BILL ANALYSIS Ó SENATE INSURANCE COMMITTEE Senator William W. Monning, Chair AB 1130 (Wilk) Hearing Date: June 25, 2014 As Amended: April 18, 2013 Fiscal: Yes Urgency: No VOTES: Asm. Floor (05/30/13)78-0/Pass Asm. Appr. (05/15/13)17-0/Pass Asm. Ins. (04/24/13)13-0/Pass SUMMARY Streamlines the application process required of out-of-state applicants for a home protection company license. DIGEST Existing law 1. Defines "home protection contract" to mean a contract whereby a person, other than a builder, seller, or lessor of the home, undertakes for a specified period of time, for a predetermined fee, to repair or replace all or any part of any component, system or appliance of a home necessitated by wear and tear, deterioration or inherent defect, arising during the effective period of the contract. 2. Requires that the contract provide for the servicing, repair, or replacement of the covered appliances or components, but may not cover damages arising from the failure of any component, system or appliance. 3. Requires home protection companies to be licensed and regulated by the California Department of Insurance (CDI). 4. Requires home protection companies to comply with specified statutes governing insurance companies. AB 1130 (Wilk), Page 2 This bill 1. Exempts foreign applicants for a home protection company license from the following requirements if the chief executive officer agrees to provide the CDI the same financial reports required of domestic home protection companies: a. Filing a financial statement certified by their domestic regulator. b. Filing a report of examination by the insurance regulator in their home state. c. Holding a certificate of authority as an insurance company. COMMENTS 1. Purpose of the bill . According to the author, existing law creates an expensive and unnecessary roadblock for existing home protection companies in other states to obtain a license in California, if the out of state company is not licensed as an insurer in the company's home state. In many states home protection companies are regulated by the state attorney general or consumer affairs or real estate regulators. In these cases, even applicants who have solid experience in many states are required to undergo the expensive and time-consuming process of obtaining licensure as a California insurer. This bill would permit companies operating in other states to offer home protection contracts in California without obtaining a separate certificate of authority here. 2. Background . According to the sponsor, home protection contracts, often referred to as "home warranties," are often purchased in connection with the sale of homes to provide buyers with coverage should the wear and tear on home appliances and systems require repair or replacement. The AB 1130 (Wilk), Page 3 contracts are short in duration, often for a year but sometimes monthly, and do not carry the "long-tail" liability typical of more insurance products like life or long-term care insurance. Home protection contracts might not be considered "insurance" in other states because of the nature of the coverage. Academically, property and casualty insurance is often thought of as covering only those risks that are accidental or by chance. This is sometimes referred to as the fortuity doctrine. Some states, however, do not view home protection contracts as a form of insurance, but rather distinguish service or maintenance contract because they cover damages that relate to predictable and controllable wear and tear. California regulates home protection companies similarly to insurers. Companies from out-of-state may be subject to numerous requirements not required in its home state. This bill provides that out-of-state home protection companies selling contracts in California do not have to file copies of certain documents to obtain a license if the companies home state regulatory official does not require the document. (So if the state's attorney general oversees these companies and does not require one of the listed documents, California will not require a copy of that document either.) However, the company will have to file the financial documents required in its home state. 3. Argument in Support . The NHSCA writes that the bill grants CDI the authority to waive certain pre-licensing requirements for new out-of-state applicants which are not licensed as insurers in their home states. In many states, home protection or home warranty companies are not required to obtain insurance licenses, and in some circumstances it should not be necessary for applicants to obtain insurance licenses in California if they have been operating successfully in other states. 4. Arguments in Opposition None received. 5. Suggested Amendments . The author, sponsor, and CDI engaged in significant discussion to streamline the regulatory AB 1130 (Wilk), Page 4 requirements relating to home protection licensees. Based on that agreement, the committee may wish to consider amendments that accomplish the following: a. Replace Quarterly with Annual Financial Reports. California law requires home protection licensees to submit both quarterly and annual financial statements to the CDI. The proposed amendment would replace the quarterly statement requirement to and annual statements, leaving the CDI the authority request financial statements at any time it deems necessary. According to the sponsor, National Home Service Contract Association (NHSCA), no other state currently requires home service/home protection companies to submit quarterly reports. NHSCA also contends that given the low regulatory risk of home protection companies, submission of an annual financial statement is adequate to protect the public. The sponsor argues that the financial condition of home protection companies simply does not change sufficiently from quarter to quarter to make such reporting necessary, and annual financial statements will be fully adequate to protect the public. b. Limit Financial Examinations. Clarify that the CDI will conduct financial examinations not more frequently than every five years, unless circumstances warrant an interim exam. According to the sponsor, financial examinations are expensive for both licensees and the CDI. Under the amendment, the CDI retains the exam authority if there is evidence that the condition of the licensee has deteriorated. Market conduct exams are not affected by this change. POSITIONS Support National Home Service Contract Association (Sponsor) Oppose None received. Consultant: Hugh Slayden (916) 651-4773 AB 1130 (Wilk), Page 5