Alberta Issues Bulletin Clarifying Regulation of Auto Dealership Products
On October 10, 2024, the Alberta Superintendent of Insurance released Interpretation Bulletin No. 05-2024 (the Bulletin). This bulletin outlines the Superintendent’s position on various products commonly marketed by automobile dealerships when selling motor vehicles. This follows a similar bulletin released earlier this year by the British Columbia Financial Services Authority.
This bulletin clarifies the regulatory landscape for certain products previously viewed as outside the scope of ‘insurance’. The Bulletin emphasizes that some products, traditionally considered warranty products by industry stakeholders, now fall under the definition of “insurance” as defined by the Insurance Act, R.S.A. 2000, c. I-3 (the Insurance Act), and will be regulated accordingly. This follows the Superintendent’s comprehensive review of insurance products posing a “material risk” of financial harm to consumers.
Scope and Implications
The Bulletin applies to:
- Motor vehicle warranty contracts
- Motor vehicle dealership loyalty programs
- Motor vehicle protection products (collectively referred to as the “products”).
When these products meet the definition of “insurance,” they must adhere to the Insurance Act’s regulations. This requires that they be underwritten by a licensed insurance company and sold through a licensed insurance agent, although specific insurance classes may be sold by businesses holding a “restricted certificate of authority.” In practice, this means that some product sales methods will need adjustment to comply with Alberta’s insurance laws.
For instance, when a warranty company has relied on being the obligor under a warranty contract and then purchased a contractual liability insurance policy (CLIP) from a licensed insurer, if the product is now regulated as automobile insurance, the contract must be between the consumer and an insurer licensed in Alberta for that specific class of automobile insurance.
It’s worth noting that the Superintendent initially removed the Bulletin from its website shortly after its publication. It is expected to be republished with no substantive changes. This alert will be updated as necessary.
Defining “Insurance”
Section 1 of the Insurance Act defines “insurance” as “the undertaking by one person to indemnify another against loss or liability for loss in respect of certain risks or perils to which the object of the insurance might be exposed, or to pay a sum of money or other thing of value on the happening of a certain event.” Following a recent review, the Superintendent’s office found that several automobile-related products share characteristics of insurance, which include:
- An insurable interest
- Terms of coverage
- Consideration paid in exchange for coverage
- The requirement of a fortuitous event to trigger payment
- A promise to compensate another on the happening of such a fortuitous event.
Under the Insurance Act, insurers must be licensed to conduct business in Alberta. However, certain insurance types can be sold by prescribed businesses with a restricted insurance agency license, such as automobile dealerships, equipment dealers, and vehicle rental agencies. These restricted insurance types include, but are not limited to, equipment warranty insurance and guaranteed asset protection (GAP) insurance.
Motor Vehicle Warranty Contracts
The Bulletin distinguishes two types of motor vehicle warranty contracts:
- Warranties/extended warranties from manufacturers (or their wholly-owned subsidiaries)
- Third-party extended motor vehicle warranties, often sold by dealerships.
Manufacturer warranties fall under the Consumer Protection Act, 2000, c. C-26.3. If a warranty offers coverage beyond defects in workmanship or materials, then it’s classified as insurance, and the Insurance Act’s licensing rules apply.
Similarly, third-party extended warranties from dealerships are considered insurance contracts. However, warranty contracts focused solely on deficiencies from a person’s service or repairs of a motor vehicle, are not viewed as insurance.
Other Products
The Bulletin clarifies and classifies other products sold in this space. Here’s a summary:
- Non-manufacturer tire and rim warranties providing for tire and rim replacement.
- Glass protection products promising to pay for windshield replacement
- Theft-deterrent products with a payment promise if the vehicle is stolen/unrecovered
- Key fob replacement coverage
- Payment for a motor vehicle rental provided in conjunction with a VPP that is insurance | The Superintendent does not consider roadside service plans, or motor vehicle service plans that provide solely for planned maintenance or routine service of a motor vehicle, or minor repairs that are routine to the ownership of a motor vehicle, to be contracts of insurance. |
Alberta Captive Insurance Companies
Stakeholders needing to restructure automobile warranty product distribution due to these bulletins may explore the possibility of establishing an Alberta-domiciled captive insurance company to manage risks and generate revenue from these products. Contact us to explore that option.
Key Takeaways
- Stakeholders in Alberta’s automobile warranty industry may not be able to assume their historical practices for distributing certain automotive warranties.
- Some warranty products, previously not seen as insurance, are now regulated as automobile insurance in Alberta and may need direct underwriting by a licensed insurer.
- Industry stakeholders may need to seek novel revenue streams from product distribution, including the option of forming an Alberta-based captive insurance company.
