidence that the cost that is charged to the purchasers or lessees of motor vehicles is a "ratable contribution”". Nor is there any evidence that Foresight's assumption to pay a sum in the event there is a stolen vehicle is part of a general scheme to distribute its losses among a large and variegated pool of persons. Without evidence to support this final element of the statutory definition of insurance, we conclude that Foresight's VIN etching service is not insurance.

II. Universal Underwriters Group

A second product that has come to the Insurance Department's attention is offered by Universal Underwriters Group ("Universal") of Overland Park, Kansas. Like the Foresight product, Universal offers VIN etching protection with the promise "that in the event of the non-recovered theft of an automobile the purchaser will be given either partial replacement of the product in the way of a credit towards another automobile or the payment of a certain dollar amount. These payments are usually in the one to three thousand dollar range." Letter dated January 2, 2002 from D. Scott McMillin, Assistant Vice President-Governmental Affairs, Universal Underwriters Group to Jon E. Arsenault, General Counsel, Insurance Department. Universal did not provide the Department with the cost of the coverage, but it is implicit that there is a charge to the automobile purchaser or lessee. Universal has argued to the Department that its product is simply a warranty.

For the same reasons provided in our analysis of the Foresight VIN etching service, above, Universal's product is also not insurance. It does not meet the statutory test for insurance because there is no evidence that the cost for the product has been rated based upon a general scheme to distribute losses among a large group of persons.

III. Assurance and Protection Co., LLC

The third product that is in question is offered by Assurance and Protection Co., LLC ("Assurance"), of Cheshire, Connecticut. Assurance is currently marketing this product in this state as a warranty. Like the other two products, Assurance sells its VIN etching product to automobile dealers, in this case for the fee of $30 to $45 per vehicle. You state that "[t]he dealers then make the product available to purchasers of vehicles at whatever price they negotiate with the consumer." Assurance guarantees payments between $3,000 and $6,000 per vehicle to the consumer if there is a theft of the vehicle and if, and only if, a replacement vehicle is purchased from the dealer. Assurance insures its risk with Interstate Insurance Group, a member of the Fireman's Fund Group, a Connecticut licensed insurer, and makes a claim to Interstate when it pays a benefit under a VIN etching agreement.

As in the case of the other two VIN etching products, there is no evidence that the cost of Assurance's product is rated based upon a general scheme to distribute losses among a large group of persons. In addition, there is even stronger evidence in Assurance's case that the cost of the product is not rated in that the dealers are free to set the cost at whatever level the market will bear.

Conclusion

Based upon our review of the three products described above, we conclude that each of them fails to meet all of the requirements of "insurance" as that term is defined in Conn. Gen. Stat. § 38a-1(10). In the event you obtain further facts that demonstrate that there is "a general scheme to distribute losses among a large group of persons bearing similar risks in return for a ratable contribution or other consideration," we would be willing to revisit this issue. However, although we have concluded that these three products do not meet the statutory definition of "insurance," the marketing of, sale of, and performance obligations embodied in these products are subject to applicable consumer protection laws, including the Connecticut Unfair Trade Practices Act's prohibition on unfair methods of competition and unfair and deceptive practices. See Conn. Gen. Stat. Sec. 42-110b.

Very truly yours,


RICHARD BLUMENTHAL
ATTORNEY GENERAL


William J. Prensky
Assistant Attorney General

RB:WJP:db


1Under Conn. Gen. Stat. § 14-99h(a), automobile dealers are required to offer "at the time of the sale or lease" the option of purchasing the "service of etching the complete identification number of the vehicle on a lower corner of the windshield and on each side or rear window in such vehicle." The rates for such service must be "reasonable" and a schedule of such rates must be filed with the State Department of Motor Vehicles. Conn. Gen. Stat. § 14-99h(b).

2W. R. Vance, Handbook on the Law of Insurance at 2 (3d ed. 1951).

3Connecticut regulates extended warranties under the Unfair Insurance Practices Act, Conn. Gen. Stat. § 38a-816(17). The Products that are the subject of this opinion do not fall within the statutory definition of "extended warranty" set forth in Conn. Gen. Stat. § 42-260(1), which are regulated by the Insurance Commissioner under Conn. Gen. Stat. § 38a-816(17).


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