Opinion ID: 2380225
Heading Depth: 1
Heading Rank: 2

Heading: vehicle service contract meets the definition of an insurance contract.

Text: ¶ 6 The petitioner relies on the public policy considerations of the Oklahoma Service Warranty Insurance Act, 36 O.S.2001 §§ 6601-6639, and the Oklahoma Insurance Code, 36 O.S.2001 § 1 et seq. to impose the duty of good faith. He argues that these statutes and the fact other jurisdictions have determined similar service contracts to be contracts of insurance support his argument that regardless of what these contracts are labeled, they are insurance contracts which may support a claim for bad faith breach. The provider counters that because vehicle service providers and insurance companies are regulated differently, and because the function and design of the service contracts resembles a warranty, a vehicle service contract does not resemble an insurance contract. ¶ 7 The Oklahoma Insurance Code (the Code), 36 O.S.2001 § 101 et seq. [4] defines insurance as a contract whereby one undertakes to indemnify another or to pay a specified amount upon determinable contingencies. [5] Insurers are defined as every person engaged in the business of making contracts of insurance or indemnity. [6]  (Nonprofit hospital service and medical indemnity corporations are expressly included within the definition of insurer. [7] Burial associations are expressly excluded from the definition of insurer. [8] Service warranty providers, such as Enterprise, are not mentioned at all.) [9] ¶ 8 Indemnity is not defined in the general provisions of the Code, but the Service Warranty Insurance Act, [10] which is located therein, defines indemnity as undertaking repair or replacement of a consumer product. [11] A consumer product is tangible personal property primarily used for personal purposes. [12] This portion of the Code also re-defines insurers as any property or casualty insurer duly authorized to transact business in this state and service warranty associations as any person, other than an insurer, who issues service warranties. [13] Service warranties are contracts between a consumer and a service warranty association in which agreements to indemnify against the cost of repair or a replacement of a consumer product is undertaken. [14] Maintenance service contracts which do not provide indemnification are expressly excluded from the definition of service warranty. [15] ¶ 9 Neither the Act nor the Code expressly refers to service warranty agreements as insurance contracts, but the Act requires: 1) the state Insurance Commissioner to regulate both service warranty associations and insurance companies in a similar manner through licensing, collecting fees, etc.; [16] 2) the treatment of service warranty associations as insurers for service of process purposes; [17] and 3) to indemnity themselves of losses [18] by either maintaining a funded reserve account or obtaining liability insurance. [19] ¶ 10 Public policy reasons exist for legislatures to require a more extensive regulation of insurance companies than service warranty companies. For instance, although service warranty associations involve a risk of loss, they are not subject to risks as large as or at the same monetary level as insurance companies. Consequently, they are frequently subjected to much less stringent regulation than insurance companies. [20] Nevertheless, the extent of regulation is not what makes a service provider an insurance company nor is it what makes a service agreement an insurance contract. ¶ 11 The United States Supreme Court in Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, 210, 228, 99 S.Ct. 1067, 59 L.Ed.2d 261 (1979), [21] in discussing whether a contract was merely an arrangement for the purchase of goods and services or whether it constituted insurance, said: . . . The primary elements of an insurance contract are the spreading and underwriting of a policyholder's risk. It is characteristic of insurance that a number of risks are accepted, some of which involve losses, and that such losses are spread over all the risks so as to enable the insurer to accept each risk at a slight fraction of the possible liability upon it. . . . (Citations omitted.) ¶ 12 The Court, quoting Jordan v. Group Health Assn., 71 App. D.C. 38, 107 F.2d 239 (1939), also stated: . . . Whether the contract is one of insurance or of indemnity there must be a risk of loss to which one party may be subjected by contingent or future events and an assumption of it by legally binding arrangement by another. Even the most loosely stated conceptions of insurance . . . require these elements. Hazard is essential and equally so a shifting of its incidence. . . ¶ 13 Vehicle service contracts are written like insurance policies. The obvious purpose of a vehicle service contract is to protect the purchaser from the expenses associated with an unexpected mechanical breakdown, or an expensive but necessary repair. The purchaser pays a premium and buys an agreement to shift any potential hazard they may face to the vehicle service provider. The vehicle service provider agrees to indemnify the consumer for mechanical repair costs. In other words, the consumer has purchased insuranceregardless of whether the vehicle service company is labeled as an insurance company and regardless of whether it labels its agreements insurance. ¶ 14 While many states have statutorily regulated service contract providers, relatively few courts have decided the issue of whether a vehicle service contract is insuranceand the courts that have are split on the issue. [22] One court has held that such contracts did not substantially amount to insurance so that the provider would be subject to the same regulations as insurance. In Griffin Systems, Inc. v. Ohio Department of Insurance, 61 Ohio St.3d 552, 575 N.E.2d 803 (1991), the Ohio Supreme Court determined that such plans are warranties because: 1) A contract for insurance promises to cover losses or damages over and above, or unrelated to, defects with the product itself; and 2)The vehicle protection plan expressly excluded losses or damages sustained by the purchaser of the product which are unrelated to the product itself. [23] ¶ 15 However, the contrary view that vehicle service contracts should be treated as insurance is set forth in Jim Click Ford, Inc. v. City of Tucson, 154 Ariz. 48, 739 P.2d 1365, 1367 (1987). The question in Ford was whether service vehicle contracts were insurance and thus exempt from taxation under state tax statutes. In determining whether the service contracts were insurance, the court recognized five determinative elements of an insurance contract, including: 1. An insurable interest; 2. A risk of loss; 3. An assumption of the risk by the insurer; 4. A general scheme to distribute the loss among the larger group of persons bearing similar risks; and 5. The payment of a premium for the assumption of risk. ¶ 16 In its analysis of those five elements, the Ford court concluded that: 1) the purchasers of vehicle service contracts had an insurable interest in the automobiles which the contracts covered; 2) they had a risk of loss if one of the listed parts malfunctioned; 3) the vehicle service provider assumed the risk and replaced the parts involved; and 4) the loss was distributed among a larger group with similar risks, because it is obvious that some of the purchasers will require a large number of replacement parts and services during the contract term, while there are others who may not require any and some who may require only a few; and 5) a premium (the purchase price of the contract) was paid in exchange for vehicle service provider's assumption of the risk of loss. Clearly, the five elements of an insurance contract were present in the vehicle service contracts. ¶ 17 In Pugh v. North American Warranty Services, 2000 UT App 121, ¶ 16, 1 P.3d 570 (2000), the Utah Court of Appeals determined that a vehicle service agreement was an insurance contract for the purpose of allowing an award of fees as consequential damages when the provider breached the implied covenant to perform in good faith. The Pugh court reasoned that the sole purpose of the contract was to shift the risk of financial loss due to vehicle breakdown from the consumer to the service contract provider. The consumer paid for and was entitled to peace of mind. If the car broke down during the warranty period, the provider absorbed the cost of the repair, thus the contract, although styled as a vehicle service contract rather than as automobile repair insurance, served the same purpose as an insurance contract. ¶ 18 Oklahoma's statutory scheme, like Ohio's in Griffin, supra, may not regulate vehicle service providers with the same regulations as it does insurance companies. However, we find the rationale of both Ford, supra, and Pugh, supra, persuasive. The purpose of the contract is to provide indemnity and shift riskit just does so on a smaller scale and with less financial responsibility than an insurance contract might provide. The contract meets the statutory definition of insurance as a contract whereby one undertakes to indemnify another or to pay a specified amount upon determinable contingencies. [24] Accordingly, we hold that a vehicle service contract which meets the definition of and is designed to function and perform as insurance should be treated like any other insurance contract if it is breached.