BILL ANALYSIS                                                                                                                                                                                                    

                             Senator Richard Roth, Chair
                                2015 - 2016  Regular 

          Bill No:              AB 2354       Hearing Date:    June 22,  
          |Author:    |Calderon                                             |
          |Version:   |May 25, 2016    Amended                              |
          |Urgency:   |No                     |Fiscal:    |No               |
          |Consultant:|Hugh Slayden                                         |
          |           |                                                     |
                         Subject:  Vehicle service contracts

           SUMMARY     Expands the types of services that may be provided under a  
          vehicle service contract (VSC).  
          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.


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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  

           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  

           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  


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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.

          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  


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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  

              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.  


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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  

              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. 


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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.

          Motor Vehicle Ancillary Products Association (sponsor)
          The California New Care Dealers Association  
          None received

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