September 5, 1978
Ms. Jane Nelson
South Dakota Department of Commerce
and Consumer Affairs
State Capitol
Pierre, South Dakota 57501
Official Opinion No. 78-35
Repair plans for motor vehicles and mechanical components for homes-insurance or service contract
Dear Ms. Nelson:
You have requested an official opinion from this office based on the following factual situation:
FACTS:
1. (Service Contracts) on motor vehicles to be sold by auto dealers. Auto dealers sell with the purchase of an automobile for a consideration over and above the cost of the automobile, an automobile service plan which provides that a dealer will repair or replace specified parts when required due to mechanical breakdown or failure or a defective part as described in the contract. No periodic or preventive maintenance is provided. The automobile owner pays the first $100 and the service contractor pays the rest.
2. (Prepaid Service Agreements) Real estate brokers enroll as members of Guaranteed Homes, Inc. (GHI), who in turn place GHI's warranty on houses to be sold by realtors's service contracts (prepaid service agreements) on homes they service, list and sell. These prepaid service agreements assure the home buyer the listed mechanical and electrical components of his newly acquired home will operate properly for a period of one year. In the event of failure of any of the listed equipment, a qualified service contractor is instructed to repair or replace the price of equipment. The homeowner pays the first $100 and GHI pays the balance to the service.
Based upon the above facts you ask the following question:
QUESTION:
Do these “automobile service contracts” on motor vehicles and “warranty service contracts (prepaid service agreements)” on homes realtors list and sell qualify as insurance according to South Dakota Insurance Laws?
Insurance is defined in SDCL 58-1-2, 58-9-5, and 58-9-27 as follows:
SDCL 58-1-2. Terms used throughout this title, unless the context otherwise plainly requires, shall mean:
(1) “Insurance” is a contract whereby one undertakes to indemnify another or pay or provide a specified or determinable amount or benefit upon determinable contingencies.
(2) “Insurer” includes every person engaged as indemnitor, surety, or contractor in the business of entering into contracts of insurance.
. . . .
(15) “Insurance business” includes the transaction of all matters pertaining to a contract of insurance, both prior to and subsequent to the effectuation of such a contract, and all matters arising out of such a contract or any claim thereunder.
SDCL 58-9-5. “Property insurance” is insurance on real or personal property of every kind and of every interest therein, whether on land, water, or in the air, against loss or damage from any and all hazards or causes, and against loss consequential upon such loss or damage, other that noncontractual liability for any such loss or damage.
SDCL 58-9-27. “Casualty insurance” includes insurance against any other kind of loss, damage, or liability properly a subject of insurance and not within any other kind of insurance as defined in this chapter, if such insurance is not disapproved by the commissioner as being contrary to law or public policy.
Five elements are normally present in an insurance contract, which include:
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;
5. The payment of a premium for the assumption of risk.
See W. Vance, Handbook on Insurance, § 1 at 2 (2nd ed. 1930); 63 A.L.R. 711, 713,; 100 A.L.R. 1449, 1450; 119 A.L.R. 1241, 1242.
Every contract indemnifying or providing a benefit upon a contingency may not necessarily be insurance. Should a manufacturer or seller offer indemnity to all purchasers for defects in an item sold, it could not reasonably be argued a contract of insurance is created. In those instances the contract is used to sell the item and is included in the price of the transaction. These contracts are usually construed as warranties and not insurance.
In the instance of the prepaid service agreement, the contract is not part of the real estate sales contract or deed or financial arrangements incidental thereto. GHI sells to the realtor who on behalf of GHI sells to the home seller and a contract results between GHI and the home buyer.
In the instance of the motor vehicle service contracts, the contract is not part of the basic transaction between the dealer and the purchaser. The dealer sells a contract to the automobile purchaser for service for a consideration over and above the price of the vehicle. Also, it is difficult to attach a service connotation to either contract as the contracts have deductible clauses.
The test in these instances is whether the effect of the mechanisms is to provide a warranty or service or whether the effect is to indemnify another or pay or provide a specified or determinable amount or benefit upon determinable contingencies within the meaning of the cited South Dakota Codified Laws.
In analyzing your statement of facts and the applicable statutes, the following appears:
1. The contract between the seller of the alleged service contract and the purchaser of the car or house is separate and apart from the transfer of the car or house;
2. There is separate consideration for the contract and this consideration is not part of the purchase price;
3. Moneys over and above a purchase price “indemnify another or provide a specified or determinable amount or benefit upon determinable contingencies”;
4. The contingency involved in the contract would cause loss or financial injury to the beneficiary of the contract.
It is my opinion that the mechanisms presented fall within the definitions of insurance contained in SDCL 58-1-2(1), (2), (15), 58-9-5 and 58-9-27.
Respectfully submitted,
William J. Janklow
Attorney General
WJJ:RHW:mam
