BILL ANALYSIS
AB 2111
Page 1
Date of Hearing: April 21, 2010
ASSEMBLY COMMITTEE ON INSURANCE
Jose Solorio, Chair
AB 2111 (Smyth) - As Amended: April 12, 2010
And As Proposed To Be Amended
SUMMARY : Expands the number of parties who may sell service
contracts, redefines a number of terms in the service contract
law, and makes conforming changes to implement these changes.
Specifically, this bill :
1)Clarifies that the definition of "service contract" includes
an "electronic" set or appliance, 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)Clarifies the definition of SCA to ensure that a service
contract seller does not have to be licensed both as a seller
and an SCA due to being affiliated with an SCA.
6)Clarifies the law to ensure that properly licensed service
contract sellers and administrators are not subject to
Department of Insurance (DOI) jurisdiction as insurers.
7)Clarifies the law to ensure that a motor vehicle
lessor-retailer who is not required to obtain a license from
the Department of Motor Vehicles may be a licensed service
contract seller without having to obtain the DMV license.
8)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.
AB 2111
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9)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.
10)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).
11)Deletes the requirement that sellers disclose in the contract
the method of calculating refunds.
12)Clarifies the scope of the vehicle glass exception from the
automobile service contract law by adding "glass sealant" to
the exception.
13)Extends the sunset date on the service contract law 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 an SCA from being an obligor on a service contract.
3)Defines "obligor" as the entity financially and legally
obligated under the terms of a service contract.
4)Requires that a SCRIP be in force for all contracts
administered by an SCA. A SCRIP is an insurance policy issued
by an insurer licensed to transact insurance in California,
that guarantees to payment of service contract benefits in the
event the obligor fails to provide the benefits provided by
the service contract.
5)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
AB 2111
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contract sold by the seller, manufacturer, or repairer of the
product covered by the service contract.
FISCAL EFFECT : Undetermined.
COMMENTS :
1)Purpose of this bill . According to the author's office, the
primary goal of this bill is to conform the California
definition of "service contract seller" to the way it is
defined in all other states. This bill also clarifies several
existing terms and issues that surround service contracts in
Section 9855 of the Business and Professions Code to create
consistency with how other states regulate these contracts and
provide more consumer protections.
2)Background . Under current law as interpreted by BEAR, only a
retailer, manufacturer, or repairer of a product may be the
obligor of a service contract covering that product. This
means that only a company that is somewhere in the stream of
commerce for the product can be an obligor for a service
contract on the 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 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 an SCA or
third party does not have a SCRIP covering each contract that
it sells, then it must be licensed as an insurer.
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3)Author's amendments . The author will be adopting three
amendments that are already reflected in this analysis. One
will eliminate a consequence of current law that forces some
sellers who are not required by the DMV to obtain a DMV
license to obtain one anyway. Two of the amendments will
avoid unintended consequences resulting from some of the
changes the bill is making. The first ensures that entities
that are not "in the chain of commerce" but that are lawful
obligors under the bill do not accidentally end up subject to
licensing requirements as an insurer under the Insurance Code.
The second ensures that a seller/obligor does not have to
obtain a second license as an administrator by virtue of being
affiliated with an administrator.
4)Arguments in support : The Service Contract Industry Council
argues that the 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.
REGISTERED SUPPORT / OPPOSITION :
Support
Service Contract Industry Council
Cal-Tex Protective Coatings
Opposition
None received.
Analysis Prepared by : Mark Rakich / INS. / (916) 319-2086