BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
AB 2111 (Smyth)
As Amended June 14, 2010
Hearing Date: June 29, 2010
Fiscal: Yes
Urgency: No
BCP:jd
SUBJECT
Service Contracts
DESCRIPTION
This bill would make various changes with regards to service
contracts, including:
permitting third-parties to be "obligors" on service
contracts;
clarifying pro rata refunds for the service contracts;
permitting optical products and accessories of
electronic sets or appliances to be covered by service
contracts;
removing the cap on incidental payments that can be made
by a service contract;
excluding contracts for structural wiring associated
with the delivery of cable, telephone, or broadband
services from the definition of "service contract;" and
exempting certain financial institutions and specified
electrical device manufacturer or contractors from the
definition of "service contract seller."
BACKGROUND
Service contracts (otherwise known as extended warranties or
maintenance agreements) cover a wide range of products,
including electronic and home appliances, furniture, and
jewelry. Persons providing service contracts must register with
the Bureau of Electronic and Appliance Repair, Home Furnishings
and Thermal Insulation, and comply with various laws and
regulations.
(more)
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This bill, sponsored by the Service Contract Industry Council,
would make various clarifying and conforming changes relating to
service contracts. This bill was approved by the Senate
Committee on Business, Professions, and Economic Development on
June 21, 2010.
CHANGES TO EXISTING LAW
1. Existing law authorizes the Bureau of Electronic and
Appliance Repair, Home Furnishings and Thermal Insulation
(Bureau) in the Department of Consumer Affairs to regulate
electronic service dealers, service contract administrators,
and service contract sellers. The Bureau additionally
regulates appliance service dealers, combination service
dealers and the home furnishings and thermal insulation
industries. (Bus. & Prof. Code Sec. 9800 et seq.)
Existing law defines certain terms for purposes of the service
contract law:
"Service contract" means a contract, in writing to
perform, over a fixed period of time or for a specified
duration, services relating to the maintenance,
replacement, or repair of various specified appliances,
equipment, furniture, and products. Those contracts may
include provisions for incidental payment of indemnity
under limited circumstances, but caps the incidental
payment at $250.
"Service contract administrator" means a person, other
than a service contract seller or an insurer admitted to do
business in this state, who performs or arranges, or has an
affiliate who performs or arranges, the collection,
maintenance, or disbursement of moneys to compensate any
party for claims or repairs pursuant to a service contract,
and who also performs other activities, as specified, on
behalf of service contract sellers.
"Service contract seller" or "seller" means a person who
sells or offers to sell a sevice contract to a service
contractholder, 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.
"Service contract reimbursement insurance policy" means
a policy of insurance issued by an insurer who provides
coverage for all obligations and liabilities incurred by a
service contract seller under the terms of the service
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contracts sold in this state. (Bus. & Prof. Code Sec.
9855.)
This bill would revise the definition of "service contract" to
include an electronic set or appliance, as specified,
accessories of those sets or appliances, and optical products.
This bill would exempt contracts to maintain structural
wiring associated with the delivery of cable, telephone, or
other broadband communications services from that definition.
This bill would delete the $250 cap on incidental payments of
indemnity under a service contract.
This bill would permit a service contract administrator to be
an obligor on a service contract if all service contracts
under which the service contract administrator is obligation
to perform are insured under a service contract reimbursement
insurance policy.
This bill would expand the definition of "service contract
seller" or "seller" to also mean a third party, including an
obligor, who is not the seller, manufacturer, or repairer of
the product.
This bill would provide that a "service contract seller" or
"seller" shall not include the following:
a bank or bank holding company, or subsidiary or
affiliate of either, or a financial institute, licensed
under state or federal law, that sells or offers to sell
a service contract unless that entity is financially and
legally obligated under the terms of the contract; or
an electrical device manufacturer or electrical
contractor who constructs, installs, or services units of
an electrical system intended to carry electrical energy
as part of a building's electrical system.
2. Existing law makes it unlawful for any person to act as a
service contractor unless that person first registers with the
bureau and maintains a valid registration. (Bus. & Prof. Code
Sec. 9855.1.)
This bill would provide that, except as provided in the
chapter, service contractors registered in accordance with the
provisions of this chapter are exempt from all provisions of
the Insurance Code.
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This bill would state that a service contract administrator
who is an obligor on a service contract and is registered as a
service contract administrator may perform all the functions
permitted by a seller and shall not be required to register
separately as a seller.
3. Existing law provides that the service contract seller shall
not issue, sell, or offer for sale a service contract unless
he or she complies with certain specified requirements,
including net worth. (Bus. & Prof. Code Sec. 9855.2(a).)
This bill would substitute "he or she complies" with "the
obligor under the service contract has complied."
4. Existing law prohibits a person from transacting any class
of insurance business in this state without first being
admitted for that class. Except as specified, admission is
secured by procuring a certificate of authority from the
Insurance Commissioner. (Ins. Code Sec. 700.)
This bill would provide that unless lawfully transacting the
business of insurance pursuant to a certificate of authority
for the appropriate class, a service contract administrator or
third-party seller acting as an obligor on a service contract
without having a service contract insurance policy covering
all service contracts under which the service contract
administrator or third-party seller is obligated, shall be
deemed to be unlawfully transacting the business of insurance,
and shall be subject to specified felony penalties, and
discipline under the Insurance Code.
5. Existing law sunsets the service contractor provisions on
January 1, 2013.
This bill would extend that sunset date until January 1, 2018.
6. Existing law prohibits a service contract from being
offered for sale or sold that covers any motor vehicle, home
appliance, or home electronic product purchased for use in
this state, unless several elements exist. Those elements
include that the contract is cancelable by the purchaser under
certain conditions. (Civ. Code Sec. 1794.31.)
This bill would remove the requirement that the seller must
indicate in the contract the method for calculating a pro rata
refund in the case of cancellation.
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7. Existing law defines vehicle service contract for purposes
of vehicle sales, and exempts a warranty provided by a vehicle
glass manufacturer from the vehicle service contract
requirements. (Ins. Code Sec. 12800.)
This bill would additionally exempt a warranty provided by a
glass sealant manufacturer from the vehicle service contract
requirements.
COMMENT
1. Stated need for the bill
According to the author:
The deficiency with the current law with respect to vehicle
service contracts is that it is unclear and subject to
multiple interpretations.
The deficiencies with respect to the consumer goods laws are
many. California is the only state in the country that does
not allow third parties to be obligated under a service
contract. This creates significant administrative burdens
for service contract providers who for the most part operate
on a national level. The result is that providers must
restructure their programs in a different manner than it is
structured everywhere else in the county. The current laws
are inconsistent with the NAIC Model Act for service
contracts and this bill would bring the California law more
into line with the NAIC Model.
2. Pro rata refunds under Civil Code Section 1794.41
Under existing law, the Song-Beverly Consumer Warranty Act, no
service contract that covers any motor vehicle, home appliance,
or home electronic product may be offered for sale unless the
contract is cancelable by the purchaser under specified
conditions. Those cancellation provisions generally permit an
individual to cancel a service contract within the first 30 or
60 days, unless the contract provides for a longer period of
time.
If there are no claims against the service contract, the full
amount paid must be refunded by the seller to the purchaser. If
a claim has been made within that period of time, the seller
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must refund a pro rata amount based on either elapsed time or an
objective measure of use, as indicated in the contract. By
removing "as indicated in the contract," this bill would permit
the seller to select which of the two methods for calculating
the amount on a pro rata basis (elapsed time or objective
measure of use) at the time of cancellation.
The author notes that this change would clarify existing law in
a manner consistent with the current interpretation by the
Department of Insurance "which allows a vehicle service contract
provider to calculate refunds due on a cancelled vehicle service
contract based on either elapsed time or mileage with the method
of calculation being selected at the time of cancellation rather
than at the outset of the contract. The result is that refund
calculations are driven by consumer use of their vehicle."
Furthermore, a letter from the Department of Insurance to All
California Licensed Vehicle Service Contract Providers explains
the situation as follows:
. . . the California Department of Insurance began reviewing
and issuing "no objection" letters for VSC forms in 2004.
From that time until March of [2009], the Department did not
object to cancellation clauses that permitted the VSC
provider to decide on the method of pro-rata refund (e.g.,
mileage, time, or other objective measure) at this time of
cancellation, rather than at the time the contract was
written.
In March, the Department reassigned responsibility to review
VSC forms to two new attorneys. Those attorneys analyzed
the California statute governing cancellation requests by
VSC purchasers and refund calculations pursuant to those
requests, California Civil Code section 1794.41. We
determined that [Section] 1794.41 required VSC providers to
decide at the time of contract issuance, and identify on the
contract, which pro-rata refund method would be used in the
event of cancellation. In other words, VSC providers could
not merely recite on the contract multiple pro-ration
methods that might be used, then decide at the time of
cancellation which method to actually use.
Based on our reading of [Section] 1794.41, we began in March
to decline to issue no objection letters to VSC forms
submitted for our review that did not conform to our
understanding of the section's requirements, and have
continued to do so until now. . . . [P]ublic policy arguably
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weighs towards the prior interpretation of allowing VSC
providers to select the pro-ration method at the time they
process a cancellation request. Consequently, the
Department has decided to discontinue objecting to VSC forms
allowing that approach.
The Association of California Insurance Companies (ACIC), in
support, maintains that deleting "as indicated in the contract"
would enable "continuation of a practice that is prevalent
throughout the United States and which best serves the interests
of consumers interested in buying vehicle service contracts."
3. Third party obligors on service contracts
Under existing law, only retailers, manufacturers or repairers
of a product may be the "obligor" on a service contract. (The
"obligor" is the person financially and legally obligated under
the terms of the service contract.) The large majority of those
contracts are sold by retailers, and administered by separate
firms that specialize in service contracts. Third-party
obligors that promise to repair products are considered insurers
and are not permitted to sell service contracts.
This bill would, instead, permit a third party who is not the
seller, manufacturer, or repairer of the product, to sell
service contracts. To ensure that future claims will be met,
the bill would provide that those third parties shall not be an
"obligor" unless they maintain a service contract reimbursement
policy. If a third party fails to have a policy, and is not
licensed as an insurer, that party is deemed to be unlawfully
transacting the business of insurance and subject the individual
to fines and/or imprisonment.
The author, in support of this provision, notes that "California
is the only state in the country that does not allow third
parties to be obligated under a service contract. This creates
significant administrative burdens for service contract
providers who for the most part operate on a national level.
The result is that providers must restructure their programs in
a different manner than it is structured everywhere else in the
county. The current laws are inconsistent with the NAIC Model
Act for service contracts and this bill would bring the
California law more into line with the NAIC Model."
4. Remaining provisions
The remaining provisions of the bill would make other
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conforming, clarifying, and technical changes to provisions
relating to service contracts, including:
permit optical products and accessories of electronic
sets or appliances to be covered by service contracts;
remove the cap on incidental payments that can be made
by a service contract;
excludes contracts for structural wiring associated with
the delivery of cable, telephone, or broadband services
from the definition of "service contract;" and
exempts certain financial institutions and specified
electrical device manufacturer or contractors from the
definition of "service contract seller."
Those provisions, and the ones discussed above, were approved by
the Senate Business, Professions and Economic Development
Committee on June 21, 2010.
Support : Association of California Insurance Companies
Opposition : None Known
HISTORY
Source : Service Contract Industry Council
Related Pending Legislation : None Known
Prior Legislation : None Known
Prior Vote :
Assembly Business and Professions Committee (Ayes 11, Noes 0)
Assembly Insurance Committee (Ayes 12, Noes 0)
Assembly Appropriations Committee (Ayes 16, Noes 0)
Assembly Floor (Ayes 63, Noes 0)
Senate Business, Professions and Economic Development Committee
(Ayes 6, Noes 0)
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