BILL ANALYSIS                                                                                                                                                                                                    

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          2354 (Calderon)

          As Amended  May 25, 2016

          Majority vote

          |ASSEMBLY:  |78-0  |(May 12, 2016) |SENATE: |38-0  |(August 16,      |
          |           |      |               |        |      |2016)            |
          |           |      |               |        |      |                 |
          |           |      |               |        |      |                 |

          Original Committee Reference:  INS.

          SUMMARY:  Expands and clarifies the law governing automobile and  
          watercraft service contracts.  

          The Senate amendments make technical and clarifying changes in  
          one provision of this bill.

          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  


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            warranty for the product that guarantees the repair and  
            replacement of mechanical components of the vehicle based on a  
            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:  None  


          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            service contracts is out of date, and fails to provide  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.  This bill clarifies and  
            updates the law and creates better options for consumers.  The  
            author also points to the elements in this 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  
            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  


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            products that meet the general definition of insurance, but  
            for a range of policy reasons are subject to formal but  
            different regulation by the Department of Insurance (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 the expanded coverage.   
            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  
            that vehicle lubricant warranties (masquerading as vehicle  
            service contracts) are "not insurance."  The effect of this  
            exception is that these "warranties" are not regulated as  
            either insurance or service contracts.  This bill cures this  


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            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 of  
            Insurance 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.  This 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.  This bill, instead, would treat  
            lubricant warranty programs the same as other vehicle service  

          4)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.  This bill provides that it does not.

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


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