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.