DISTINCTION BETWEEN INSURANCE AND WARRANTY CONTRACT

INSURANCE ‑- WARRANTY ‑- DISTINCTION BETWEEN INSURANCE AND WARRANTY CONTRACT

Criteria for determining whether an "extended vehicle warranty" contract issued in connection with the sale of a new or used car constitutes "insurance" for the purposes of the Washington state insurance code.

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                                                                February 26, 1976

Honorable Karl Herrmann
Insurance Commissioner
Insurance Building
Olympia, Washington 98504                                                                                                               Cite as:  AGLO 1976 No. 17

Dear Sir:

            By letter previously acknowledged you asked whether a certain "Extended Vehicle Warranty" form commonly used by new and used car dealers constitutes an insurance contract for the purposes of the various regulatory provisions of the Washington state insurance code.  In our opinion, for the reasons set forth below, it does not.

                                                                     ANALYSIS

            RCW 48.01.040, codifying § .01.04 of the state insurance code as enacted by chapter 79, Laws of 1947, defines the term "insurance" to mean:

            ". . . a contract whereby one undertakes to indemnify another or pay a specified amount upon determinable contingencies."

            More particularly, insofar as motor vehicles and the like are concerned, RCW 48.11.060 defines the term "vehicle insurance" to mean:

            ". . . insurance against loss or damage to any land vehicle or aircraft or any draft or riding animal or to property while contained therein or thereon or being loaded or unloaded therein or therefrom, and against any loss or liability resulting from or incident to ownership, maintenance, or use of any such vehicle or aircraft or animal.

            "(2) Insurance against accidental death or accidental injury to individuals while in, entering, alighting from, adjusting, repairing, cranking, or caused by being struck by a vehicle, aircraft, or draft or riding animal, if such insurance is issued as part of insurance on the vehicle, aircraft, or draft or riding animal, shall be deemed to be vehicle insurance."

             [[Orig. Op. Page 2]]

            A fundamental precept of the state insurance code is that it is unlawful to engage in the business of insurance in the state of Washington without compliance with the various regulatory provisions thereof.1/   Thus, if the "Extended Vehicle Warranty" which you have asked us to review (as below described) were held to constitute an insurance contract the automobile dealers issuing that warranty to their new or used car customers would be in violation of the code unless licensed or certificated in accordance with its provisions.

            Research has disclosed no Washington cases interpreting RCW 48.01.040,supra, or in any other manner determining where the line is properly to be drawn between an insurance contract and a manufacturer's or vendor's warranty.  Yet as all consumers know, the latter, in one form or another, either express or implied, are common ingredients of most commercial transactions involving not only motor vehicles but many other consumer items including appliances, household furnishings, and even clothing.  Accord, RCW 62A.2-313 through 62A.2-315 and related provisions of the Uniform Commercial Code.

            This basic issue has, however, been explored by the courts of other jurisdictions.  Three principal cases dealing with the question are State ex rel. Herbert v. Standard Oil Co., 138 Ohio St. 376, 35 N.E.2d 437 (1941);Ollendorff Watch Co. v. Pink, 279 N.Y. 32, 17 N.E.2d 676 (1938); andState ex rel. Duffy v. Western Auto Supply Co., 134 Ohio St. 163, 16 N.E.2d 256 (1938).2/   Although none of these cases involved the precise statutory definition of "insurance" which is contained in RCW 48.01.040, they did, nevertheless, utilize quite comparable definitions.  For example, inState ex rel. Duffy v. Western Auto Supply co.,supra, the supreme court of Ohio, lacking a statutory definition of the term, adopted the following definition from a leading legal encyclopedia:

            "What is insurance?  'Broadly defined, insurance is a contract by which one party, for a compensation called the premium,  [[Orig. Op. Page 3]] assumes particular risks of the other party and promises to pay to him or his nominee a certain or ascertainable sum of money on a specified contingency.  As regards property and liability insurance, it is a contract by which one party promises on a consideration to compensate or reimburse the other if he shall suffer loss from a specified cause, or to guarantee or indemnify or secure him against loss from that cause.' 32 Corpus Juris, 975. . . ."

            Accord,State ex rel. Herbert v. Standard Oil Co.,supra.  Then, in the first of these two Ohio cases the court went on to distinguish the concepts of insurance and warranty by saying:

            ". . .  A warranty promises indemnity against defects in the article sold, while insurance indemnifies against loss or damage resulting from perils outside of and unrelated to defects in the article itself."

            At issue inState ex rel. Duffy v. Western Auto Supply Co., supra, was the legal status of a so-called warranty issued by a retailer of automobile tires which, in the words of the court,

            ". . . was a specific guarantee for the period stated therein 'against blowouts, cuts, bruises, rim-cuts, under-inflation, wheels out of alignment, faulty brakes or other road hazards that may render the tire unfit for further service (except fire and theft).' . . ."

            The warranty then provided that:

            ". . .  'In the event that the tire becomes unserviceable from the above conditions, we will (at our option) repair it free of charge, or replace it with a new tire of the same make at any of our stores, charging of our current price for each month which has elapsed since the date of purchase. . . ."

             [[Orig. Op. Page 4]]

            The court held this warranty to constitute an insurance contract saying, at pages 259-260:

            "We are unable to discern any essential difference in the character or effect of the various forms of agreement of indemnity made by the respondent and advertised in its catalogue.  Each constitutes 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.  It is substantially an unconditional promise of indemnity, and that is insurance."

            Three years later inState ex rel. Herbert v. Standard Oil Co.,supra, however, the same Ohio supreme court, utilizing the same definition of "insurance," held another dealer's tire warranty form not to constitute an insurance contract.  In this case the warranty read, in material part, as follows:

            "'The Standard Oil Company (an Ohio corporation) hereby warrants to the above purchaser that the materials and labor incorporated into the tire listed hereon are of such quality that the tire may be expected to render service, if Atlas or Atlas Lug Grip brand, for a minimum period of twelve months from the date of purchase for passenger car service, or six months from the date of purchase for commercial car service; if Junior Atlas Brand, for a minimum period of six months from the date of purchase for passenger car service, or three months from the date of purchase for commercial car service, provided same is used under usual conditions in such respective service, and The Standard Oil Company (an Ohio corporation) warrants the tire to give the purchaser satisfactory service under the usual conditions of wear and tear, except as hereinafter stated, during such respective minimum periods of time.

            "'If the tire fails to give the purchaser satisfactory service under any usual conditions of wear and tear, except as hereinafter stated, the liability of The Standard Oil Company (an Ohio corporation) under this Warranty and Adjustment Agreement is strictly limited either to repairing the tire without charge or to replace it  [[Orig. Op. Page 5]] with a new tire of same brand at its option.  If so replaced, purchaser is to be charged and agrees to pay, if Atlas or Atlas Lug Grip brand, one‑twelfth (1/12) of the current retail price if in passenger car service, or one‑sixth (1/6) of the current retail price if in commercial car service, for each month or fraction thereof which has elapsed since the date of purchase; if Junior Atlas brand, one‑sixth (1/6) of the current retail price if in passenger car service, or one‑third (1/3) of the current retail price if in commercial car service, for each month or fraction thereof which has elapsed since the date of purchase.

            "'This Warranty and Adjustment Agreement does not cover punctures, tires ruined in running flat, tires injured or destroyed by fire, wrecks or collisions, tires cut by chains, or by obstruction on vehicle, theft, clincher tires, tubes used in any form, or tires used in taxicab or common carrier bus service.

            "'This Warranty and Adjustment Agreement does not cover consequential damages.'"

            In holding this latter warranty not to constitute an insurance contract the court noted and distinguished its earlier ruling in Duffy, supra, and said:

            "As we read the instant warranty, the seller represents to the purchaser that the materials and labor incorporated into its tires are of such quality that the tires will render satisfactory service for a designated period of time under the usual conditions of wear and tear, and that if the tires fail because of faulty construction or materials, repairs will be made free of charge or new tires substituted at a reduced price based on the length of time which has elapsed since the original purchase.  Then follows a specific list of tire injuries, not ordinarily associated with faulty construction or materials, and other items for which the seller disclaims any responsibility whatsoever.

            "We find difficulty in construing this agreement as more than a representation  [[Orig. Op. Page 6]] that the tires being sold are so well and carefully manufactured that they will give satisfactory service under ordinary usage for a specified number of months, excluding happenings disassociated from imperfections in the tires themselves."

            In the third case above cited, Ollendorff Watch Co. v. Pink, supra, a manufacturer of watches issued, with each watch sold, a certificate under which he promised to replace the watch with a new one of like qualify if the first watch was lost through burglary or robbery within one year of purchase.  Although the lower court had held this contract not to be an insurance contract, the New York court of appeals reversed, stating that since the theft was not an occurrence within the control of the party promising the indemnity it could not be construed as a contract of warranty.

            Lacking anything more definite by way of local, Washington, case law or statutory provisions, we are here inclined to go along with what we discern to be the basic principle to be derived from these three cases.  Thus, if an automobile manufacturer, dealer, or anyone else, agrees to indemnify an automobile owner against loss or damage resulting from theft, fire, collision, or any other risk not related to the quality or fitness of the parts or workmanship involved in the vehilce itself, the result will be an insurance contract.  Likewise, if someone other than the manufacturer or dealer purports to indemnify an automobile owner against loss resulting from defects in the vehicle itself, the line between warranty and insurance will also be crossed because the risk insured against will not be one within the control of the insurer.  But, instead, if the risk covered by the contract is exclusively one relating to the parts and workmanship involved in the vehicle itself, and if the contract is issued either by the manufacturer of that vehicle or by a dealer in connection with a specific sale, the rationale of State v. Standard Oil Co., supra, will apply and the contract will not, accordingly, constitute an insurance contract within the meaning of our state insurance code.

            Turning, finally, to the "Extended Vehicle Warranty" which you have asked us to review, we find that it falls within the last of these three categories.  The relevant terms of this warranty read as follows:

             [[Orig. Op. Page 7]]

            "WARRANTY COVERAGE OF ISSUING DEALER

                        "Administered By

            "AMERICAN AUTO DEALER SERVICES, INC.

            "EXTENDED WARRANTY COVERAGE:  The issuing dealer warrants, subject to the terms and conditions as itemized herein that it will:  (A) From the first day of retail usage for the period of time or miles above indicated (whichever shall first occur) reimburse the warranty holder for reasonable costs incurred by the warranty holder for the repair or replacement of any of the below listed mechanical parts of the vehicle described hereon, provided that such repair or replacement is required due to a mechanical breakdown which results from the failure of a defective part or faulty workmanship as supplied by the manufacturer, and will,