The Regulation of Product Warranties in British Columbia
The Financial Institution Commission of British Columbia (“FICOM”) recently released Information Bulletin INS-14-001 to clarify its position regarding the issuance and sale of glass repair and replacement contracts in British Columbia.
Although the Information Bulletin was directed at the glass suppliers and insurance agencies selling the product, it may have implications far beyond broken glass and should be cautiously considered by any manufacturer or retailer who offers accidental repair and replacement coverage on the products they sell.
“Product Warranty Insurance” versus “Property Insurance”
INS-14-001 was the result of an enquiry FICOM received as to whether a particular glass repair and replacement product was, in fact, a contract of insurance subject to regulation under theFinancial Institutions Act and the Insurance Act in B.C.
The product FICOM considered provided for the repair and replacement of residential or commercial glass in the event of breakage or damage regardless of the cause. The product was being offered by glass suppliers and sold by licensed insurance agents’ incidental to the sale of an insurance product.
FICOM did not take issue with the glass supplier’s ability to offer repair and replacement coverage on glass that they manufacture or sell but stipulated that such coverage could only be provided in the event that the damage or breakage was caused by a manufacturing defect or defective installation. That is, that the cause of the loss was material to whether the product was insurance, or not. If the cause of the loss was a manufacturing defect or defective installation (an inherent peril), the product would be considered “product warranty insurance”. In B.C., “product warranty insurance” may be sold by the manufacturer or retailer of the good pursuant to an exemption in the Financial Institutions Act. This same exemption is available for “vehicle warranty insurance”.
If the cause of the breakage or damage was unrelated to a manufacturing defect or a defective installation (that is, an external peril), FICOM considers the product to be “property insurance” - an unwelcome characterization for many businesses as it means that the product must be underwritten by a licensed insurer, sold by licensed intermediaries and be drafted in conformance with the Insurance Act.
In connection with the release of INS-14-001, FICOM also prepared an accompanying “Frequently Asked Questions” document. The FAQ reiterated FICOM’s position on the difference between a glass repair or replacement contract and a product warranty by highlighting the causation issue.
Causation – An External or Internal Peril?
The Financial Institutions Act defines “product warranty insurance” to mean:
[I]nsurance, 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;
The Financial Institutions Act defines “property insurance” to mean:
[I]nsurance against the loss of, or damage to, property, and includes insurance against loss caused by forgery.
On a literal interpretation of these definitions, the only apparent distinction between the two classes appears to be that “product warranty insurance” provides for a narrower scope of coverage than does “property insurance”. The former indemnifying only for the cost of repair or replacement while the latter broadly indemnifies for loss or damage. However, FICOM’s interpretation of “product warranty insurance” as set out in INS-14-001 distinguishes these two classes not on the basis of scope but on the basis of causation. On a plain reading of both definitions, no causal requirement is included.
The absence of any causal language in the definition of “product warranty insurance” is perhaps even starker when read alongside the definition of “vehicle warranty insurance” – the other class of insurance entitled to the manufacturer and retailer exemption.
The Financial Institutions Act defines “vehicle warranty insurance” to mean:
[I]nsurance, 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;
- the cost of repairing or replacing the motor vehicle,
- towing fees,
- the cost of renting a substitute motor vehicle, or
- the cost of accommodation required because of the mechanical failure.
The definition of “vehicle warranty insurance” clearly requires a particular type of causal connection. Although not spelled out in the definition, a vehicle’s mechanical failure is more akin to an inherent peril within the vehicle as opposed to an external one.
In an earlier Information Bulletin issued by FICOM in 2006, INS-06-009, FICOM described its position on “product warranty insurance” and “vehicle warranty insurance”. In INS-06-009, FICOM under the heading ‘Underwriting’, FICOM stated that:
All contracts which undertake to indemnify another person for a loss by:
- Repairing a product or vehicle;
- Replacing the broken parts of a product or vehicle; or
- Reimbursing the cost of repairs made to a product or vehicle,
are considered to be contracts of product warranty insurance or vehicle warranty insurance.
Like the definition of “product warranty insurance”, this description of the coverage captured does not include a causal requirement.
Understanding and interpreting legislation is ultimately an exercise in statutory interpretation. The accepted approach to statutory interpretation is well-known: a statutory provision must be read in its entire context, taking into consideration not only the ordinary and grammatical sense of the words, but also the scheme and object of the statute, and the intention of the legislature.Despite that, there will not always be agreement on the legislature’s true intent. When a regulator has a different interpretation than the industry it can lead to unexpected and costly fixes in order to move forward.
Although INS-14-001 was directed at the glass supplier industry, the definition FICOM is clarifying simply deals with “products”. If your business is offering accidental repair and replacement coverage on products it manufacturers or sells – we recommend reviewing your coverage wording carefully.