BILL ANALYSIS                                                                                                                                                                                                    Ó







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        |Hearing Date:June 17, 2013         |Bill No:AB                         |
        |                                   |480                                |
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                      SENATE COMMITTEE ON BUSINESS, PROFESSIONS 
                               AND ECONOMIC DEVELOPMENT
                              Senator Ted W. Lieu, Chair
                                           

                       Bill No:        AB 480Author:Ian Calderon
                      As Amended:March 21, 2013       Fiscal:Yes

        
        SUBJECT:  Service contracts.
        
        SUMMARY:  Defines "service contract" to also include optical products  
        thereby requiring a written contract for the performance of services  
        relating to the maintenance, replacement, or repair of optical  
        products, thereby making administrators and sellers of those contracts  
        subject to registration and regulation by the Bureau of Electronic and  
        Appliance Repair, Home Furnishings and Thermal Insulation.

        Existing law:
        
       1)Regulates service contract sellers, service contract administrators,  
          and electronic service dealers 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.  (Business and Professions Code (BPC) § 9800 et seq.)

       2)Defines certain terms for purposes of the service contract law,  
          including:  (BPC § 9855)

           a)   "Service contract" as a contract in writing to perform, over a  
             fixed period time or for a specified duration, services relating  
             to the maintenance, replacement, or repair of an electronic set  
             or appliance, as defined, and their accessories, 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.   





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           b)   "Service contract administrator" or "administrator" as a  
             person 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.

           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.  A "service contract seller"  
             also means 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.

           d)   "Obligor" as the entity financially and legally obligated  
             under the terms of 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.  (BPC § 9855.1)

       2)Provides that unless lawfully transacting business as an insurance  
          agent, a service contract administrator or third-party seller, who  
          does not have a service contract reimbursement insurance policy  
          covering all of the service contracts sold, shall be deemed to be  
          the unlawful transaction of the business of insurance and subject to  
          specified criminal penalties.  
       (BPC § 9855.85)

        This bill:

       1)Includes optical products in the definition of "service contract"  
          thereby requiring a written contract for the performance of services  
          relating to the maintenance, replacement, or repair of optical  
          products, and thus making administrators and sellers of those  
          contracts subject to registration and regulation by the Bureau.

       2)Defines optical products to mean "prescription and nonprescription  
          eyewear" and "shall not include contact lenses of any kind."






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        FISCAL EFFECT:  This measure has been keyed "fiscal" by Legislative  
        Counsel.  The April 17, 2013 Assembly Appropriations Committee  
        analysis indicates that this legislation could add approximately 3,000  
        additional licensees to the Bureau's 19,000 licensees.  "Ongoing costs  
        associated with those additional licenses would be approximately  
        $230,000 per year (Electronic and Appliance Repair Fund) which would  
        be mostly offset by $215,000 in fee revenue.  The fund does not have  
        the resources to cover the on-going additional $15,000 in costs."

        COMMENTS:
        
       1.Purpose.  This bill is sponsored by the Author to add optical  
          products to the current definition of service contracts (also known  
          as extended warranties, protection plans, and service agreements) so  
          that retailers and manufacturers can sell service contracts for  
          prescription and nonprescription eyewear.  Additionally, it subjects  
          the administrators and sellers of such contracts to the Electronic  
          and Appliance Repair Dealer Registration Law and requires them to  
          register with the Bureau.

       2.Background.

           a)   Service Contacts Explained.  Service contracts (also referred  
             to as protection plans, 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, telephone equipment,  
             small kitchen appliances and tools, and home health care products  
             which are collectively governed by the provisions of BPC § 9801  
             et seq.  Service contracts are bought separately from the product  
             and last for a specific period of time.  Similar to insurance  
             policies, these contracts assure consumers 

           that should something go wrong with a product their investment is  
             protected at a fraction of the cost of out-of-pocket repair work.

           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.






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           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.

           b)   History of the Regulation of Service Contracts in California.   
              SB 2075  (Chapter 1075, Statutes of 1998) required the 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 extracted 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  





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               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.

       3.Related and Prior Legislation.   AB 1926  (Solorio, 2012) also  
          sponsored by NEWAsurion was similar to this bill.  That bill would  
          have included optical products in the definition of service  
          contracts, but did not define "optical products" as done in this  
          bill.  There was no opposition registered to the bill.  (  Status  :   
          This bill was held on suspense in the Senate Appropriations  
          Committee.)
       
        AB 2111  (Smyth, Chapter 543, Statutes of 2010) revised the service  
          contract law to expand the number of parties who may sell service  
          contracts and specified the following: require a service contract  
          reimbursement insurance policy for all service contracts; permit  
          electronic sets, appliances and their accessories to be covered by  
          service contracts; exclude contracts for structural wiring  
          associated with the delivery of cable, telephone, or broadband  
          services from the definition of service contracts; and, exempt  
          certain financial institutions and specified electrical device  
          manufacturer or contractors from the definition of "service contract  
          seller."

        (Note  : As approved by this Committee on June 21, 2010, AB 2111 also  
          included "optical products" in the list of those who may sell  
          service contracts.  However amendments were made on the Senate Floor  
          to remove optical products from the bill.)  
       
        AB 1553  (Wesson, Chapter 775, Statutes of 2003) expanded the scope of  
          what a consumer goods "service contract" may cover to include  
          furniture, jewelry, lawn and garden equipment, power tools,  
          equipment, telephone equipment, small kitchen appliances, tools, and  





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          home health care products; established an alternative means for  
          service contract sellers to fulfill existing financial reserve  
          requirements by filing a current recent audited and certified  
          financial statement reflecting a net worth of not less than $100  
          million.
       
       4.Arguments in Support.  In sponsoring the bill,  NEWAsurion  states that  
          service contracts provide a low cost means of protecting investments  
          in such products and have become extremely important to consumers.   
          Optical products, however, are excluded from the list of products  
          covered under the definition of service contracts.  Consequently,  
          service contracts insuring optical products cannot be sold in  
          California even though every other state in the nation authorizes  
          their sale.  The Sponsor further argues:  "The fact that one in  
          three consumers of optical products nationwide chooses to buy  
          coverage indicates strong consumer demand for optical service  
          contracts, and underscores the need to permit the sale of optical  
          service contracts in California.  AB 480 would solve this arbitrary  
          limitation by expanding the definition of service contracts to  
          include optical products, thereby authorizing the sale of optical  
          service contracts in California."  

       The Sponsor contends that the bill would not only benefit businesses  
          offering this service, but also provide consumers greater protection  
          by allowing a wider range of in-demand products entering the  
          marketplace to be insured against damage or loss.

        California Retailers Association  (CRA) indicates that by adding optical  
          products to the definition of a service contract, the bill would  
          allow consumers access to replacement, maintenance and repair  
          services for their prescription and non-prescription eyewear.   
          Retailers who wish to offer this type of service contract would be  
          required to register annually with the Bureau.  CRA believes that  
          the additional annual license fee revenue will more than offset any  
          state costs that may result from the bill.


        SUPPORT AND OPPOSITION:
        
         Support:  

        NEWAsurion 
        California Retailers Association

         Opposition: 






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        None received as of  June 12, 2013.



        Consultant:G. V. Ayers