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
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          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
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            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.  








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           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