Last March 27, 2009, the Quebec Autorité des marchés financiers (AMF) published a notice stating that it considered certain vehicle replacement cost warranties to be insurance.
On April 30, 2010, the AMF published two more notices respecting products relating to a vehicle: one on products relating to vehicles generally (which includes a discussion of marking warranties) (the "Vehicle Product Notice") and one on GAP warranties (the "GAP Warranty Notice"). The AMF considers both marking and GAP warranties to be insurance products if the criteria set out below are met.
An insurance product
According to the Vehicle Product Notice, a product that relates to a vehicle is considered insurance if the product:
- is offered on the sale or lease of a vehicle or one of its components or parts; and
- gives the right to an indemnity upon the occurrence of a risk covered in the contract (e.g. loss, theft, accident, vandalism) in exchange for the price of purchasing the protection.
In the AMF's view, all the criteria necessary for a product to be considered insurance are present in such products: (i) the payment of a benefit; (ii) upon the occurrence of a risk; (iii) for a consideration. The difference between an insurance product and a warranty is that insurance protects the consumer from risk while a warranty protects the consumer from defects in quality.
However, a product providing for:
- reimbursement of its cost; and
- cancellation of the contract in the event that the good sold does not work effectively is not an insurance product.
The consequences of being qualified as an insurance product are that:
- the product must be issued by an insurer duly registered with the AMF; and
- the product (if it is not a replacement warranty, which can be distributed through the distributor regime) can only be distributed by AMF-certified representatives (damage insurance brokers and agents).
Specific types of products
In the Vehicle Product Notice, the AMF discusses marking warranties. "Marking" a vehicle means identifying it through a technical process by which the parts of a vehicle are marked with an engraving or in some other way.
In the AMF's view,
- A marking is not in itself an insurance product.
- However, if the "marking warranty" provides for payment of an indemnity to replace a stolen marked vehicle - and not just an indemnity for the cost of marking the vehicle - it will be considered to be an insurance product.
Sellers of marking products that will now be considered to be insurance (e.g. which provide for replacement cost indemnity) have a three-month transition period beginning April 30, 2010 to either modify their products so that they comply with the new guidelines (e.g. by removing payment of the replacement indemnity), or withdraw their products from the market. Products sold prior to April 30, 2010 and throughout the transition period must be honoured up to their expiry date.
According to the GAP Warranty Notice, a GAP warranty covers the difference between the balance of the debt incurred to acquire a vehicle (pursuant to a purchase or a long-term lease) and the value of that vehicle at the time of the event resulting in its loss (value as determined by the motor vehicle insurer) (the "GAP").
In the AMF's view,
- When offered by a third party, the GAP warranty is an insurance product.
- However, an agreement by the creditor or lessor to assume the cost of the GAP (which amounts to the unpaid cost of the lost vehicle not covered by the insurance indemnity) is not an insurance product but only a waiver by the creditor or lessor in favour of the purchaser or the lessee.
Sellers of GAP warranties that are considered to be insurance must comply with the GAP Warranty Notice as of April 30, 2010. Warranties sold prior to this date must be honoured up to their expiry date.