BILL ANALYSIS Ó
AB 2354
Page 1
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).
AB 2354
Page 2
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
AB 2354
Page 3
presumption that the damage was due to the failure of the
lubricant, and declares that this warranty does not constitute
insurance.
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).
COMMENTS:
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
AB 2354
Page 4
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
AB 2354
Page 5
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
AB 2354
Page 6
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
contract.
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.
REGISTERED SUPPORT / OPPOSITION:
Support
None received
AB 2354
Page 7
Opposition
None received
Analysis Prepared by:Mark Rakich / INS. / (916) 319-2086