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service contracts is out of date, and fails to provide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