BILL ANALYSIS                                                                                                                                                                                                    

                                                                    AB 2354

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          Date of Hearing:  May 4, 2016

                           ASSEMBLY COMMITTEE ON INSURANCE

                                   Tom Daly, Chair

          AB 2354  
          (Calderon) - As Amended April 11, 2016

          SUBJECT:  Vehicle service contracts

          SUMMARY:  Expands and clarifies the law governing automobile and  
          watercraft service contracts.  Specifically, this bill:  

          1)Repeals the statute that allows sellers of certain motor  
            lubricants to provide a warranty that covers all damages to  
            the vehicle drive train under a presumption that any  
            mechanical failures are caused by a failure of the lubricant.

          2)Adds lubricant-based repair commitment programs to the vehicle  
            service contract law.

          3)Requires a vehicle service contract provider that offers  
            incidental indemnity benefits to certify that the indemnity  
            benefits are substantially less than the primary service  
            contract benefits.

          4)Authorizes service contracts of at least one year duration to  
            provide for routine maintenance of the covered vehicle(s).


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          5)Authorizes vehicle service contracts to provide for the  
            replacement of a vehicle key or fob in the event the key or  
            fob is lost, stolen, or becomes inoperable.

          6)Exempts from the vehicle service contract law service  
            arrangements whereby an employer contracts with a third party  
            to provide basic vehicle service reimbursements to employees  
            of the employer who use their own personal vehicle for  
            business purposes on behalf of the employer.

          7)Clarifies that the vehicle service contract law covers  
            watercraft or motor vehicles.

          8)Defines "road hazard" for purposes of the vehicle service  
            contract law that authorizes limited wheel and tire repair  
            coverage by a vehicle service contract.

          9)Specifies that the new services authorized to be provided via  
            the service contract law do not make the seller of those  
            services subject to the Motor Club law.

          EXISTING LAW:  

          1)Requires that contractual arrangements whereby one party  
            accepts a payment from another party, and agrees to provide a  
            service or pay indemnification upon the occurrence of a future  
            contingent event be regulated as insurance.

          2)Authorizes the seller of a motor lubricant to provide a  
            warranty for the product that guarantees the repair and  
            replacement of mechanical components of the vehicle based on a  


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            presumption that the damage was due to the failure of the  
            lubricant, and declares that this warranty does not constitute  

          3)Establishes a separate but insurance-like regulatory system  
            for vehicle service contracts, which are contractual promises  
            made by a third-party obligor (i.e., not the manufacturer or  
            seller of the vehicle) to repair or replace damaged or worn  
            out vehicles in exchange for a premium or charge.

          4)Establishes a separate but insurance-like regulatory structure  
            for Motor Clubs, which generally  provide  towing and emergency  
            roadside assistance programs.

          FISCAL EFFECT:  Undetermined.  The bill is tagged non-fiscal.   
          Minor changes in the rules governing vehicle service contracts  
          should have little effect on the regulatory program administered  
          by the Department of Insurance (DOI).  


           1)Purpose  .  According to the author, current law governing  
            service contracts is out of date, and fails to provide  
            consumers with desirable coverage, such as coverage for lost,  
            stolen or damaged keys and fobs - increasingly expensive  
            necessities for operating a vehicle.  The bill clarifies and  
            updates the law and creates better options for consumers.  The  
            author also points to the elements in the bill intended to  
            remedy loopholes in the law that have been exploited to the  
            detriment of consumers.

           2)Warranty, service contract, or insurance  .  In general,  
            whenever a business sells a contract to a consumer that  


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            promises to pay a claim or provide a service in the future,  
            based on some uncertain or contingent event, the contract is a  
            contract of insurance, and the elaborate regulatory structure  
            governing insurance applies.  However, there are a number of  
            products that meet the general definition of insurance, but  
            for a range of policy reasons are subject to formal but  
            different regulation by the DOI. Typically these products  
            cover relatively small risks, and the financial requirements  
            of full insurance regulation would be too burdensome. Motor  
            Clubs and vehicle service contracts are two examples.

          Warranties are different.  Warranties are governed by federal  
            law, and the promises being made to the consumer are from  
            either the manufacturer or seller of the underlying product.   
            For example, an automobile manufacturer or an automobile  
            dealer can warrant the car you buy.  But if some third-party  
            wants to sell you an extended service contract, even if  
            offered by the dealer, it is not a warranty, but rather a  
            service contract regulated by the DOI.  Typically automobile  
            dealers do not offer their own warranties because they want  
            the responsibility for performance on the service contract to  
            be the duty of the third party seller.

          Warranties also differ from insurance or service contracts in  
            the scope of what is promised.  A warranty typically covers  
            the product that the consumer purchased in the event of  
            defects or prematurely wearing out.  Service contracts can  
            provide a broader scope of coverage, but that scope is  
            detailed in the vehicle service contract law.  In order for a  
            service contract provider to offer broader coverage, the  
            statute must be amended to authorize these new coverages.   
            Several of the amendments in this bill provide the statutory  
            authorization for vehicle service contract providers to offer  
            broader coverage to consumers.
           3)Lubricant warranties  .  The Insurance Code has, as noted above,  
            some exceptions to the rule that insurance-like transactions  
            be regulated as insurance.  One of those exceptions states  


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            that vehicle lubricant warranties (masquerading as vehicle  
            service contracts) are "not insurance."  The effect of this  
            exception is that these "warranties" are neither regulated as  
            service contracts nor insurance.  This bill cures this  
            regulatory hole by changing the characterization of these  
            products from "warranty" to "vehicle service contract."

          According to the Department of Insurance, lubricant warranty  
            scams have cost consumers in California and across the country  
            hundreds of millions of dollars - one case alone involved over  
            $100,000,000 of fraudulent activity.  The Department has  
            obtained cease and desist orders and pursued other enforcement  
            efforts against individuals and businesses that have attempted  
            illegally to circumvent the vehicle service contract law via  
            the warranty exception.  The bill takes a moderate approach to  
            curing the problem.  Merely repealing the Insurance Code  
            provision that declares these products not to be insurance  
            would result in any business desiring to sell such a product  
            having to comply with full insurance company regulation.  The  
            bill, instead, would treat lubricant warranty programs the  
            same as other vehicle service contracts.
           4)Incidental indemnity coverage  .  The bill proposes several  
            expansions of what may be covered by a vehicle service  
            contract.  Most of the changes are self-explanatory and  
            detailed, above.  One issue that requires more explanation is  
            the proposed requirement that a vehicle service contract  
            provider certify that indemnity benefits are substantially  
            smaller benefits than the primary service contract benefits.   
            The law that allows indemnity benefits already requires that  
            they be "incidental."  The new certification is designed to  
            provide more specific guidance about what the word  
            "incidental" means.  The "incidental" requirement is  
            important.  Vehicle service contracts are already in a  
            category of contracts that are exempt from the standard rules  
            that regulate insurance.  The purpose of a vehicle service  
            contract is to cover the repair of the vehicle.  The  
            Legislature in the past has judged that it is appropriate to  


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            allow some insurance-like indemnity benefits, such as  
            reimbursement for towing or rental cars that arise due to a  
            covered breakdown.  However, a problem could arise if these  
            indemnity benefits constituted the overwhelming value of the  
            contract - in that case, the contract could start to look like  
            a full-fledged insurance policy masquerading as a vehicle  
            service contract.  As a result, only "incidental" indemnity  
            benefits have been authorized.  The bill adds clarity that  
            these benefits may only be a small portion of the value of the  

           5)Employee reimbursements  .  Some vehicle service providers  
            provide services to businesses that do not trigger application  
            of the law.  For example, businesses often contract with third  
            party providers to help in the management of their vehicle  
            fleets, and this may involve repairs, routine maintenance,  
            among other services.  These activities do not come within the  
            vehicle service contract law.  However, the question has  
            arisen whether or not the vehicle service contract law would  
            be triggered if these same fleet management activities are  
            performed for a business that has its employees use their own  
            vehicles and the employer reimburses the employees for that  
            use.  The bill provides that it does not trigger application  
            of the vehicle service contract law when a service provider  
            contracts with a business to help manage employee-owned  
            business use vehicles.  



          None received


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          None received

          Analysis Prepared by:Mark Rakich / INS. / (916) 319-2086