BILL ANALYSIS Ó
SENATE COMMITTEE ON INSURANCE
Senator Richard Roth, Chair
2015 - 2016 Regular
Bill No: AB 2354 Hearing Date: June 22,
2016
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|Author: |Calderon |
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|Version: |May 25, 2016 Amended |
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|Urgency: |No |Fiscal: |No |
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|Consultant:|Hugh Slayden |
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Subject: Vehicle service contracts
SUMMARY Expands the types of services that may be provided under a
vehicle service contract (VSC).
DIGEST
Existing law
1. Provides for the regulation of insurance, VSCs, and motor
clubs by the California Department of Insurance (CDI), under
separate regulatory schemes, and prescribes various
requirements and conditions governing the services provided
or contractual terms involved.
2. Authorizes car dealers and lessor-retailors licensed by the
Department of Motor Vehicles, as well as a person who sells
or leases watercraft, to sell VSCs.
3. Permits a VSC to cover a limited number of services
specified in statute related to the repair, replacement, or
maintenance of a motor vehicle or watercraft that arise from
operational or structural failure due to defect or normal
wear and tear.
AB 2354 (Calderon) Page 2
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4. Authorizes a VSC to provide for incidental indemnity
benefits for specified expenses including towing, substitute
transportation, emergency road services, and rental car
reimbursement.
5. Authorizes a VSC to repair or replace a tire due to damage
caused by a road hazard and other reasons.
6. Authorizes manufacturers of motor vehicle lubricants and
treatments to provide a warranty for the product that guarantees
the repair and replacement of mechanical components of the
vehicle based on the use of the product, and declares that this
warranty does not constitute insurance and is not subject to
licensing by CDI.
This bill
1. Requires a VSC provider that offers incidental indemnity
benefits to certify that the cost to provide the indemnity
benefits are substantially less than the cost to provide all
of the primary VSC benefits.
2. Authorizes VSCs of at least one year duration to provide
for routine maintenance of the covered vehicles.
3. Authorizes VSC providers to replace a vehicle key or key
fob in the event that it is lost, stolen, or becomes
inoperable.
4. Defines "road hazard" for the purposes of clarifying when a
VCS may cover wheel and tire repair.
5. Specifies that the new services authorized by this bill do
not subject a VSC provider to laws applicable to motor
clubs.
AB 2354 (Calderon) Page 3
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6. Exempts from the laws applicable to VSCs those arrangements
where an employer promises or contracts with a third party
to provide basic vehicle service reimbursements to employees
using their own personal vehicle on behalf of the employer.
7. Repeals the exemption from regulation for manufacturers of
certain motor vehicle lubricants and treatments that offer
warranties, as specified, and reclassifies those warranties
as VSCs.
COMMENTS
1. Purpose of the bill According to the author, AB 2354
corrects several problems that arise because the definition
of insurance under existing law captures some VSC agreements
and inappropriately applies the laws governing insurance.
2. Background Insurance, VSCs, motor club memberships, and
warranties involve similar types of agreements but differ in
their magnitude, complexity, and purpose. These differences
call for specific regulatory structures to ensure that the
consumer is treated fairly without overburdening the
provider. This bill clarifies those situations where
overlapping benefits may trigger overly burdensome
regulatory requirements.
Insurance involves a contractual arrangement where one party
accepts a payment from another party, and agrees to provide
indemnification or reimbursement upon the occurrence of a
future contingent event. Insurers assume the risk from the
insured and diffuse that risk among members of an insurance
pool. Auto insurance policies often involve significant
risks related to liabilities arising from bodily injury,
death or property damage, legal defense costs, and damage to
the insured's vehicle. Because the risks involved are so
great and varied, and the mechanisms involving insurance are
so complex, insurers are highly regulated and subject to
sophisticated capital and reserving requirements, prior
approval for ratemaking, and regular financial exams.
But while typical auto insurance will fix a vehicle, up to
AB 2354 (Calderon) Page 4
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the limit, if the insured crashes into a tree, it won't fix
a vehicle if the engine fails due to wear and tear. Auto
maintenance and repairs based on wear and tear or mechanical
failure may be covered under a VSC. These agreements are
less complex and involve relatively limited losses.
Accordingly, VSC providers are not subject to the stringent
standards applicable to insurers, but must be licensed, file
their contracts with CDI, submit evidence that they have the
ability to follow through on the promised services (usually
by way of a contractual liability insurance policy), and
must provide some consumer disclosures. In a similar way,
motor clubs may offer some coverage for towing or emergency
roadside assistance, travel services, driver's license and
registration assistance, and other services related to
automobiles.
Additions to Authorized VSC Services. This bill adds
several services to those authorized under a VSC license
without being subject to the laws governing insurance or
motor clubs.
Existing law already permits VSC providers to offer
specified indemnity benefits to cover the costs related to
vehicle breakdown such as towing and emergency road service,
so long as these benefits are "incidental." This bill
requires a VSC to certify that the costs to provide
incidental indemnity benefits that represent a significantly
lower cost than those to provide the basic VSC services.
This bill continues to permit VSCs to offer these minor,
insurance-like benefits, but establishes a clearer line to
keep providers from converting a VSC into an insurance
policy masquerading as a VSC.
Many vehicles require special keys and key fobs that can be
far more expensive to reproduce than simply getting a copy
made at a hardware store. VSCs may already cover damaged
keys and key fobs, but replacement of one that is lost or
stolen does not fall under repair or maintenance. The
author explains that although replacement of the key or fob
may be covered under an auto insurance policy, the cost
almost always falls below the deductible amount. This bill
makes an exception to the general rule and authorizes a VSC
to replace lost and stolen keys and key fobs.
AB 2354 (Calderon) Page 5
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Auto Lubricant and Engine Treatment Warranties. A warranty
is a promise by a manufacturer or seller to stand behind a
product. There are different species of warranty, but the
most common involves a promise by the seller or manufacturer
that the product will do what it is supposed to do. For
example, an automobile manufacturer may provide a 100,000
mile warranty on a car and will service the vehicle if it
breaks down. These warranties come with the price of the
product.
The "warranties" that are the subject of this bill actually
guarantee the performance of the vehicle based on a
third-party product. Moreover, the additive probably would
not prevent the breakdown any more than any other similar
product. These warranties might also involve additives or
add-ons and are inexpensive to manufacture, but are very
expensive to purchase because the consumer is actually
paying for the warranty. To the extent that the
manufacturer is covering losses not truly related to the
failure of the product, the warranty is really a form of
insurance. These sellers and manufacturers are not subject
to any licensing requirement and there are no regulatory
safeguards to assure performance. CDI explains that these
products have been involved in large scale fraudulent
activity, but because of the existing exemption it lacks the
authority to investigate potentially wrongful conduct. This
bill eliminates that exemption and subjects the warrantor to
the laws applicable to VSC providers. One manufacturer has
expressed concern that this bill would unfairly limit their
product to sales through auto dealers.
Exemption from VSC Services. Some employers offer
reimbursement for, or hire a contractor to make or provide,
non-collision repairs and routine maintenance and other
services on employee vehicles that were used on behalf of
the employer. These assurances and services are not offered
to the general public, and arise out of the employment
relationship. This bill excludes those services from the
laws applicable to VSCs. The author explains that although
some employers offer incidental damage coverage or vehicle
maintenance as part of their mileage reimbursement programs,
the main purpose of these agreements is to provide a benefit
to the employee.
AB 2354 (Calderon) Page 6
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3. Arguments in Support The Motor Vehicle Ancillary Products
Association states that this bill provides a balanced
regulatory framework with appropriate oversight of industry
and consumer protections while fostering regulatory
certainty for contract providers.
POSITIONS
Support
Motor Vehicle Ancillary Products Association (sponsor)
The California New Care Dealers Association
Oppose
None received
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