Pub. 16 2017-2018 Issue 2

N E W J E R S E Y C O A L I T I O N O F A U T O M O T I V E R E T A I L E R S 23 new jersey auto retailer W W W . N J C A R . O R G “indemnification”wouldbe considered insur- ance. Inotherwords, ifGAPwas sold through a third party unrelated to the lender and that third party agreed to pay off the loan balance in the event of an approved claim, then the product would be considered insurance. For the decade following the adoption of these DOBI regulations, NJ CAR advised dealers that GAP issued by any third party other than the lender’s affiliate is “insurance”, and thus, dealers and their personnel who sold such products had to possess an insur- ance producer license. However, in 2015, new questions were raised concerning the applicability of New Jersey’s insurance laws to GAP. Namely, NJ CAR received reports from dealers that DOBI personnel had indi- cated that no producer license was required to sell GAP. Dealers also reported that GAP providers asserted that their productswerenot insurance and a DOBI license was therefore unnecessary to sell them. Accordingly, NJ CAR submitted a request to DOBI to address this confusion about regu- latory treatment of GAP. By way of a letter dated November 10, 2015, DOBI responded by explaining that certain GAP products were not considered insurance and GAP was therefore not always regulated byDOBI. On the issue of when an insurance producer license is required to sell GAP, DOBI iden- tified a distinction between GAP products underwritten by an insurer and those which are not, stating: “[i]f the Gap Protection coverage sold by the retailer is underwritten by an insurer, then such personmust be licensed as an insurance producer inNew Jersey pursuant toN.J.S.A. 17:22A-26 et seq. and N.J.A.C. 11:17.” This appeared to provide a workable test to determine whether a dealer and its personnel must obtain an insurance producer license to sell a particular GAP product—that is, if an insurance company is a party to the contract underlying the GAP product, and therefore underwriting that product, then an insurance producer license is required to sell it. What Does The Future Hold? On November 11, 2017, a new law will take effect regulating the sale of GAP by dealers in New Jersey. This new law specifically addresses GAP “waivers” offered by a “cred- itor” for a separate charge at the time of the purchase or lease of a vehicle. The new law broadly defines “creditor” as either the lender on a loan, the lessor in a lease transaction, the motor vehicle dealer, the seller in commer- cial retail installment sales transactions, or the assignees of any of the foregoing to whom a credit obligation is payable. GAP “waivers” are products structured as part of vehicle financing agreements that provide for debt cancellation in the event of an outstanding loan balance after a vehicle is declared a total loss. The new law expressly states that GAP waivers are not insurance. However, oth- er GAP products may still be considered insurance under certain circumstances. As mentioned above, GAP “insurance” is a product that the dealership offers directly through a third-party insurance under- writer ( i.e., not the dealer, lender, or lease funding source ) and sells to a consumer. That is, GAP products are regulated as insurance when the parties to the con- tract underlying the GAP product are the customer and a third-party insurance company. GAP waivers, on the other hand, only involve the customer and the dealer/creditor as parties. This is a subtle but meaningful distinction because despite the new law, GAP “insurance” remains regulated under New Jersey’s insurance laws and still requires an insur- ance producer license to sell. The new GAP waiver law requires motor vehicle dealerships to provide a notice to all borrowers that the extension of credit, finance, sale or lease may not be condi- tioned upon the purchase of a GAP waiver. The law also requires that GAP waivers disclose: (1) the name and address of the initial creditor and borrower; (2) the pur- chase price and terms of the GAP waiver; (3) that the purchaser may cancel the GAP waiver during a “free-look” period (of a minimum of 30 days); (4) the procedure for receiving GAP waiver benefits; (5) whether the GAP waiver is cancellable after the “free-look” period ends; (6) that in order to receive a refund for a cancelled GAP waiver, the borrower must submit a written request to the lender within 90 days of the event terminating the finance agreement; and (7) the methodology for calculating any refund of the unearned purchase price of the GAP waiver. The disclosures regarding a customer’s can- cellation of the waiver all correspond to specific requirements of the new law. Most important, the new law requires motor vehicle dealerships that offer GAP waivers to obtain insurance or contractual indemnification for their GAP waiver obligations. However, this does not mean that these waivers are “underwritten” by an insurance company, or that selling GAP waivers otherwise subjects deal- ers to the insurance producer licensing requirements. Rather, it simply requires that providers of GAP waivers separately ensure that they can meet their obligations to borrowers in the event of an approved claim. Notably, the statute provides that such insurance may be obtained by an administrator to cover a dealer’s obliga- tions. Thus, unless a dealership is selling its own GAP waivers, it can avoid having to obtain insurance directly, so long as the administrator of the GAP waiver they are selling has obtained such insurance on their behalf. In addition, dealers that are lessors of motor vehicles are not required to insure obligations related to GAP waiv- ers on leased vehicles. The new law sets fines between $500 and $10,000 for lenderswho violate its provisions. Accordingly, in advance of the law taking effect, NJ CAR recommends that dealers discuss the law’s requirements with the pro- viders ofGAPproducts they sell todetermine who will arrange for the insurance required by the statute. NJ CAR further recommends that the dealer be listed as an additional in- sured on any such insurance policy. In sum, it is imperative that New Jersey deal- ers fully understand the nature of the GAP products theyoffer to their customers.Wheth- er a GAP product is best characterized as a waiver or insurance, or whether it is subject to Sales Tax or not, is fact-specific. Dealers must carefully review the documentation underlying these products and understand the business of theirGAPproviders to ensure compliance with the new GAP waiver law, NewJersey’s insurance laws, and their obliga- tion to collect New Jersey Sales Tax. Anthony Anastasio is NJ CAR’s Director of Legal & Regulatory Affairs. He can be reached at 609.883.5056, ext. 350 or via email at aanastasio@njcar.org.