BILL ANALYSIS AB 2111 Page 1 Date of Hearing: April 21, 2010 ASSEMBLY COMMITTEE ON INSURANCE Jose Solorio, Chair AB 2111 (Smyth) - As Amended: April 12, 2010 And As Proposed To Be Amended SUMMARY : Expands the number of parties who may sell service contracts, redefines a number of terms in the service contract law, and makes conforming changes to implement these changes. Specifically, this bill : 1)Clarifies that the definition of "service contract" includes an "electronic" set or appliance, and its accessories. 2)Deletes the $250 per year limit on incidental indemnity payments. 3)Permits a service contract seller or an insurer admitted to do business in this state to be a "service contract administrator" (SCA) or "administrator." 4)Authorizes a SCA to be an obligor on a service contract, as long as the SCA has a service contract reimbursement insurance policy (SCRIP) for all service contracts under which the SCA is obligated. 5)Clarifies the definition of SCA to ensure that a service contract seller does not have to be licensed both as a seller and an SCA due to being affiliated with an SCA. 6)Clarifies the law to ensure that properly licensed service contract sellers and administrators are not subject to Department of Insurance (DOI) jurisdiction as insurers. 7)Clarifies the law to ensure that a motor vehicle lessor-retailer who is not required to obtain a license from the Department of Motor Vehicles may be a licensed service contract seller without having to obtain the DMV license. 8)Expands the definition of "service contract seller" or "seller" to include a third party, including an obligor who is not the seller, manufacturer, or repairer of the product, as long as the obligor obtains a SCRIP for all service contracts. AB 2111 Page 2 9)Permits a SCA who is an obligor on a service contract and is registered as a SCA to perform all the functions permitted by a seller. A SCA acting in this capacity is not required to register separately as a seller. 10)States that unless a SCA or third party seller acting as an obligor on a service contract has a SCRIP, as specified, or is lawfully transacting the business of insurance under a proper certificate of authority, the SCA or third party seller is subject to enforcement by the California Department of Insurance (Department). 11)Deletes the requirement that sellers disclose in the contract the method of calculating refunds. 12)Clarifies the scope of the vehicle glass exception from the automobile service contract law by adding "glass sealant" to the exception. 13)Extends the sunset date on the service contract law from January 1, 2013 to January 1, 2018. EXISTING LAW: 1)Makes it unlawful for any person to act as a SCA or a service contract seller without first registering with the Bureau of Electronic and Appliance Repair (BEAR), Home Furnishings, and Thermal Insulation under the Electronic and Appliance Repair Dealer Registration Law. 2)Prohibits an SCA from being an obligor on a service contract. 3)Defines "obligor" as the entity financially and legally obligated under the terms of a service contract. 4)Requires that a SCRIP be in force for all contracts administered by an SCA. A SCRIP is an insurance policy issued by an insurer licensed to transact insurance in California, that guarantees to payment of service contract benefits in the event the obligor fails to provide the benefits provided by the service contract. 5)Defines a service contract seller as a person who sells or offers to sell a service contract to a service contract holder, including a person who is the obligor under a service AB 2111 Page 3 contract sold by the seller, manufacturer, or repairer of the product covered by the service contract. FISCAL EFFECT : Undetermined. COMMENTS : 1)Purpose of this bill . According to the author's office, the primary goal of this bill is to conform the California definition of "service contract seller" to the way it is defined in all other states. This bill also clarifies several existing terms and issues that surround service contracts in Section 9855 of the Business and Professions Code to create consistency with how other states regulate these contracts and provide more consumer protections. 2)Background . Under current law as interpreted by BEAR, only a retailer, manufacturer, or repairer of a product may be the obligor of a service contract covering that product. This means that only a company that is somewhere in the stream of commerce for the product can be an obligor for a service contract on the product. The vast majority of BEAR regulated service contracts are retailer-obligor and sold by retailers. Most of those contracts, in turn, are administered by separate firms that specialize in administering service contracts (SCAs). Historically, a third-party obligor that promises to repair a product, i.e., an obligor that doesn't manufacture, distribute, or retail the covered product, has been considered an insurer and has not been permitted to sell service contracts. The BEAR regulatory system for service contracts has worked reasonably well for nearly two decades. The main regulatory concern with service contracts is that the obligor be financially solvent in order to pay claims years later on service contracts with multi-year durations. Changing current law to permit third parties and SCAs to be the obligor on a service contract will codify an exception to the longstanding rule in California that only insurers and parties in the "chain of distribution" of a product may legally promise to repair that product. The requirement in the bill that SCA-obligors and other third-party obligors be backed by a SCRIP ensures that future claims will be met. If an SCA or third party does not have a SCRIP covering each contract that it sells, then it must be licensed as an insurer. AB 2111 Page 4 3)Author's amendments . The author will be adopting three amendments that are already reflected in this analysis. One will eliminate a consequence of current law that forces some sellers who are not required by the DMV to obtain a DMV license to obtain one anyway. Two of the amendments will avoid unintended consequences resulting from some of the changes the bill is making. The first ensures that entities that are not "in the chain of commerce" but that are lawful obligors under the bill do not accidentally end up subject to licensing requirements as an insurer under the Insurance Code. The second ensures that a seller/obligor does not have to obtain a second license as an administrator by virtue of being affiliated with an administrator. 4)Arguments in support : The Service Contract Industry Council argues that the bill will bring California's regulation of motor vehicle and consumer goods service contracts more in line with the national regulatory trend, as well as with the National Association of Insurance Commissioners' Model Act with respect to service contracts. REGISTERED SUPPORT / OPPOSITION : Support Service Contract Industry Council Cal-Tex Protective Coatings Opposition None received. Analysis Prepared by : Mark Rakich / INS. / (916) 319-2086