BILL ANALYSIS Ó AB 2354 Page 1 CONCURRENCE IN SENATE AMENDMENTS AB 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 AB 2354 Page 2 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 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: None 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 According to the author, current law governing service contracts is out of date, and fails to provide consumers with desirable coverage, such as coverage for lost, stolen or damaged keys and fobs - increasingly expensive necessities for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. 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 AB 2354 Page 3 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 AB 2354 Page 4 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 contracts. 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: 0004338 AB 2354 Page 5