BILL ANALYSIS
AB 2111
Page 1
Date of Hearing: April 6, 2010
ASSEMBLY COMMITTEE ON BUSINESS AND PROFESSIONS
Mary Hayashi, Chair
AB 2111 (Smyth) - As Amended: March 23, 2010
SUBJECT : Service contracts.
SUMMARY : Expands the number of parties who may sell service
contracts, requires a service contract reimbursement insurance
policy for all service contracts, and eliminates an exemption
for certain products in service contract law, as specified.
Specifically, this bill :
1)Redefines "service contract" to include an electronic set or
appliance, as specified, and its accessories.
2)Deletes the $250 per year limit on incidental indemnity
payments.
3)Permits a service contract seller or an insurer admitted to do
business in this state to be a "service contract
administrator" (SCA) or "administrator."
4)Authorizes a SCA to be an obligor on a service contract, as
long as the SCA has a service contract reimbursement insurance
policy (SCRIP) for all service contracts under which the SCA
is obligated.
5)Expands the definition of "service contract seller" or
"seller" to include a third party, including an obligor who is
not the seller, manufacturer, or repairer of the product, as
long as the obligor obtains a SCRIP for all service contracts.
6)Permits a SCA who is an obligor on a service contract and is
registered as a SCA to perform all the functions permitted by
a seller. A SCA acting in this capacity is not required to
register separately as a seller.
7)States that unless a SCA or third party seller acting as an
obligor on a service contract has a SCRIP, as specified, or is
lawfully transacting the business of insurance under a proper
certificate of authority, the SCA or third party seller is
subject to enforcement by the California Department of
Insurance (Department).
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8)Deletes the requirement that sellers disclose in the contract
the method of calculating refunds.
9)Deletes provisions exempting express warranties for motor
vehicle lubricants, treatment fluids, or additives covering
incidental or consequential damage resulting from a failure of
those products from the provisions of automobile insurance.
10)Redefines a "vehicle service contract" to include an
agreement, provided with or without separate consideration,
that promises to repair, replace, or maintain a motor vehicle
or watercraft, or to indemnify for the repair, replacement, or
maintenance of a motor vehicle or watercraft, conditioned upon
the use of a specific brand or brands of lubricant, treatment,
fluid, or additive.
11)Extends the sunset date from January 1, 2013 to January 1,
2018.
EXISTING LAW:
1)Makes it unlawful for any person to act as a SCA or a service
contract seller without first registering with the Bureau of
Electronic and Appliance Repair (BEAR), Home Furnishings, and
Thermal Insulation under the Electronic and Appliance Repair
Dealer Registration Law.
2)Prohibits a SCA, as defined, from being an obligor, as
defined, on a service contract and existing law requires these
SCAs to maintain a SCRIP, as defined.
3)Defines a service contract seller as a person who sells or
offers to sell a service contract to a service contract
holder, including a person who is the obligor under a service
contract sold by the seller, manufacturer, or repairer of the
product covered by the service contract.
FISCAL EFFECT : Unknown
COMMENTS :
Purpose of this bill . According to the author's office, "We
have seen abusive practices of existing [service contract]
exemptions, which require some products to be brought within the
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regulatory framework that currently exists for vehicle service
contracts. This creates more consumer protection for consumers
who purchase additive products. ? This bill [also] clarifies
several existing terms and issues that surround service
contracts in B&P Code Section 9855 to create consistency with
how other states regulate these contracts and provide more
consumer protections."
Background . Under the current BEAR law, only a retailer,
manufacturer, or repairer of a product may be the obligor of a
service contract covering that product. The vast majority of
BEAR regulated service contracts are retailer-obligor and sold
by retailers. Most of those contracts, in turn, are
administered by separate firms that specialize in administering
service contracts (SCAs). Historically, a third-party obligor
that promises to repair a product, i.e., an obligor that doesn't
manufacture, distribute, or retail the covered product, has been
considered an insurer and has not been permitted to sell service
contracts.
The BEAR regulatory system for service contracts has worked
reasonably well for nearly two decades. The main regulatory
concern with service contracts is that the obligor be
financially solvent in order to pay claims years later on
service contracts with multi-year durations. Changing current
law to permit third parties and SCAs to be the obligor on a
service contract will codify an exception to the longstanding
rule in California and most other jurisdictions that only
insurers and parties in the "chain of distribution" of a product
may legally promise to repair that product. The requirement in
the bill that SCA-obligors and other third-party obligors be
backed by a SCRIP ensures that future claims will be met. If a
SCA or third party does not have a SCRIP covering each contract
they sell, they must be licensed as an insurer.
This bill also eliminates the regulatory exemption of certain
motor vehicle lubricants, treatments, fluids, and additives.
Current law essentially provides that a warranty covering a
motor vehicle additive is neither insurance nor a vehicle
service contract (VSC). The warranty included in these products
must be included in the price of the additive, but the warrantor
may, and often does, charge between $1,000 - $2,000 for the
bottle or tablet of additive to cover the cost of (and profit
on) the warranty. However, according to the sponsor, the
additive typically costs only a few dollars to manufacture.
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Similar additives can be purchased from auto supply stores for
approximately $10.
According to the sponsor, objective automotive experts consider
these warranty additives to be of minimal effectiveness, and
certainly not sufficiently efficacious to justify an implied or
express presumption that any mechanical breakdown is due to a
failure of the additive. While some additives may slightly
reduce friction and lower engine operating temperature, none
significantly reduce the prevalence of the types of breakdowns
covered by these warranties relative to proper maintenance
alone. The Federal Trade Commission has taken action in the
past against additive companies for deceptive marketing,
charging that their engine treatment performance claims were
deceptive and unsubstantiated.
Recently, the country's largest warranty company, US Fidelis,
which sold an additive-based vehicle protection product called
AutoLifeXtend, declared bankruptcy. According the St. Louis
Post-Dispatch, the firm was founded by a convicted thief,
burglar, check forger and counterfeiter. Newspaper reports
based on the bankruptcy filing indicate that the founder and his
brother may have looted the company for over $50 million to
support a lavish lifestyle. Thousands of unpaid California
claims are expected in the coming years, according to a
Department enforcement attorney. Because of current California
law, US Fidelis operated in California beyond the reach of the
Department. This bill would regulate these companies in the
same manner as other VSC sellers.
This bill also amends the requirement that the seller disclose
the method of calculating service contract refunds in the
contract. It is currently at the seller's discretion whether to
base a refund on either elapsed time or an objective measure of
use, and this decision must be reflected in the contract. It is
argued that the proposed change will conform the code to usual
warranty expiration terms, e.g., "3 years or 36,000 miles,
whichever comes first." The argument is that the change will
allow for a proper matching of premium to exposure and prevent
certain contract holders from being able to "game the system,"
as can occur under the Department's current interpretation of
the statute's wording. For example, if a VSC company states in
its contracts that refunds will be based on elapsed miles, than
a contract holder who drives a vehicle very few miles per year
will be able to cancel a seven year contract after six years and
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receive a substantial refund, despite being covered for six
years. Conversely, if the VSC company states that refunds will
be based on elapsed time, then owners who drive 50,000 miles per
year can cancel after a few years and obtain very inexpensive
coverage on a per mile basis.
Arguments in support : The Service Contract Industry Council
writes, "[This bill] will bring California's regulation of
[motor vehicle and consumer goods service contracts] more in
line with the national regulatory trend, as well as with the
National Association of Insurance Commissioners' Model Act with
respect to service contracts. In addition, the bill will bring
certain vehicle additive products that have historically been
exempt from regulation into the regulatory scheme applicable to
motor vehicle service contracts, ensuring that California
consumers receive the protections afforded them under
California's current laws governing motor vehicle service
contracts."
Arguments in opposition : Warranty Administration Services
(Warranty) writes, "Warranty is a California company that
manufactures various vehicle products intended to extend the
useful life of automobiles. Because Warranty is a product
manufacturer, and has been determined by the Department to meet
the definition of Automobile Product Warrantor, pursuant to
section 116.5 of the Insurance Code, it is not in the business
of insurance. ?AB 2111 attempts to repeal section 116.5, which
would effectively re-classify this manufacturer as an insurance
company subject to regulation by the Department as a vehicle
services contractor. In short, this bill would put warranty out
of business resulting in a loss of at least 50 California jobs."
Double-referred . This bill is double-referred to Assembly
Insurance Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
Service Contract Industry Council (sponsor)
The Association of California Insurance Companies
Opposition
AB 2111
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Warranty Administration Services
Analysis Prepared by : Sarah Weaver / B. & P. / (916) 319-3301