Automotive OEM's Take Note: BC Tunes Up Approach To Vehicle Service Contracts

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On April 25, 2024, the British Columbia Financial Services Authority ("BCFSA") issued Regulatory Statement 24-008 ("RS 24-008"), clarifying the limits of "vehicle warranty insurance" and "product...
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On April 25, 2024, the British Columbia Financial Services Authority ("BCFSA") issued Regulatory Statement 24-008 ("RS 24-008"), clarifying the limits of "vehicle warranty insurance" and "product warranty insurance" as well as the scope of "automobile insurance." RS 24-008 will have significant impact on and require automobile manufacturers and automobile dealers to revisit the underwriting and sale of vehicle service contracts in British Columbia ("BC").

British Columbia's insurance and warranties regime

The BCFSA has long considered product warranties and vehicle warranties to be insurance. Product warranty insurance and vehicle warranty insurance are defined as follows in the Classes of Insurance Regulation passed under BC's Financial Institutions Act ("FIA"):

"product warranty insurance" means insurance, not being insurance included in or incidental to any other class of insurance, under which the insurer undertakes, in the event of loss of, or damage to, personal property, other than a motor vehicle, to pay, for a specified period after it is purchased, the cost of repairing or replacing the personal property

"vehicle warranty insurance" means insurance, not being insurance included in or incidental to automobile insurance, under which the insurer undertakes, in the event of loss of, or damage to, a motor vehicle arising from mechanical failure, to pay, for a specified period after the motor vehicle is purchased,

(a) the cost of repairing or replacing the motor vehicle,

(b) towing fees,

(c) the cost of renting a substitute motor vehicle, or

(d) the cost of accommodation required because of the mechanical failure.

Under the FIA only insurers authorized to conduct business in BC may underwrite insurance and only licensed insurance salespersons or licensed insurance agents may sell insurance. The definitions of insurance agents and insurance salesperson are broad and include activities such as soliciting, taking an application for insurance, negotiating insurance and/or collecting a premium for insurance.

Notwithstanding the general requirement insurance be underwritten by licensed insurers, section 4 of the Insurer Exemption Regulation passed under the FIA creates an exemption to this licensing requirement. This exemption permits manufacturers and retailers to provide vehicle warranty insurance or product warranty insurance that is solely incidental to the sale of the manufacturer or retailer's product. The exemption extends to a corporation of which the manufacturer is a wholly owned subsidiary or a wholly owned subsidiary of the manufacturer or retailer.

Similarly, section 2 of the Insurance Licensing Exemptions Regulation creates an exemption to the general rule that only licensed insurance agents or insurance salespersons may sell insurance. This exemption permits a defined class of persons and businesses selling defined classes of insurance in the course of their business. For example, a motor vehicle dealer and its employees may sell vehicle warranty insurance sold incidentally to the ordinary business of the motor vehicle dealer. A person may sell product warranty insurance without a license where the sale of the product warranty insurance is incidental to the sale of the product.

Manufacturer's warranties and vehicle service contracts

Vehicles routinely come accompanied by a manufacturer's limited warranty. These limited warranties, generally, warrant that the vehicle or product will be free of manufacturing defects for a discrete period (for example, one to five years).

In addition to the manufacturer's limited warranty, consumers frequently have the option to purchase additional protection in the form of an extended warranty or service contract. Vehicle service contracts often cover losses arising from damage to components of the vehicle such as chips or cracks in the windshield, dents in the body of the vehicle, ripped or punctured seats, and/or damaged tires and rims. With the growing prevalence of vehicle thefts, manufacturers are increasingly offering guarantees that anti-theft devices will prevent vehicle theft and offer monetary indemnification in the event of theft. This coverage is in contrast to vehicle warranty insurance that protects against loss arising from mechanical failure.

While insurance and warranty legislation varies by provinces, it is common that automobile manufacturers offer and automobile dealers sell vehicle service contracts. More recently, manufacturers within and outside of the automotive industry have offered anti-theft products that offer indemnification in the form of reimbursement of an insurance deductible or dealership credit in the event the anti-theft product fails and the vehicle is stolen ("anti-theft guarantees").

Regulatory Statement Number 24-008

In RS 24-008, the BCFSA has clarified its position with respect to service contract that offers coverage on an automobile in the event of theft or if the glass, paint or other part of a motor vehicle is otherwise damaged due to a fortuitous event. The BCFSA has stated that such products are automobile insurance and that "vehicle warranty insurance" is limited to loss or damage to motor vehicles arising from mechanical failure.

The clarification from BCFSA will have wide-ranging implications for manufacturers and automobile dealerships in British Columbia. Automobile insurance is not currently a class of insurance that is subject to the Insurer Licensing Exemption Regulation or the Insurance Licensing Exemption Regulation. Manufacturers cannot underwrite and automobile dealerships cannot sell automobile insurance in the absence of licensing.

Implementation and moving forward

The BCFSA has RS 24-008 to insurers authorized to conduct insurance business in BC. Manufacturers nor automobile dealers are on the distribution list notwithstanding the impact this direction will have on their respective business in vehicle service contracts or anti-theft guarantees. It is also notable that RS 24-008 does not provide for a transitionary period.

While the BCFSA and the Insurance Council of British Columbia are currently reviewing the implementation of restricted insurance agent's licensing, there is no indication in the public consultations issued by either regulator that restricted insurance agent's licences will be available to automobile dealerships. There has been no indication from the BCFSA with respect to licensing exceptions for automobile manufacturers underwriting automobile insurance limited to minor body damage typically covered under vehicle service contracts.

Manufacturers, automotive dealers, and any other unlicensed third parties underwriting or selling vehicle service contracts or anti-theft guarantees should promptly review the terms and conditions of their vehicle service contracts in British Columbia and seek legal advice with respect to existing contracts and related business, moving forward.

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