BILL NUMBER: AB 2815 CHAPTERED 08/28/06 CHAPTER 196 FILED WITH SECRETARY OF STATE AUGUST 28, 2006 APPROVED BY GOVERNOR AUGUST 28, 2006 PASSED THE ASSEMBLY AUGUST 7, 2006 PASSED THE SENATE JUNE 29, 2006 AMENDED IN SENATE MAY 26, 2006 AMENDED IN ASSEMBLY MARCH 27, 2006 INTRODUCED BY Assembly Member Bogh FEBRUARY 24, 2006 An act to amend Sections 116.5, 12800, and 12830 of the Insurance Code, relating to service contracts. LEGISLATIVE COUNSEL'S DIGEST AB 2815, Bogh Service contracts: definitions. Existing law provides that the primary manufacturer is the obligor for the purposes of a warranty that covers damage to a automobile due to failure of the lubricant. This bill would require that specified factors used to define "manufacturer" be used to produce the product. Existing law, for purposes of service contracts, defines the circumstances under which a contract covers defects in materials and workmanship in motor vehicles and watercraft, as defined. This bill would change the definition of "motor vehicle" to include motor vehicles operated off-road and "watercraft" to include certain trailers and to revise provisions that exclude certain large vehicles. Existing law requires that a vehicle service contract be filed with, and approved by, the Insurance Commissioner before it is used. The commissioner may authorize the use of the filed policy if, among other factors, the company maintains a ratio of direct written premiums to surplus as to policyholders and paid-in capital of not less than 3 to 1. This bill would change the ratio to not more than 3 to 1. THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS: SECTION 1. 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 all of the following requirements are 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, used to produce the product, plus the per unit cost of nonsubcontracted labor used to produce the product, exceeds twice the per unit cost of raw materials used to produce the product. "Manufacturer" also means a person who has formulated or produced, and continuously offered in this state for more than nine 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. 2. Section 12800 of the Insurance Code is amended to read: 12800. The following definitions apply for purposes of this part: (a) "Motor vehicle" means a self-propelled device operated solely or primarily upon land and may include both self-propelled motor homes or recreational vehicles, non-self-propelled camping and recreational trailers, off-road vehicles, and trailers designed to transport off-road vehicles. 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 15 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, and may include any non-self-propelled trailer used to transport such watercraft upon land. (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, necessitated by 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. SEC. 3. Section 12830 of the Insurance Code is amended to read: 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 more 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.