BILL ANALYSIS
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THIRD READING
Bill No: AB 2111
Author: Smyth (R)
Amended: 8/16/10 in Senate
Vote: 21
SEN. BUS., PROF. & ECON. DEV. COMMITTEE : 6-0, 6/21/10
AYES: Negrete McLeod, Aanestad, Calderon, Correa, Florez,
Yee
NO VOTE RECORDED: Wyland, Oropeza, Walters
SENATE JUDICIARY COMMITTEE : 4-0, 6/29/10
AYES: Corbett, Harman, Hancock, Leno
NO VOTE RECORDED: Walters
SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8
ASSEMBLY FLOOR 63-0, 5/28/10 - See last page for vote
SUBJECT : Service contracts
SOURCE : Service Contract Industry Council
DIGEST : This bill revises the service contract law, and
makes conforming changes to implement these changes.
Senate Floor Amendments of 8/16/10 (1) strike the proposed
addition of "optical products" to the definition of
"service contract;" (2) clarify the exemption from the
definition of "service contract seller" or "seller" for
manufacturers or contractors that construct, install or
CONTINUED
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service specified electrical devices; and (3) clarify two
provisions related to pro rata refunds for vehicle service
contracts.
ANALYSIS :
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, 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.
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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.
3.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.
4.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.
5.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.
6.Repeals (sunsets) the service contractor provision on
January 1, 2013.
7.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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8.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 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
electrical devises which includes any unit of
electrical system as part of a building's electrical
system, including raceways, conductors, invertors,
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conduits, 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.
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.Provides that the obligator on a canceled vehicle
service contract shall choose the method of determining
the pro rata refund at the time of cancellation.
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.
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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 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.
Service Contracts 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
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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; 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.
History of the Regulation of Service Contracts in
California . SB 2075 (Polanco), 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
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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 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.
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(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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: Yes
SUPPORT : (Verified 8/4/10)
Service Contract Industry Council (source)
Association of California Insurance Companies
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
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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.
ASSEMBLY FLOOR :
AYES: Adams, Ammiano, Anderson, Arambula, Beall, Block,
Blumenfield, Bradford, Brownley, Buchanan, Caballero,
Charles Calderon, Conway, Cook, Coto, Davis, DeVore, Eng,
Evans, Feuer, Fletcher, Fong, Fuentes, Fuller, Gaines,
Galgiani, Garrick, Gilmore, Hagman, Harkey, Hayashi,
Hernandez, Hill, Huber, Huffman, Jones, Knight, Lieu,
Logue, Bonnie Lowenthal, Ma, Mendoza, Miller, Monning,
Nava, Nestande, Niello, Nielsen, Norby, V. Manuel Perez,
Portantino, Ruskin, Saldana, Skinner, Solorio, Swanson,
Torlakson, Torres, Torrico, Tran, Villines, Yamada, John
A. Perez
NO VOTE RECORDED: Bass, Bill Berryhill, Tom Berryhill,
Blakeslee, Carter, Chesbro, De La Torre, De Leon,
Emmerson, Furutani, Hall, Jeffries, Salas, Silva, Smyth,
Audra Strickland, Vacancy
JJA:cm:do 8/17/10 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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