Alberta’s Insurance Superintendent Issues Bulletin on Auto Dealership Products
On October 10, 2024, the Office of the Alberta Superintendent of Insurance released Interpretation Bulletin No. 05-2024 (the Bulletin). This document outlines the Superintendent’s position on products commonly marketed by automobile dealerships in connection with vehicle sales. This bulletin follows a similar one from the British Columbia Financial Services Authority earlier this year. We’ve been working with various industry stakeholders affected by these bulletins and want to offer some practical insights, focusing on Alberta for simplicity.
In short, the Bulletin clarifies that certain products previously considered “warranty” products fall under the definition of “insurance” according to the Insurance Act, R.S.A. 2000, c. I-3 (the Insurance Act) and will be regulated as such. This decision followed the Superintendent’s comprehensive review of insurance products that pose a “material risk” of financial harm to consumers. Notably, it mirrors guidance issued earlier in 2024 by the British Columbia Financial Services Authority in Bulletin No. 24-008.
Scope of the Bulletin
The Bulletin applies to motor vehicle warranty contracts, motor vehicle dealership loyalty programs, and motor vehicle protection products. When these products meet the definition of “insurance,” they’re subject to the Insurance Act. This means they must be underwritten by a licensed insurance company and sold through a licensed insurance agent, though certain classes of insurance can be sold by businesses holding a “restricted certificate of authority.”
Practically, this means that the sale of some of these products will need adjustments to comply with Alberta’s insurance laws. For example, warranty companies may have relied on their obligation under a warranty contract and then purchased a contractual liability insurance policy (CLIP) from a licensed insurer to cover their obligations. However, if that product is now clearly categorized and regulated as automobile insurance, the contract must be between the customer and an insurer licensed in Alberta for that class of automobile insurance.
It’s worth noting that the Superintendent temporarily removed the Bulletin from its website shortly after publication, but it’s expected to be republished without significant changes, and this alert will be updated as necessary.
Understanding the Insurance Act’s Definition of “Insurance”
According to section 1 of the Insurance Act, “insurance” is defined 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.”
The Superintendent’s office recently reviewed products related to automobiles and discovered several that shared characteristics of insurance contracts, including:
- An insurable interest
- Terms of coverage
- Consideration given in exchange for coverage
- The requirement of a fortuitous event to trigger payment
- A promise to compensate someone upon the occurrence of a fortuitous event.
Licensing Requirements and Exceptions
Under the Insurance Act, insurers must hold a valid license to conduct business in Alberta. However, some insurance types can be sold by businesses holding a restricted insurance agency license called a “restricted certificate of authority” (Restricted License). This license allows the business to transact only that specific type of insurance. Examples of such businesses include:
- Automobile dealerships
- Equipment dealers
- Vehicle rental agencies
Restricted insurance types include, but are not limited to, equipment warranty insurance and guaranteed asset protection (GAP) insurance.
Classifying Motor Vehicle Warranty Contracts
The Bulletin distinguishes between two primary types of motor vehicle warranty contracts:
- Warranties and extended warranties sold by manufacturers (or their wholly owned subsidiaries)
- Third-party extended motor vehicle warranties, typically sold by motor vehicle dealerships.
Manufacturer Warranties vs. Third-Party Warranties
Warranties sold by manufacturers are not considered insurance; instead, they fall under the purview of the Consumer Protection Act, 2000, c. C-26.3. If an insurer covers any risk, peril, damage, or loss beyond deficiencies in workmanship or materials, those products are viewed as insurance contracts and must adhere to the Insurance Act’s licensing requirements.
Similarly, third-party extended vehicle warranty contracts, such as those provided by automotive dealers, are considered insurance contracts. However, warranty contracts that provide coverage “solely for those inherent deficiencies in the workmanship arising from the person’s service or repairs of a motor vehicle” are exempt.
Other Products Listed in the Bulletin
The Bulletin provides classifications for other products, some of which are listed below in chart form:
Type of Product: Motor vehicle dealership loyalty programs
- Insurance:
- Typically sold at dealerships with new or used vehicle purchases, leases, or financing. The price takes the form of a membership fee. Deals provide a dealership discount on a replacement vehicle should something happen to the original. Products provide consumers with an indemnity for only part of the cost of a replacement vehicle upon a certain risk or peril, for example theft or collision. Therefore, this falls under insurance and such products must be developed, sold, and underwritten in compliance with the Insurance Act.
- Exception: A debt waiver underwritten by the financing company is not insurance. For example, vehicle finance companies sometimes agree to waive up to a certain amount of a vehicle loan in the instance that the vehicle is written off and the insurance payment is less than the outstanding loan amount.
Type of Product: Ancillary motor vehicle protection products (VPPs)
-
Insurance
- Deductible reimbursement and/or monetary credits given in the event of loss, damage, or theft
- Non-manufacturer tire and rim warranties
- Glass protection products that cover some or all windshield replacement costs
- Theft-deterrent products that include a payment promise if theft and/or non-recovery occur (e.g., etching/tagging/catalytic converter devices)
- Key fob replacement coverage.
- Payment for a motor vehicle rental provided in conjunction with a VPP that is insurance.
-
Exception: The Superintendent does not consider roadside service plans or motor vehicle service plans that focus exclusively on planned maintenance like oil changes, windshield repairs, tire and rim repairs, wiper blade replacements, air filter replacements, or incidental repairs like scuffs, singes, chips, cuts, tears, and scratches, to be insurance contracts.
Alberta Captive Insurance Companies and Potential Restructuring
Stakeholders facing restructuring of automobile warranty product distribution as a consequence of the Bulletin may have opportunities to establish an Alberta-domiciled captive insurance company to assume risks and earn premiums from these products. The Bulletin may present an opportunity for innovation or to reduce costs.
For more information on this topic, or if you’re looking for more information on how to establish a captive insurance company to assume the risks and earn premiums paid for, reach out to any of the authors or key contacts below.
Key Takeaways
- Alberta’s automobile warranty industry stakeholders may no longer be able to rely on previous assumptions about how they distribute certain automotive warranties within the province.
- Some automobile warranty products previously not construed as insurance are classified as automobile insurance in Alberta and must be underwritten directly by a licensed insurer, unless an exemption applies.
- Industry stakeholders may need to find new ways to generate revenue from these products, including the potential of establishing an Alberta-domiciled captive insurance company.
