BILL ANALYSIS
AB 2111
Page 1
Date of Hearing: May 19, 2010
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
AB 2111 (Smyth) - As Amended: May 6, 2010
Policy Committee: Business and
Professions Vote: 11 - 0
Insurance 12 - 0
Urgency: No State Mandated Local Program:
Yes Reimbursable: No
SUMMARY
This bill expands the number of parties who may sell service
contracts. Specifically, this bill:
1)Redefines "service contract" to include an electronic
appliance, as specified, and its accessories.
2)Authorizes a Service Contract Administrator (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.
3)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.
4)Deletes provisions exempting express warranties for motor
vehicle lubricants, treatment fluids, or additives covering
incidental or consequential damage resulting from a failure of
those products from the provisions of automobile insurance.
5)Extends the sunset date from January 1, 2013 to January 1,
2018.
FISCAL EFFECT
1)Workload associated with this expansion would be minor and
absorbable within existing resources.
AB 2111
Page 2
2)It is anticipated that a small amount of revenue,
approximately $50,000, will be generated by licensing
additional service contract providers.
COMMENTS
1)Purpose . The sponsors of the bill, the Service Contract
Industry Council note that this 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.
"In addition, the bill will bring certain vehicle additive
products that have historically been exempt from regulation
into the regulatory scheme applicable to motor vehicle service
contracts, ensuring that California consumers receive the
protections afforded them under California's current laws
governing motor vehicle service contracts."
2)Background . Under the current Bureau of Electronic and
Appliance Repair (BEAR), Home Furnishings, and Thermal
Insulation law, only a retailer, manufacturer, or repairer of
a product may be the obligor of a service contract covering
that product. The vast majority of BEAR regulated service
contracts are retailer-obligor and are 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 does not manufacture,
distribute, or sell 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 and most other jurisdictions 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
AB 2111
Page 3
claims will be met. If a SCA or third party does not have a
SCRIP covering each contract they sell, they must be licensed
as an insurer.
This bill also eliminates the regulatory exemption of certain
motor vehicle lubricants, treatments, fluids, and additives.
Current law essentially provides that a warranty covering a
motor vehicle additive is neither insurance nor a vehicle
service contract (VSC). The warranty included in these
products must be included in the price of the additive, but
the warrantor may, and often does, charge between $1,000 -
$2,000 for the bottle or tablet of additive to cover the cost
of (and profit on) the warranty. However, according to the
sponsor, the additive typically costs only a few dollars to
manufacture. Similar additives can be purchased from auto
supply stores for approximately $10.
Analysis Prepared by : Julie Salley-Gray / APPR. / (916)
319-2081