BILL ANALYSIS
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|Hearing Date:June 21, 2010 |Bill No:AB |
| |2111 |
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SENATE COMMITTEE ON BUSINESS, PROFESSIONS
AND ECONOMIC DEVELOPMENT
Senator Gloria Negrete McLeod, Chair
Bill No: AB 2111Author:Smyth
As Amended:June 14, 2010 Fiscal: Yes
SUBJECT: Service contracts.
SUMMARY: Revises the service contract law, and makes conforming
changes to implement these changes.
Existing law:
1)Regulates some 4,500 electronic service dealers, 30 service contract
administrators, 5,200 service contract sellers by the Bureau of
Electronic and Appliance Repair, Home Furnishings and Thermal
Insulation (Bureau) in the Department of Consumer Affairs (DCA).
The Bureau additionally regulates appliance service dealers,
combination service dealers and the home furnishings and thermal
insulation industries.
2)Defines certain terms for purposes of the service contract law,
including:
a) "Service contract" as a contract in writing to perform, over a
fixed period of time or for a specified duration, services
relating to the maintenance, replacement, or repair of a set or
appliance, as defined, or of furniture, jewelry, lawn and garden
equipment, power tools, fitness equipment, telephone equipment,
small kitchen appliances and tools, or home health care products,
and may include provisions for incidental payment of indemnity
under limited circumstances. Limits incidental payment of
indemnity to not exceed a retail value of $250 per year.
b) "Service contract administrator" or "administrator" as a
person, other than a service contract seller or an insurer
admitted to do business in this state, who performs or arranges,
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or has an affiliate who performs or arranges, the collection,
maintenance, or payment of money to compensate any party for
claims or repairs under a service contract, and who performs
other activities, as specified, on behalf of service contract
sellers.
c) "Service contract seller" or "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 contract
sold by the seller, manufacturer, or repairer of the product
covered by the service contract.
d) "Obligor" as the entity financially and legally obligated
under the terms of a service contract and specifies that a
service contract administrator shall not be an obligor on a
service contract.
1)Makes it unlawful for any person to act as a service contract
administrator or a service contract seller without first registering
with the Bureau under the Electronic and Appliance Repair Dealer
Registration Law.
2)Requires that a service contract fully and conspicuously disclose in
simple and readily understood language the terms, conditions, and
exclusions of that contract, and with equally clear and conspicuous
statements, any services, parts, characteristics, components,
properties, defects, malfunctions, causes, conditions, repairs, or
remedies that are excluded from the scope of the service contract.
3)Requires that a service contract reimbursement insurance policy be in
force for all contracts administered by a service contract
administrator. A service contract reimbursement insurance policy 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.
4)Repeals (sunsets) the service contractor provision on January 1,
2013.
5)Under the Civil Code, prohibits a service contract covering any motor
vehicle, home appliance, or home electronic product purchased for
use in this state from being offered for sale or sold unless several
elements exist, including that the contract is cancelable by the
purchaser under certain conditions.
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6)Under the Insurance Code, defines vehicle service contract for
purposes of vehicle sales, and exempts a warranty provided by a
vehicle glass manufacturer from the vehicle service contract
requirements.
This bill:
1)Redefines "service contract" to include an electronic appliance, as
specified, and its accessories and optical products, and does not
include a contract to maintain structural wiring for cable,
telephone, or other broadband communications services.
2)Deletes the $250 limitation on incidental payment of indemnity under
a service contract.
3)Authorizes a service contract administrator to be an obligor on a
service contract, as long as the administrator has a service
contract reimbursement insurance policy for all service contracts
under which the administrator is obligated.
4)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 service contract reimbursement insurance policy for all
service contracts.
5)Provides that a "service contract seller" does not include:
a) A bank or bank holding company, or subsidiary or affiliate, or
a state or federally licensed financial institution that sells or
offers a service contract unless it is financially and legally
obligated under the terms of a service contract.
b) An electrical device manufacturer or electrical contractor who
constructs, installs, or services an electrical system as part of
a building's electrical system, including raceways, conductors,
invertors, conduit, wires, switches or similar devices.
6)Specifies that unless otherwise provided, service contractors
registered under the service contractor law are exempt from all
provisions of the Insurance Code.
7)Authorizes a registered service contract administrator who is an
obligor on a service contract to perform all the functions of a
seller and shall not be required to register separately as a seller.
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8)Provides that unless otherwise lawfully transacting the business of
insurance under an appropriate certificate of authority issued
pursuant to the Insurance Code, a service contract administrator or
third-party seller acting as an obligor on a service contract,
without having a service contract reimbursement insurance policy
covering all service contracts under which the service contract
administrator or third-party seller is obligated, shall be deemed to
be unlawfully transacting the business of insurance, and shall be
subject to specified felony penalties, and discipline under the
Insurance Code.
9)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.
10)Makes technical corrections, updating and conforming changes.
11)Extends the sunset date from January 1, 2013 to January 1, 2018.
12) Changes the conditions of a motor vehicle, home appliance, or home
electronic service contract cancellation so that the seller is no
longer required to indicate in the contract the specific bases for a
pro rata refund if the contract is cancelled.
13)Adds a warranty provided by a glass sealant manufacturer to the
existing warranty exemption for a vehicle glass manufacturer from
the vehicle service contract requirements.
FISCAL EFFECT: The Assembly Appropriations Committee analysis, dated
May 19, 2010, indicates that workload associated with this expansion
would be minor and absorbable within existing resources. It is
anticipated that a small amount of revenue, approximately $50,000,
will be generated by licensing additional service contract providers.
COMMENTS:
1.Purpose. This bill is sponsored by the Service Contract Industry
Council (Sponsor) in order to 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
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contracts, ensuring that California consumers receive the
protections afforded them under California's current laws governing
motor vehicle service contracts."
The Sponsor further summarizes provisions in the bill as follows:
a) Clarifies that product accessories and optical products may be
covered under a service contract (i.e. A/C adaptors, modems,
Bluetooth, eyeglasses, etc).
b) Strikes an arbitrary limit of $250 on incidental indemnity
that exists under current law. The Sponsor states that as these
types of products have advanced, their cost has increased
substantially. Therefore, removing the limit will help providers
give consumers valuable benefits that they would otherwise be
prohibited from offering.
c) Revises the definition of "administrator" and "service
contract seller" to bring California law more in line with the
Model Act created by the National Association of Insurance
Commissioners (NAIC).
d) According to the Sponsor, recently, the Department of
Insurance has begun rejecting service contract forms that do not
select the method of calculating pro rata refunds (elapsed time
or mileage) in the contract. While this is a departure from
longstanding approvals by the Department, after reassessing the
statutory language, the Department feels as though their hands
are tied by the statute.
The Sponsor contends that such an interpretation can lead to
situations where the consumer is getting the short end of the
stick. For example, a provider is forced to select the method of
calculating a refund in the contract and selects elapsed mileage.
When the refund is calculated, it turns out that the consumer
drives a lot, so the pro rata calculation based on elapsed
mileage is small compared to what it would have been if
calculated based on elapsed time. The amendment allows the
provider to determine the method of calculating the refund at the
time of cancellation, rather than at the outset. This is
consistent with regulation in other states, and the Department
has agreed to the change, according to the Sponsor.
2.Background. Under current law, as interpreted by the Bureau, 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
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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 Bureau-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. 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 Bureau's 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 service
contract administrators 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 service contract administrator obligors and other third-party
obligors be backed by a service contract reimbursement insurance
policy ensures that future claims will be met. If a service
contract administrator or third party does not have a policy
covering each contract that it sells, then it must be licensed as an
insurer.
a) Service Contacts Explained. Service contracts (also referred
to as extended warranties or maintenance agreements) cover a
broad range of electronic and home appliance products as well as
furniture, jewelry, lawn and garden equipment, power tools,
fitness equipment, and telephone equipment and are collectively
governed by the provisions of Business and Professions Code
Section 9801 et seq. Those providing service contracts must
register with the Bureau and comply with both the laws and
regulations regarding service contracts and service contract
sellers. Service contracts are also subject to regulation
pursuant to the Song-Beverly Warranty Act which is intended to
protect consumers who purchase goods covered by service contracts
and extended warranties by requiring that certain provisions be
included in the contracts and by obligating the service contract
sellers to adhere to certain standards when providing such
contracts or warranties.
Generally, service contracts cover installation and maintenance of
equipment or burglar alarm systems used in automobiles;
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installation, maintenance and repair of telephone and/or
receivers, antennas, rotors and satellite signal devices;
repairing, servicing or maintaining major appliances such as
refrigerators, freezers, ranges microwave ovens, washers, dryers,
dishwashers, trash compactors and room air conditioners;
repairing, servicing or maintaining television sets, radios,
audio or video machines, recorders, video cameras, video games,
video monitors, computer systems, photocopies, facsimile
machines, or cell phones.
b) History of the Regulation of Service Contracts in California.
SB 2075 (Chapter 1075, Statutes of 1998) required DCA to conduct
an in-depth study of the evolving marketplace related to home
service contracts and to include recommendations regarding
regulation of home service contracts. On August 31, 1999, the
DCA released its report titled, The Service Contract Industry in
California - Market Trends and Policy Issues (Service Contract
Report). The following background information regarding the
regulation of service contracts is excerpted from that report:
Formerly known as the Bureau of Electronic and Appliance Repair,
the Bureau was established in 1963, as a result of the enactment
of the Electronic Repair Dealer Registration Law. At the time,
the stated intent of the law was to provide protection to
California consumers against fraud and negligence in the repair
business for home electronics. Home electronics consisted mainly
of radios and television sets, although the law also regulated
the repair of stereo components. The most prevalent fraud and
negligence was in the television repair industry. By the 1960's,
it was becoming increasingly common for consumers to complain of
repair businesses charging too much for repair services; or
charging for services that were unnecessary, performed poorly, or
not performed at all. Safety was a concern, since negligent
repair could lead to fire, shock, picture tube implosion, and
other safety hazards. In response, the legitimate repair
industry and consumer groups sought regulatory protection from
the State. Over the years, the Legislature has continued to
assign responsibility to the Bureau for a number of other types
of products and appliances.
The Bureau was given regulatory responsibility regarding "service
contracts" in 1994, with the passage of the Service Contractor
Registration Act. The reason for this was that many of these
service contracts provided for the maintenance, repair and/or
replacement of electronics and appliances by service dealers that
Bureau already regulated. The main force behind California's
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regulation of service contracts was the occurrence of defaulting
on contracts by service contract providers. In the early 1990s,
consumer complaints about defaults by service contract companies
increased considerably. A number of service contract companies
simply went out of business or moved out of state, leaving
consumers without the protection for which they paid. Consumers
also complained that contracts sold to them simply duplicated
repair services already covered by the manufacturer's warranty.
By duplicating coverage, service contract providers were charging
consumers extra money for services that were already included in
their purchases, since manufacturers' warranties are included in
the purchase prices of products.
The basis of service contract regulations is to provide the
following consumer safeguards:
(1) Clear disclosure of the terms and duration of the
contract.
(2) Identification of responsible parties and financial
obligors.
(3) Protection against default of service contract sellers
and administrators.
(4) Confidence that the terms of the service contract will
be satisfied by the obligor.
(5) An avenue for mediation and remedies of consumer
complaints.
(6) Reasonable assurance of the financial backing of the
contract.
3.Prior Legislation. AB 1553 (Wesson, Chapter 775, Statutes of 2003)
expanded the definition of a "service contract" to include
furniture, jewelry, lawn and garden equipment, power tools, fitness
equipment, telephone equipment, small kitchen appliances and tools,
home health care products, and provides that the service contract
may include provisions for incidental payment of indemnity, not to
exceed $250, for limited circumstances, including, but not limited
to, power surges, food spoilage, or accidental damage from handling.
The bill also gave service contract sellers another option to
fulfill existing financial reserve requirements, through filing with
the director of DCA a certified public accountant audited financial
statement reflecting a net worth of not less than $100 million.
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AB 2911 (Vargas, 2002) would have created the "Regulated Service
Contract Provider Registration Law" to set up compliance standards
for a "regulated provider, " if met, would have subjected the entity
to regulation by the Insurance Commissioner. By setting up a
different regulatory scheme certain businesses providing home
warranty type protection would have been exempt from home protection
laws. That bill died in the Senate Insurance Committee.
AB 372 (Nation, 2001) would have removed jurisdiction over all home
warranties (except those in connection with real estate sale, and
those that cover heating, cooling, electric wires and plumbing) from
the California Department of Insurance and placed jurisdiction
instead with the Bureau. It revised the definition of "service
contract" and "home protection contract" so that anyone in the
business of selling such a warranty contract could be regulated by
the Bureau, regardless of whether the company directly sold or
serviced the particular covered home system, component or appliance.
That bill died in Assembly Insurance Committee.
1.Arguments in Support. The Service Contract Industry Council states
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.
The Association of California Insurance Companies (ACIC) writes in
support that the bill would make several important changes to ACIC
members by clarifying the cancellation provisions in vehicle service
contracts. Currently, as the law is interpreted by the Department
of Insurance, service contract sellers must decide at the outset
which method will be used to calculate the refund in the event a
purchaser decides the cancel the contract. Essentially this would
require purchasers themselves to decide at the outset which approach
would be used to calculate any refund that they may be entitled to
at some later date.
NOTE : Double-referral to Judiciary Committee (second).
SUPPORT AND OPPOSITION:
Support:
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Service Contract Industry Council (Sponsor)
Association of California Insurance Companies
Opposition: None received as of June 15, 2010
Consultant:G. V. Ayers