Griffin Systems, Inc. v. Washburn

• Decision Date: 26 February 1987
• Docket Number: No. 85-3701,85-3701
• Citation: 505 N.E.2d 1121,106 Ill.Dec. 330,153 Ill.App.3d 113
• Parties: , 106 Ill.Dec. 330 GRIFFIN SYSTEMS, INC., a foreign corporation, Plaintiff-Appellant, v. John E. WASHBURN, Illinois Director of Insurance, Illinois Department of Insurance, Defendants-Appellees.
• Court: United States Appellate Court of Illinois

Page 1121

505 N.E.2d 1121

153 Ill.App.3d 113, 106 Ill.Dec. 330

GRIFFIN SYSTEMS, INC., a foreign corporation, Plaintiff-Appellant, v. John E. WASHBURN, Illinois Director of Insurance, Illinois Department of Insurance, Defendants-Appellees.

No. 85-3701.

Appellate Court of Illinois First District, Fourth Division.

Feb. 26, 1987.

Barnard & Associates, Ltd., Chicago (Robert W. Boughton, of counsel, Cleveland, Ohio), for plaintiff-appellant.

Neil F. Hartigan, Atty. Gen. and Roma Jones Stewart, Sol. Gen., Chicago (Rita M. Novak, Asst. Atty. Gen., of counsel), for defendants-appellees.

Justice LINN delivered the opinion of the court:

Appellant Griffin Systems, Inc. (Griffin), brings this appeal seeking reversal of a cease and desist order issued by the Illinois Department of Insurance (the Department), and affirmed after review by the trial court. The trial court agreed with the Department's finding that Griffin was engaged in the selling of insurance without a certificate of authority.

The Department's cease and desist order prohibits Griffin from distributing its "Vehicle Protection Plan" (Plan). Griffin was marketing the Plan to Illinois residents who had recently purchased new automobiles. Under the Plan, consumers pay a yearly fee in exchange for Griffin's promise to pay for the repair or replacement of certain automobile parts should those parts break down or fail to operate during a specified coverage period.

After a hearing on the matter, the Department ruled that the Plan constituted an insurance policy and entered a cease and desist order against Griffin. Griffin appealed the Department's ruling to the trial court which, after holding its own hearing, agreed with the Department's findings.

Griffin now appeals contending: (1) that the trial court erred in ruling that the Plan constitutes an insurance policy rather than a service contract; (2) that the Department's cease and desist order is not supported by the evidence; and (3) that the trial court erred in failing to find that the Plan, because it is a service contract, is governed by Federal law and is therefore exempt from state regulation.

We affirm.

Background

The facts of this case are not in dispute. Griffin is an Ohio corporation which began marketing the Plan in Illinois in early 1984. Griffin sent a sales brochure and a sales agreement to Illinois residents who had recently purchased new automobiles. The brochure describes the Plan as "a mechanical service contract." Under the Plan, Griffin agrees to repair or replace any of the specific automobile parts covered by the Plan should those parts breakdown or fail during the coverage period.

The Plan provides for a $25.00 deductible per part. When a customer needs mechanical service, he contacts Griffin which then forwards the claim request to Great Plains Insurance, Inc. Only upon approval by Great Plains adjusters will a repair be covered by the Plan's provisions. A customer can bring his vehicle into any facility the customer selects. Griffin itself, however, does not perform any of the repair services.

The customer is permitted to select one of four different policies. The policies differ in their length of time and with respect to the number of parts covered. The policies also contain certain exclusions, limitations, and conditions.

The Department determined that under Illinois common law, the Plan indemnified customers against possible future losses and, as a result, the Plan constituted an insurance policy. The trial court subsequently agreed with the Department's ruling prompting Griffin to bring this appeal.

Opinion

I.

The central issue in this appeal is whether Griffin engages in the business of selling insurance when it offers the Plan to Illinois residents. In reviewing the Department's decision, our function is to determine whether the Department's finding that the Plan constitutes an insurance policy was clearly against the manifest weight of the evidence. Anzinger v. O'Connor (1982), 109 Ill.App.3d 550, 65 Ill.Dec. 159, 440 N.E.2d 1014.

The Illinois Insurance Code (Ill.Rev.Stat.1983, ch. 73, par. 733) fails to define the term "insurance." Nevertheless, a definition is provided by the Illinois common law. One Illinois court, for example, defined "insurance" as:

"[A]n agreement by which the insurer, for a consideration agrees to indemnify the insured against loss, damage, or prejudice to certain property described in the agreement for a specified period, by reason of specified perils." (Barnes v. People ex. rel. Moloney (1897), 168 Ill. 425, 426, 48 N.E. 91.)

Insurance has also been described as:

"[A] contract of indemnity by which the insurer * * * undertakes to indemnify the insured against pecuniary loss arising from the destruction of, or injury to, the insured's property * * *. The essence of the contract is indemnity against loss." Continental Casualty Co. v. Fleming (1964), 46 Ill.App.2d 276, 284, 197 N.E.2d 88.

Thus, it appears that "insurance" can be characterized as involving: (1) a contract or agreement between an insurer and an insured which exists for a specific period of time; (2) an insurable interest (usually property) possessed by the insured; (3) consideration in the form of a premium paid by the insured to the insurer; and (4) the assumption of risk by the insurer whereby the insurer agrees to indemnify the insured for potential pecuniary loss to the insured's property resulting from certain specified perils.

In the present case, Griffin's Plan contains each of the four elements set forth above.

First, the "Mechanical Service Contract" is clearly an agreement between Griffin and a customer which lasts for a specified period of time. The exact length of the time period varies and depends upon which of the four policies the customer purchases.

Second, there is an insurable interest involved, namely, the mechanical parts of the customer's vehicle which are covered by the Plan.

Third, under the Plan, the customer is obligated to pay a premium in return for Griffin's promise to reimburse the customer for the repair or replacement of certain automobile parts.

And fourth, Griffin agrees to indemnify the customer for a potential future loss; specifically, the costs involved in the repair or replacement of certain automobile parts.

Hence, we agree with the Department and the trial court that Griffin's Plan contains all of the elements contained within the common law definition of insurance. The essence of the Plan is to indemnify the customer; to reimburse the customer for a possible future loss to a specified piece of property caused by a specified peril, namely, mechanical failure. Consequently, the Plan constitutes insurance and properly falls within the authority of the Department.

The Plan is not, as Griffin contends, merely a "service contract" nor does it fall within the purview of a "warranty."

An example of a "service contract" can be found in the case of Rayos v. Chrysler Credit Corp. (Tex.App.1985), 683 S.W.2d 546. In Rayos, the court reviewed a 5 year/50,000 mile owner protection plan issued by Chrysler. Under the Chrysler plan, Chrysler agreed to repair or replace certain parts should those parts fail or breakdown within the specified period (5 years or 50,000 miles). The court in Rayos noted, however, that the Chrysler plan included a requirement that the customer bring his vehicle into a Chrysler Corporation Dealer for any of the covered repairs. Because Chrysler built the vehicle to which it was going to make repairs, the Rayos court properly determined that the plan issued by Chrysler amounted to a service contract rather than an insurance policy.

A "warranty," on the other hand, was found to exist in GAF Corp. v. County School Board of Washington County, Virginia (4th Cir.1980), 629 F.2d 981. There, a company agreed to repair or replace a roof it had sold to a customer should the roof ever leak in the future. However, the company which agreed to perform the repairs was the same company that had sold the roof. Consequently, because the company promising to make the repairs was the same company that had sold the roof, the GAF court found that the agreement to repair or replace constituted a warranty rather than an insurance policy.

An analysis of the cases set forth above reveals that a warranty and a...