BILL NUMBER: AB 984	CHAPTERED
	BILL TEXT

	CHAPTER  439
	FILED WITH SECRETARY OF STATE  SEPTEMBER 22, 2003
	APPROVED BY GOVERNOR  SEPTEMBER 20, 2003
	PASSED THE ASSEMBLY  SEPTEMBER 5, 2003
	PASSED THE SENATE  SEPTEMBER 3, 2003
	AMENDED IN SENATE  AUGUST 29, 2003
	AMENDED IN SENATE  JULY 16, 2003
	AMENDED IN SENATE  JUNE 23, 2003
	AMENDED IN ASSEMBLY  JUNE 2, 2003
	AMENDED IN ASSEMBLY  MAY 19, 2003
	AMENDED IN ASSEMBLY  APRIL 30, 2003
	AMENDED IN ASSEMBLY  APRIL 2, 2003

INTRODUCED BY   Assembly Member Vargas

                        FEBRUARY 20, 2003

   An act to amend Section 1794.41 of the Civil Code, and to amend
Sections 116, 116.5, and 1634 of, and to add Part 8 (commencing with
Section 12800) to Division 2 of, the Insurance Code, relating to
service contracts.



	LEGISLATIVE COUNSEL'S DIGEST


   AB 984, Vargas.  Service contracts:  automobile insurance.
   (1) Existing law generally regulates automobile insurance and sets
forth various circumstances under which a contract covering only
defects in material and workmanship in automobiles, and certain
related items, may not be deemed insurance.
   This bill would eliminate the provisions exempting these contracts
from being deemed insurance.  It would, instead, define a "vehicle
service contract" and would provide that this type of contract does
not constitute automobile insurance when it meets specified
requirements.  The bill would allow a vehicle service contract to be
sold only by the seller, as defined, of the motor vehicle or
watercraft covered by the contract.
   The bill would require an obligor under a vehicle service contract
who is not a seller to possess a vehicle service contract provider
license, and would subject the obligor, the seller, and the
administrator, as defined, under the contract to various regulatory
provisions, including requirements relating to licensing, contract
forms, notices, cancellations, and insurance.  It would require an
obligor's insurance policy to be approved by the Insurance
Commissioner, and would allow the policy to be issued by a risk
retention group, as defined, that meets specified requirements.  The
bill would distinguish between a refund agreement and a service
contract and would provide that a refund agreement meeting certain
conditions is not insurance.  A violation of certain of these
provisions would be a crime.  By creating a new crime, this bill
would impose a state-mandated local program.
   This bill would place specified limitations on the grounds for
denying claims under a vehicle service contract and on the bases for
determining commissions for selling this type of contract.
   The bill would exempt specified vehicle service contracts from
certain of these provisions.
   The bill would allow the commissioner to adopt regulations
implementing these provisions.
   The bill would provide that, if these provisions conflict with
certain other provisions of law relating to service contracts, only
these provisions shall be given effect.
   The bill would make other technical, clarifying changes.
   (2) Existing law provides that an agreement promising repair or
replacement of a motor vehicle or part thereof after a mechanical or
electrical breakdown, where the repair or replacement is at either no
cost or a reduced cost for the agreementholder, shall not constitute
automobile insurance if the obligor is a manufacturer of motor
vehicle lubricants, treatments, fluids, or additives, provided that
specified conditions are met.
   This bill would provide, instead, that an express warranty
warranting a motor vehicle lubricant, treatment, fluid, or additive
that covers incidental or consequential damage resulting from a
failure of that substance, shall constitute automobile insurance,
unless (a) the obligor is the primary manufacturer, as defined, of
the product, (b) the commissioner has issued a written determination
that the obligor is a manufacturer, (c) the agreement covers only
damage incurred while the product was in the vehicle, and (d) the
agreement is provided automatically with the product at no extra
charge.
   (3) Existing law prohibits a person from soliciting, negotiating,
or effecting contracts of insurance, or acting in other specified
capacities, unless the person holds a valid license from the
commissioner.  Existing law exempts from this requirement a person
acting in the capacity of an employee, not paid on a commission
basis, of a home protection company.
   This bill would provide that this exemption applies to an employee
of a home protection company, not paid on a commission basis, who
engages in soliciting, negotiating, or effecting home protection
contracts.
  (4) The California Constitution requires the state to reimburse
local agencies and school districts for certain costs mandated by the
state. Statutory provisions establish procedures for making that
reimbursement.
   This bill would provide that no reimbursement is required by this
act for a specified reason.
   (5) The bill would declare that it shall become operative on July
1, 2004.


THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:


  SECTION 1.  Section 1794.41 of the Civil Code is amended to read:
   1794.41.  (a) No service contract covering any motor vehicle, home
appliance or home electronic product purchased for use in this state
may be offered for sale or sold unless all of the following elements
exist:
   (1) The contract shall contain the disclosures specified in
Section 1794.4 and shall disclose in the manner described in that
section the buyer's cancellation and refund rights provided by this
section.
   (2) The contract shall be available for inspection by the buyer
prior to purchase and either the contract, or a brochure which
specifically describes the terms, conditions, and exclusions of the
contract, and the provisions of this section relating to contract
delivery, cancellation, and refund, shall be delivered to the buyer
at or before the time of purchase of the contract.  Within 60 days
after the date of purchase, the contract itself shall be delivered to
the buyer.  If a service contract for a home appliance or a home
electronic product is sold by means of a telephone solicitation, the
seller may elect to satisfy the requirements of this paragraph by
mailing or delivering the contract to the buyer not later than 30
days after the date of the sale of the contract.
   (3) The contract is applicable only to items, costs, and time
periods not covered by the express warranty.  However, a service
contract may run concurrently with or overlap an express warranty if
(A) the contract covers items or costs not covered by the express
warranty or (B) the contract provides relief to the purchaser not
available under the express warranty, such as automatic replacement
of a product where the express warranty only provides for repair.
   (4) The contract shall be cancelable by the purchaser under the
following conditions:
   (A) Unless the contract provides for a longer period, within the
first 60 days after receipt of the contract, or with respect to a
contract covering a used motor vehicle without manufacturer
warranties, a home appliance, or a home electronic product, within
the first 30 days after receipt of the contract, the full amount paid
shall be refunded by the seller to the purchaser if the purchaser
provides a written notice of cancellation to the person specified in
the contract, and if no claims have been made against the contract.
If a claim has been made against the contract either within the first
60 days after receipt of the contract, or with respect to a used
motor vehicle without manufacturer warranties, home appliance, or
home electronic product, within the first 30 days after receipt of
the contract, a pro rata refund, based on either elapsed time or an
objective measure of use, such as mileage or the retail value of any
service performed, at the seller's option as indicated in the
contract, shall be made by the seller to the purchaser if the
purchaser provides a written notice of cancellation to the person
specified in the contract.
   (B) Unless the contract provides for a longer period for obtaining
a full refund, after the first 60 days after receipt of the
contract, or with respect to a contract covering a used motor vehicle
without manufacturer warranties, a home appliance, or a home
electronic product, after the first 30 days after the receipt of the
contract, a pro rata refund, based on either elapsed time or an
objective measure of use, such as mileage or the retail value of any
service performed, at the seller's option as indicated in the
contract, shall be made by the seller to the purchaser if the
purchaser provides a written notice of cancellation to the person
specified in the contract.  In addition, the seller may assess a
cancellation or administrative fee, not to exceed 10 percent of the
price of the service contract or twenty-five dollars ($25), whichever
is less.
   (C) If the purchase of the service contract was financed, the
seller may make the refund payable to the purchaser, the assignee, or
lender of record, or both.
   (b) Nothing in this section shall apply to a home protection plan
that is issued by a home protection company which is subject to Part
7 (commencing with Section 12740) of Division 2 of the Insurance
Code.
   (c) The amendments to this section made at the 1988 portion of the
1987-88 Regular Session of the Legislature that extend the
application of this section to service contracts on home appliances
and home electronic products shall become operative on July 1, 1989.

   (d) If any provision of this section conflicts with any provision
of Part 8 (commencing with Section 12800) of Division 2 of the
Insurance Code, the provision of the Insurance Code shall apply
instead of this section.
  SEC. 2.  Section 116 of the Insurance Code is amended to read:
   116.  (a) Automobile insurance includes insurance of automobile
owners, users, dealers, or others having insurable interests therein,
against hazards incident to ownership, maintenance, operation, and
use of automobiles, other than loss resulting from accident or
physical injury, fatal or nonfatal, to, or death of, any natural
person.
   (b) Automobile insurance also includes any contract of warranty,
or guaranty that promises service, maintenance, parts replacement,
repair, money, or any other indemnity in event of loss of or damage
to a motor vehicle or a trailer, as defined by Section 630 of the
Vehicle Code, or any part thereof from any cause, including loss of
or damage to or loss of use of the motor vehicle or trailer by reason
of depreciation, deterioration, wear and tear, use, obsolescence, or
breakage if made by a warrantor or guarantor who is doing an
insurance business.
   (c) Automobile insurance also includes any agreement that promises
repair or replacement of a motor vehicle, or part thereof, after a
mechanical or electrical breakdown, at either no cost or a reduced
cost for the agreement holder.  However, automobile insurance does
not include a vehicle service contract subject to Part 8 (commencing
with Section 12800) of Division 2, or an agreement deemed not to be
insurance under that part.
   (d) The doing or proposing to do any business in substance
equivalent to the business described in this section in a manner
designed to evade the provisions of this section is the doing of an
insurance business.
  SEC. 3.  Section 116.5 of the Insurance Code is amended to read:
   116.5.  An express warranty warranting a motor vehicle lubricant,
treatment, fluid, or additive that covers incidental or consequential
damage resulting from a failure of the lubricant, treatment, fluid,
or additive, shall constitute automobile insurance, unless each of
the following requirements is met:
   (a) The obligor is the primary manufacturer of the product.  For
the purpose of this section, "manufacturer" means a person who can
prove clearly and convincingly that the per unit cost of owned or
leased capital goods, including the factory, plus the per unit cost
of nonsubcontracted labor, exceeds twice the per unit cost of raw
materials.  "Manufacturer" also means a person who has formulated or
produced, and continuously offered in this state for more than 10
years, a motor vehicle lubricant, treatment, fluid, or additive.
   (b) The commissioner has issued a written determination that the
obligor is a manufacturer as defined in subdivision (a).  An obligor
shall provide the commissioner with all information, documents, and
affidavits reasonably necessary for this determination to be made.
Approval by the commissioner shall be obtained prior to January 1,
2004, or prior to the issuance of a warranty subject to this section,
whichever is later.  If the commissioner determines that the obligor
is not a manufacturer, the obligor may obtain a hearing in
accordance with Chapter 4.5 (commencing with Section 11400) of Part 1
of Division 3 of Title 2 of the Government Code.
   (c) The agreement covers only damage incurred while the product
was in the vehicle.
   (d) The agreement is provided automatically with the product at no
extra charge.
  SEC. 4.  Section 1634 of the Insurance Code is amended to read:
   1634.  No license is required under this chapter for a person to
act in any of the following capacities:
   (a) As a full-time salaried employee of a title insurer,
controlled escrow company or an underwritten title company.
   (b) As a salaried solicitor or agent of a mortgage insurer or
mortgage guaranty insurer provided no part of the compensation of the
person is on a commission basis.
   (c) As the attorney in fact of a reciprocal or interinsurance
exchange.
   (d) As a life and disability insurance analyst.
   (e) As a surplus line broker or special lines surplus line broker.

   (f) As a bail agent, bail solicitor or bail permittee.
   (g) As an employee, not paid on a commission basis, of a home
protection company, including, but not limited to, soliciting,
negotiating, or effecting home protection contracts by the employee.

   (h) As an employee of a creditor who secures and forwards
information for the purpose of obtaining group credit life, credit
disability, or involuntary unemployment insurance, or for enrolling
individuals in a group credit life, credit disability, or involuntary
unemployment insurance plan or issuing certificates of insurance
thereunder where no commission is paid to the employee for those
services.
  SEC. 5.  Part 8 (commencing with Section 12800) is added to
Division 2 of the Insurance Code, to read:

      PART 8.  SERVICE CONTRACTS

   12800.  The following definitions apply for purposes of this part:

   (a) "Motor vehicle" means a self-propelled device operated solely
or primarily upon roadways to transport people or property.  However,
"motor vehicle" shall not include a self-propelled vehicle, or a
component part of such a vehicle, that has any of the following
characteristics:
   (1) Has a gross vehicle weight rating of 30,000 pounds or more,
and is not a recreational vehicle as defined by Section 18010 of the
Health and Safety Code.
   (2) Is designed to transport more than 10 passengers, including
the driver.
   (3) Is used in the transportation of materials considered
hazardous pursuant to the Hazardous Materials Transportation Act (49
U.S.C. Sec. 5101 et seq.), as amended.
   (b) "Watercraft" means a vessel, as defined in Section 21 of the
Harbors and Navigation Code.
   (c) "Vehicle service contract" means a contract or agreement for a
separately stated consideration and for a specific duration to
repair, replace, or maintain a motor vehicle or watercraft, or to
indemnify for the repair, replacement, or maintenance of a motor
vehicle or watercraft because of an operational or structural failure
due to a defect in materials or workmanship, or due to normal wear
and tear.  A vehicle service contract may also provide for the
incidental payment of indemnity under limited circumstances only in
the form of the following additional benefits:  coverage for towing,
substitute transportation, emergency road service, rental car
reimbursement, road hazard protection, reimbursement of deductible
amounts under a manufacturer's warranty, and reimbursement for
travel, lodging, or meals.  "Vehicle service contract" also includes
an agreement, for separately stated consideration, that promises
repairs at a discount to the purchaser for any combination of parts
and labor in excess of 20 percent.
   (d) "Service contract administrator" or "administrator" means any
person, other than an obligor, who performs or arranges, directly or
indirectly, the collection, maintenance, or disbursement of moneys to
compensate any party for claims or repairs pursuant to a vehicle
service contract, and who also performs or arranges, directly or
indirectly, any of the following activities with respect to vehicle
service contracts in which a seller located within this state is the
obligor:
   (1) Providing sellers with service contract forms.
   (2) Participating in the adjustment of claims arising from service
contracts.
   (e) "Purchaser" means any person who purchases a vehicle service
contract from a seller.
   (f) "Seller" means either of the following:
   (1) With respect to motor vehicles, a dealer or lessor-retailer
licensed in one of those capacities by the Department of Motor
Vehicles and who sells vehicle service contracts incidental to his or
her business of selling or leasing motor vehicles.
   (2) With respect to watercraft, a person who sells vehicle service
contracts incidental to that person's business of selling or leasing
watercraft vehicles.
   (g) "Obligor" means the entity legally obligated under the terms
of a service contract.
   12805.  (a) Notwithstanding Sections 103 and 116, the following
types of agreements shall not constitute insurance:
   (1) A vehicle service contract that does each of the following:
   (A) Names as the obligor a motor vehicle manufacturer or
distributor licensed in that capacity by the Department of Motor
Vehicles, or a watercraft manufacturer.
   (B) Covers only motor vehicles or watercraft manufactured,
distributed, or sold by that obligor.
   (2) A vehicle service contract in which the obligor is a seller,
provided that the obligor complies with all provisions of this part
except Section 12815.
   (3) A vehicle service contract sold by a seller in which the
obligor is a party other than the seller, provided that the obligor
complies with all provisions of this part.
   (4) An agreement in which the obligor is a motor vehicle or
watercraft part manufacturer, distributor, or retailer, that covers
no more than the following items:
   (A) The repair or replacement of a part manufactured, distributed,
or retailed by that obligor.
   (B) Consequential and incidental damage resulting from the failure
of that part.
   (5) An agreement in which the obligor is a repair facility, that
is entered into pursuant and subsequent to repair work previously
performed by that repair facility, and that is limited in scope to
the following:
   (A) The repair or replacement of the part that was previously
repaired.
   (B) Consequential and incidental damage resulting from the failure
of that part.
   (6) A maintenance service contract with a term of one year or less
that does not contain provisions for indemnification and does not
provide a discount to the purchaser for any combination of parts and
labor in excess of 20 percent.
   (b) The types of agreements described in paragraphs (4), (5), and
(6) of subdivision (a) are exempt from all provisions of this part.
   (c) Vehicle service contracts described in paragraph (1) are
exempt from the provisions of Sections 12815, 12830, 12835, and
12845.
   12810.  (a) No person, other than a seller, shall sell or offer
for sale a vehicle service contract to a purchaser.
   (b) No obligor shall use a seller as a fronting company and no
seller shall act as a fronting company.  For purposes of this
section, a "fronting company" is a seller that authorizes a
third-party obligor to use its name or business to evade or
circumvent the provisions of subdivision (a).
   12815.  (a) An obligor who is not a seller shall possess a vehicle
service contract provider license.  A vehicle service contract
provider license shall be applied for and maintained, and its holder
shall be subject to disciplinary action, as if it were a fire and
casualty broker-agent license, with the following exceptions:
   (1) An applicant for a vehicle service contract provider license
is exempt from having to satisfy prelicensing and continuing
education requirements, and from having to pass a qualifying exam.
   (2) The fee to obtain or renew a vehicle service contract provider
license shall be the same as that to obtain or renew a certificate
of authority to operate a motor club.
   (b) A service contract administrator shall be licensed as a fire
and casualty broker-agent.
   12820.  (a) Prior to offering a vehicle service contract form to a
purchaser or providing a vehicle service contract form to a seller,
an obligor shall file with the commissioner a specimen of that
vehicle service contract form.
   (b) A vehicle service contract form shall comply with all of the
following requirements:
   (1) The vehicle service contract shall include a disclosure in
substantially the following form:  "Performance to you under this
contract is guaranteed by a California approved insurance company.
You may file a claim with this insurance company if any promise made
in the contract has been denied or has not been honored within 60
days the date proof of loss was filed.  The name and address of the
insurance company is:  (insert name and address).  If you are not
satisfied with the insurance company's response, you may contact the
California Department of Insurance at 1-800-927-4357."
   (2) All vehicle service contract language that excludes coverage,
or imposes duties upon the purchaser, shall be conspicuously printed
in boldface type no smaller than the surrounding type.
   (3) The vehicle service contract shall do each of the following:
   (A) State the obligor's full corporate name or a fictitious name
approved by the commissioner, the obligor's mailing address, the
obligor's telephone number, and the obligor's vehicle service
contract provider license number.
   (B) State the name of the purchaser and the name of the seller.
   (C) Conspicuously state the vehicle service contract's purchase
price.
   (D) Comply with Sections 1794.4 and 1794.41 of the Civil Code.
   (E) Name the administrator, if any, and provide the administrator'
s license number.
   (4) If the vehicle service contract excludes coverage for
preexisting conditions, the contract must disclose this exclusion in
12-point type.
   (c) The following benefits constitute insurance, whether offered
as part of a vehicle service contract or in a separate agreement:
   (1)  Indemnification for a loss caused by misplacement, theft,
collision, fire, or other peril typically covered in the
comprehensive coverage section of an automobile insurance policy, a
homeowner's policy, or a marine or inland marine policy.
   (2)  Locksmith services, unless offered as part of an emergency
road service benefit.
   12825.  (a) In addition to any other right of rescission an
obligor or purchaser may have, an obligor may include a provision in
a service contract that reserves to the obligor the right to cancel
the service contract within 60 days under the following conditions:
   (1) Notice of cancellation is mailed to the purchaser postmarked
before the 61st day after the date the contract was sold by the
seller.
   (2) The obligor provides the purchaser with a refund equal to the
full purchase price stated on the contract within 30 days from the
date of cancellation.  However, if the obligor has paid a claim, or
has advised the purchaser in writing that it will pay a claim, it may
provide a pro rata refund, less the amount of any claims paid prior
to cancellation.
   (3) The service contract ceases to be valid no less than five days
after the postmark date of the notice.
   (4) The notice states the specific grounds for the cancellation.
   (b) An obligor may at any time cancel a service contract for
nonpayment by the purchaser, conditioned upon each of the following:

   (1) Notice of cancellation is mailed to the purchaser.
   (2) If any refund is owed pursuant to Section 1794.41 of the Civil
Code, the refund is paid within 30 days of the date of cancellation.

   (3) The service contract ceases to be valid no less than five days
after the postmark date of the notice.
   (4) The notice states the specific grounds for the cancellation.
   (c) An obligor may at any time cancel a service contract for
material misrepresentation or fraud by the purchaser, conditioned
upon each of the following:
   (1) Notice of cancellation is mailed to the purchaser
   (2) A pro rata refund of the purchase price stated on the contract
is paid within 30 days of the date of cancellation.
   (3) The notice states the specific nature of the
misrepresentation.
   (d) An obligor who cancels a contract is liable for any claim
reported to a person designated in the contract for the reporting of
claims if the claim is reported prior to the effective date of
cancellation and is covered by the contract.  For the purpose of this
subdivision, a purchaser is deemed to have reported a claim if he or
she has completed the first step required under the contract for
reporting a claim.
   (e) An obligor canceling a contract pursuant to subdivision (b),
(c), or (d) who pays a claim, or has advised the purchaser in writing
that he or she will pay a claim, may provide a prorata rather than
full refund, less the amount of any claims paid prior to
cancellation.
   12830.  (a) Prior to incurring an obligation under a vehicle
service contract, an obligor shall file with the commissioner, to the
attention of the legal division, and receive the commissioner's
approval to use, a copy of an insurance policy covering 100 percent
of the obligor's vehicle service contract obligations.  The policy
must be issued by an insurer admitted in this state and authorized by
the commissioner to issue that insurance in this state.  The policy
may also be issued by a risk retention group, as that term is defined
in 15 U.S.C. Sec. 3901(a)(4), as long as that risk retention group
is in full compliance with the federal Liability Risk Retention Act
of 1986 (15 U.S.C. Sec. 3901 and following), is in good standing in
its domiciliary jurisdiction, and has registered with the
commissioner pursuant to Chapter 1.5 (commencing with Section 125) of
Part 1 of Division 1.  The insurance required by this subdivision
shall be subject to the following:
   (1) The insurer or risk retention group shall, at the time the
policy is filed with the commissioner, and continuously thereafter,
be rated "B++" or better by A. M. Best Company, Inc., maintain
surplus as to policyholders and paid-in capital of at least fifteen
million dollars ($15,000,000), and annually file audited financial
statements with the commissioner.
   (2) The commissioner may authorize an insurer or risk retention
group that has surplus as to policyholders and paid-in capital of
less than fifteen million dollars ($15,000,000) but at least equal to
ten million dollars ($10,000,000) to issue the insurance required by
this paragraph if the insurer or risk retention group demonstrates
to the satisfaction of the commissioner that the company maintains a
ratio of direct written premiums, wherever written, to surplus as to
policyholders and paid-in capital of not less than 3 to 1.
   (3) An obligor required to maintain insurance pursuant to this
paragraph who is an affiliate of a distributor of new motor vehicles
licensed as such in any state prior to January 1, 2003, and
continuously thereafter, is exempt from the requirement that its
insurer or risk retention group satisfy the rating, surplus, and
paid-in capital requirements of paragraph (1).  This exemption shall
apply only if the distributor sold or distributed at least 25,000 new
motor vehicles to licensed dealers in the preceding five years.  For
the purpose of this paragraph, "affiliate" has the meaning set forth
in subdivision (a) of Section 1215.
   (b) An insurance policy filed with the commissioner pursuant to
subdivision (a) shall state the name of the obligor.  The policy
shall provide that all purchasers of vehicle service contracts shall
be entitled to satisfaction by the insurer of any and all obligations
arising under vehicle service contracts of the named obligor, upon
the existence of all of the following conditions and no others:
   (1) The service contract obligor refuses or fails to satisfy an
obligation arising under the vehicle service contract within 60 days
of the date the purchaser submits proof of loss to the obligor.
   (2) The purchaser provides written notice to the insurer that the
obligor has failed to comply with an obligation under the vehicle
service contract.
   (3) The purchaser possesses a vehicle service contract sold after
the inception and prior to any cancellation of the insurance policy
required by subdivision (a), and the vehicle service contract recites
the name of the obligor that is insured by the policy as the obligor
of the service contract.
   (c) An insurer's liability under a policy filed pursuant to
subdivision (a) shall not be negated by any failure of the seller, an
administrator, the obligor, or agents of any of these persons, to
report the issuance of a vehicle service contract or to remit moneys
to another person pursuant to a contractual agreement.  The policy
must state that the insurer is deemed to have received the premium
for the policy upon payment by the purchaser for a vehicle service
contract insured by that policy.
   (d) An obligor may have on file with the commissioner only one
active policy from one insurer at any time.
   (e) No policy cancellation by an insurer shall be valid unless a
notice of the intent to cancel the policy was filed with the
commissioner 30 days prior to the effective date of the cancellation,
or 10 days prior in the event that the cancellation is due to fraud,
material misrepresentation, or defalcation by the obligor or its
administrator, if any.
   12835.  (a) In the event an insurer cancels a policy that it has
filed with the commissioner pursuant to Section 12830, the obligor
named on the policy shall do either of the following:
   (1) File a copy of a new policy with the commissioner, before the
termination of the prior policy, providing no lapse in coverage
following the termination of the prior policy.
   (2) Discontinue acting as an obligor as of the termination date of
the policy until a new policy becomes effective and has been
accepted and acknowledged by the commissioner.
   (b) This section shall not relieve an obligor from any obligation
incurred under service contracts issued with its name as obligor
prior to the date the policy was terminated.
   12840.  (a) Every obligor or its administrator shall maintain at
its principal office complete and accurate accounts, books, and
records of all transactions among the obligor, its administrator, if
any, sellers, insurers, and purchasers.  Records maintained pursuant
to this section shall be made available to the commissioner upon
reasonable request.  Any computerized recordkeeping system must be
capable of producing a legible hard copy of all required records.
Accounts, books, and records shall include:
   (1) A complete set of accounting records, including, but not
limited to, a general ledger, cash receipts and disbursements
journals, accounts receivable registers, and accounts payable
registers.
                                                           (2) Copies
of each type of service contract sold.
   (3) The name and address of each service contract purchaser to the
extent that the name and address have been furnished by the service
contract purchaser.
   (4) A list of the locations where service contracts are marketed,
sold, or offered for sale.
   (5) Written claims files which shall contain at least the dates
and descriptions of claims related to the service contracts.
   (b) All required records pertaining to a service contract shall be
maintained by the obligor, its administrator, or the insurer
underwriting the contract, for at least three years after the
expiration of the contract.
   (c) Every insurer that has issued a policy to an obligor shall
have an ongoing right to access that obligor's books and records in
order to permit the insurer to fulfill all obligations to purchasers.

   (d) The commissioner may examine and investigate the affairs of
every obligor and any administrator of an obligor.  Any examination
or investigation shall be at the expense of the obligor or the
administrator, in the discretion of the commissioner.  Any
information contained in the books and records, including, but not
limited to, the identity and addresses of sellers and purchasers of
service contracts, shall be confidential, except that the
commissioner may use the information in any proceeding or
investigation instituted against an obligor or an administrator.
   (e) An obligor's failure to keep or maintain the required
accounts, books, or records, or to provide the commissioner with full
and immediate access to those records, shall be grounds for the
immediate suspension or revocation of the obligor's vehicle service
contract provider's license, and also shall be grounds for the
commissioner to issue a cease and desist order pursuant to Section
1065.2.
   12845.  Any vehicle service contract obligor or administrator that
provides vehicle service contract forms to sellers or purchasers,
directly or indirectly, and fails to comply with Sections 12815,
12830 and 12835, is guilty of a public offense punishable by
imprisonment in the state prison, or by a fine not exceeding five
hundred thousand dollars ($500,000), or both, and shall be enjoined
from further violations by a court of competent jurisdiction on
petition of the commissioner.  This section shall not apply to a
seller who is an obligor under vehicle service contracts it sells.
The commissioner may issue a cease and desist order pursuant to
Section 1065.2 to an obligor or administrator who violates Section
12830 or 12835.  The commissioner may issue a cease and desist order
pursuant to Section 12921.8 to an obligor or administrator in
violation of Section 12815.
   12850.  (a) An obligor has the burden of proving that a claim is
not covered by a service contract.  An obligor has the burden of
proving that a claim settlement amount is proper under the terms of
the contract.
   (b) No seller of a service contract who participates in or
influences, directly or indirectly, the processing, administration,
or adjustment of claims, shall enter into any agreement or
understanding the effect of which is to make the amount of the seller'
s commission or compensation contingent upon savings effected in the
adjustment, settlement, or payment of losses covered by the contract.

   12855.  The commissioner may adopt regulations necessary or
desirable to implement this chapter.
   12860.  The provisions of this part are severable.  If any
provision of this part or its application is held invalid, that
invalidity shall not affect other provisions or applications that can
be given effect without the invalid provision or application.
   12865.  A promise to refund some or all of the purchase price of a
service contract if the purchaser does not file any claims, files a
limited number of claims, or files claims the dollar amount of which
does not exceed a set amount or percentage, shall constitute
insurance, unless subdivisions (a) and (b) are satisfied.  If
conditions (a) and (b) are satisfied, the promise shall constitute a
refund agreement.
   (a) The promise is offered without separate consideration, and the
promisor complies with subdivisions (a)(1), (a)(2) or (a)(3).
   (1) The promisor is a service contract obligor, the promise is
contained within a service contract, and the obligor has complied
with all provisions of this part.
   (2) The promisor is a seller, the refund agreement provides no
benefits other than the refund of some or all of the purchase price,
and the promisor utilizes a refund agreement administrator.
   (3) The promisor is neither a seller nor a service contract
obligor.  Such a person shall be deemed a refund agreement obligor,
and shall comply with subdivisions (c)(1), (c)(2) and (c)(3).
   (b) A person other than the seller who performs or arranges,
directly or indirectly, the collection, maintenance, or disbursement
of moneys to compensate any party under a refund agreement, and who
also provides sellers with refund agreement forms and participates in
the adjustment of refund agreement claims, shall be deemed a refund
agreement administrator, and shall comply with subdivision (b)(2).
   (1) The sections enumerated in subdivision (b)(2) shall apply to
refund agreements and refund agreement administrators.  In applying
those sections, the terms vehicle service contract administrator,
administrator and obligor shall instead mean refund agreement
administrator, the word sold shall instead mean provided and the
terms vehicle service contract and service contract shall instead
mean refund agreement.  The sections enumerated in subdivision (b)(2)
shall be construed in accordance with the nature of refund agreement
forms, refund agreement administrators, and the refund agreement
business.
   (2) The following sections shall apply and be interpreted pursuant
to subdivision (b)(1):  12815(b); 12820(a), (b)(1), (b)(2), (b)(3)
(A), (b)(3)(B), 12830(a), (a)(1), (a)(2), (b), (c), (d), (e); 12835;
12840; 12845; 12850; 12855.
   (c) (1) The sections enumerated in subdivision (c)(2) shall apply
to refund agreements and refund agreement obligors.  In applying
those sections, the terms vehicle service contract obligor and
obligor shall instead mean refund agreement obligor, the word sold
shall instead mean provided and the terms vehicle service contract
and service contract shall instead mean refund agreement.  The
sections enumerated in subdivision (c)(2) shall be construed in
accordance with the nature of refund agreement forms, refund
agreement obligors, and the refund agreement business.
   (2) The following sections shall apply and be interpreted pursuant
to subdivision (c)(1):  12810(b); 12815(a); 12820(a), (b)(1), (b)
(2), (3)(A), (3)(B); 12830(a), (a)(1), (a)(2), (b), (c), (d), (e);
12835; 12840; 12845; 12850; 12855.
   (3) A refund agreement obligor may not promise any benefit other
than a refund of some or all of the purchase price of a service
contract if the purchaser does not file any claims, files a limited
number of claims, or files claims the dollar amount of which does not
exceed a set amount or percentage.
   (4) No person other than a seller shall provide or offer to
provide a refund agreement to a purchaser.
  SEC. 6.  No reimbursement is required by this act pursuant to
Section 6 of Article XIII B of the California Constitution because
the only costs that may be incurred by a local agency or school
district will be incurred because this act creates a new crime or
infraction, eliminates a crime or infraction, or changes the penalty
for a crime or infraction, within the meaning of Section 17556 of the
Government Code, or changes the definition of a crime within the
meaning of Section 6 of Article XIII B of the California
Constitution.
  SEC. 7.  This act shall become operative on July 1, 2004.