HBA-MPA H.B. 2845 76(R) BILL ANALYSIS Office of House Bill AnalysisH.B. 2845 By: Brimer Licensing & Administrative Procedures 4/20/1999 Introduced BACKGROUND AND PURPOSE A service contract is an agreement a consumer obtains for additional cost and for an additional period of time to cover the repair, replacement, or maintenance of goods for failure due to a defect or normal wear and tear. Such contracts are currently unregulated in the state of Texas, exposing consumers to unscrupulous contract providers and leaving them without reasonable remedies to receive the benefits of the contract. H.B. 2845 creates a regulatory system under which service contracts may be sold in this state, giving consumers who purchase service contracts for home electronics, automobiles, computers and other goods protection of a uniform, structured system under which contract providers must operate. RULEMAKING AUTHORITY It is the opinion of the Office of House Bill Analysis that rulemaking authority is expressly delegated to commissioner of the Texas Department of Licensing and Regulation in SECTION 1 (Section 3. Article 9034, V.T.C.S.) of this bill. SECTION BY SECTION ANALYSIS SECTION 1. Amends Title 132, V.T.C.S., by adding Article 9034 as follows: Art. 9034. REGULATION OF CERTAIN SERVICE CONTRACT PROVIDERS Sec. 1. SHORT TITLE. Authorizes this article to be cited as the "Service Contract Regulatory Act." Sec. 2. DEFINITIONS. Defines "administrator," "commissioner," "commission," "consumer," "department," "maintenance agreement," "person," "premium," "provider," "provider fee," "reimbursement insurance policy," "service contract," "service contract holder," and "warranty." Sec. 3. POWERS AND DUTIES OF COMMISSIONER. (a) Authorizes the commissioner of the Texas Department of Licensing and Regulation (commissioner) to adopt rules as necessary to implement this article. (b) Authorizes the commissioner to conduct investigations of providers, administrators, or other persons as necessary to enforce this article and protect service contract holders in this state. Requires a provider to make the provider's records maintained under Section 9 of this article regarding service contracts sold by the provider available to the commissioner as necessary to enable the commissioner to reasonably determine compliance with this article on request of the commissioner. Sec. 4. SERVICE CONTRACT PROVIDERS ADVISORY BOARD. (a) The service contract providers advisory board is an advisory body to the Texas Department of Licensing and Regulation (department). The advisory board shall advise the commissioner in adopting rules and enforcing and administering this article, and the commission in setting fees. (b) Provides that the advisory board is composed of six members appointed by the commissioner who meet certain specified criteria. (c) Provides that a member of the advisory board serves a term of six years with terms expiring on February 1 of odd-numbered years. (d) Requires the commissioner to designate one member of the advisory board to serve as presiding officer. Requires the commissioner or the commissioner's designee to serve as an ex officio nonvoting member of the advisory board. Requires the commissioner to fill any vacancy on the advisory board for the remainder of the unexpired term with an individual who represents the same interests with which the predecessor was identified. (e) Requires the advisory board to meet at least every six months and may meet at other times at the call of the presiding officer. Requires the advisory board to meet at a location in this state designated by the advisory board. (f) Provides that a decision of the advisory board is not effective unless it receives the affirmative vote of at least four members. (g) Provides that the advisory board members serve without compensation. Entitles a member to reimbursement for actual and necessary expenses incurred in performing functions as a member of the advisory board, subject to any applicable limitation on reimbursement provided by the General Appropriations Act. Sec. 5. REGISTRATION REQUIREMENTS; EXEMPTIONS. (a) Prohibits a person from operating as a provider of service contracts sold in this state unless the person is registered with the department. Provides that, except for this registration requirement, providers and service contract sellers, administrators, and other persons marketing, selling, or offering to sell service contracts are exempt from any licensing requirements of this state that relate to the activities regulated under this article. (b) Requires each applicant for registration to file a registration application with the commissioner in the form prescribed by the commissioner that includes evidence satisfactory to the commissioner of compliance with the financial security requirements adopted under Section 6 of this article. (c) Requires each registered provider to pay an annual registration fee not to exceed $2,000 as set by the commission to cover the costs of administrating this article. (d) Provides that the marketing, sale, offering for sale, issuance, making, proposing to make, and administration of service contracts by providers, service contract sellers, administrators, and other persons regulated under this article is exempt from certain specified laws and regulations. (e) Provides that specified contracts and agreements are exempt from the application of this article. Sec. 6. FINANCIAL SECURITY REQUIREMENTS. (a) Requires each provider to comply with the financial security requirements adopted under this section to ensure the faithful performance of a provider's obligations to its service contract holders. (b) Authorizes a provider to insure service contracts under a reimbursement insurance policy issued by an insurer authorized to engage in the business of insurance in this state or under a surplus lines insurance policy issued by an insurer eligible to place coverage in this state. (c) Authorizes a provider to maintain a funded reserve account as provided by Subsection (d) of this section for its obligations under its service contracts issued and outstanding in this state instead of insurance under Subsection (b) of this section, and may: (1) place in trust with the commissioner a security deposit that meets the requirements of Subsection (e) of this section; or (2) maintain, either itself or through its parent company, a net worth or stockholders' equity of at least $100,000,000 as evidenced in the manner provided by Subsection (f) of this section. (d) Provides that the reserves in a funded reserve account established under Subsection (c) of this section must equal at least 40 percent of the total consideration received on the sale of a service contract, less claims paid on that contract, for all in-force contracts, and a reserve account maintained under this subsection is subject to examination and review by the commissioner. (e) Provides that a security deposit used under Subsection (c)(1) of this section must have a value of at least the greater of $25,000 or the amount equal to five percent of the total consideration received on the sale of the service contract, less the claims paid on the contract, for all service contracts issued and in force, and must meet certain specified conditions. (f) Requires the provider to transmit to the commissioner on request a copy of the provider's or the provider's parent company's most recent Form 10-K or Form 20-F, filed with the Securities and Exchange Commission within the last calendar year. Requires the provider to submit a copy of the provider's or the provider's parent company's audited financial statements showing a net worth of the provider or its parent company if the company does not file with the Securities and Exchange Commission. Provides that the parent company must agree to guarantee the obligations of the provider relating to service contracts sold by the provider in this state if the provider's parent company's Form 10-K, Form 20-F or audited financial statements are filed to meet the provider's financial security requirement under this section. Sec. 7. REIMBURSEMENT INSURANCE POLICY. (a) Provides that a reimbursement insurance policy used to comply with Section 6 of this article must state certain information. (b) Prohibits an insurer who issues a reimbursement insurance policy under this article from canceling the policy until the insurer delivers to the provider a written notice of cancellation that complies with the requirements adopted for those notices under Articles 21.49-2A (Cancellation and Nonrenewal of Certain Liability Coverage) and 21.49-2B (Cancellation and Nonrenewal of Certain Property and CasualtyPolicies), Insurance Code. Requires the provider to forward a copy of the cancellation notice to the commissioner not later than the 15th business day after the date the notice is delivered to the provider. Provides that the cancellation of a reimbursement insurance policy does not reduce the insurer's responsibility for service contracts issued by the provider and insured under the policy before the date of the cancellation. (c) Provides that, for purposes of this section, the provider is considered the agent of the insurer who issues the reimbursement insurance policy for purposes of obligating the insurer to service contract holders in accordance with the service contract and this article. (d) Provides that this article does not prevent or limit the right of an insurer who issues a reimbursement insurance policy to seek indemnification or subrogation against a provider if the insurer pays or is obligated to pay a service contract holder any amount that the provider is obligated to pay under the terms of the service contract. Sec. 8. GENERAL PROVIDER OPERATION REQUIREMENTS. (a) Authorizes a provider to appoint an administrator or other designee to be responsible for any or all of the administration or sale of service contracts and for compliance with this article. (b) Prohibits a service contract from being issued, sold, or offered for sale in this state unless the provider has provided to the service contract holder a receipt for, or other written evidence of, the purchase of the service contract, and a copy of the service contract within a reasonable period from the date of purchase. Sec. 9. PROVIDER RECORDS. (a) Requires each provider to maintain accurate accounts, books, and other records regarding transactions regulated under this article including specified information. (b) Requires each provider to retain all records required to be maintained under Subsection (a) of this section at least until the first anniversary of the expiration date under the contract of the specified period of coverage, except as provided by Subsection (d) of this section. (c) Authorizes the records required to be maintained under this section to be maintained in an electronic medium or through other record-keeping technology. Provides that, if a record is maintained in a format other than hard copy, the provider must be able to reformat the record into legible hard copy at the request of the commissioner. (d) Requires a provider who discontinues business in this state shall maintain its records until the provider furnishes the commissioner with proof satisfactory to the commissioner that the provider has discharged all obligations to service contract holders in this state. Sec. 10. REQUIRED DISCLOSURES. (a) Requires each service contract marketed, sold, offered for sale, issued, made, proposed to be made, or administered in this state to be written, printed, or typed in clear understandable language that is easy to read and to disclose the applicable requirements set forth in this section. (b) Provides that a service contract insured under a reimbursement insurance policy under Section 6(b) of this article must contain a statement substantially similar to the following: "Obligations of the provider under this service contract are insured under a service contract reimbursement insurance policy," and other specified information. (c) Provides that a service contract that is not insured under a reimbursement insurance policy must contain a statement substantially similar to the following: "Obligations of the provider under this service contract are backed by the full faith and credit of the provider." (d) Requires each service contract to state the name and address of the provider and shall identify any administrator if different from the provider, the service contract seller, and the service contract holder to the extent that the name of the service contract holder has been furnished by the service contract holder. Provides that the identities of those persons are not required to be preprinted on the service contract and may be added to the service contract at the time of sale. (e) Provides that each service contract must state the purchase price of the contract and the terms under which the contract is sold, and is not required to be preprinted on the service contract and may be negotiated at the time of sale with the service contract holder. (f) Provides that each service contract must state the terms, restrictions, or conditions governing cancellation of the service contract by either the provider or by the service contract holder before the expiration date of the service contract. Requires a provider to mail a written notice of cancellation to the service contract holder at the last known address of the service contract holder contained in the records of the provider before the fifth day preceding the effective date of the cancellation. Provides that prior notice is not required if the reason for cancellation is nonpayment of the provider fee, a material misrepresentation by the service contract holder to the provider, or a substantial breach of duties by the service contract holder relating to the covered product or its use. Provides that the notice must state the effective date of the cancellation and the reason for the cancellation. (g) Provides that each service contract must: (1) state the amount of any deductible, if applicable; (2) specify the products and services to be provided and any limitations, exceptions, or exclusions; (3) specify any restrictions governing the transferability of the service contract; (4) state the duties of the service contract holder, including any duty to protect against any further damage and any requirement to follow owner's manual instructions; and (5) if applicable, state whether the service contract provides for or excludes consequential damages or preexisting conditions. Sec. 11. VOIDING OF CONTRACT. (a) Requires each service contract to require the provider to permit the service contract holder to return the service contract not later than the 20th day after the date the service contract was mailed to the service contract holder or, if the service contract is delivered to the service contract holder at the time of sale or at a later time permitted under the service contract, not later than the 10th day after the date of delivery. (b) Requires the provider to refund to the service contract holder or credit the account of the service contract holder with the full purchase price of the service contract on the timely return of the service contract to the provider, if a claim has not been made under the service contract before its return to the provider, and provides that the service contract is void. Provides that the right provided by this section to void the service contract is not transferable and applies only to the original service contract purchaser. Provides that, if a service contract is voided under this section and the provider does not pay the refund or credit the service contract holder's account before the 46th day after the date of the return of the service contract to the provider, the provider is liable to the contract holder for a penalty in an amount not to exceed 10 percent of the amount outstanding per month. Sec. 12. LIMITATIONS ON PROVIDER NAME. (a) Prohibits a provider from using: (1) in its name the words insurance, casualty, surety, mutual, or any other words descriptive of the insurance, casualty, or surety business; (2) a name deceptively similar to the name or description of any insurance or surety corporation; or (3) a name deceptively similar to the name of any other provider. (b) Authorizes a provider to use the word "guaranty" or a similar word. (c) Provides that this section does not apply to a provider that, before September 1, 1999, used a word prohibited under this section in its name, but that provider must include in each of its service contracts a statement in substantially the following form: "This agreement is not an insurance contract." Sec. 13. PROHIBITED ACTS. (a) Prohibits a provider, or a provider's representative, from, in the provider's service contracts or literature, making, permitting, or causing to be made any false or misleading statement, or deliberately omitting a material statement that would be considered misleading if omitted. (b) Prohibits a person, including a bank, savings and loan association, lending institution, manufacturer, or seller of any product, from requiring the purchase of a service contract as a condition of a loan or the sale of any property. Sec. 14. ENFORCEMENT. (a) Authorizes the commissioner to impose appropriate administrative sanctions, including an administrative penalty as provided by Article 9100 Department of Licensing and Regulation, V.T.C.S., on a finding that a ground for disciplinary action exists under one or more provisions of this article. Prohibits an administrative penalty imposed under this section from exceeding $500 per violation or $10,000 in the aggregate for all violations of a similar nature. (b) Provides that a disciplinary action taken under this article is subject to Section 17(d) (concerning a county or district attorney bringing action to recover civil penalties), Article 9100,V.T.C.S. (c) Authorizes the commissioner to bring an action for injunctive proceedings under Section 18 (Injunctive Relief and Civil Penalties), Article 9100, Revised Statutes, for a threatened or existing violation of this article or the commissioner's orders or rules adopted under this article and may also bring an action for civil penalties as provided by that section. Prohibits that a civil penalty assessed under this subsection from exceeding $2,500 per violation or $50,000 in the aggregate for all violations of a similar nature. (d) Provides that, for purposes of Subsections (a) and (c) of this section, a violation is of a similar nature if the violation consists of the same or a similar course of conduct, action, or practice, regardless of the number of times the act, conduct, or practice determined to be a violation of this article occurred. SECTION 2. (a) Provides that Article 9034,V.T.C.S., as added by this Act, takes effect September 1, 1999, and applies only to a service contract entered into on or after January 1, 2000., and a service contract entered into before that date, and renewed after that date, is not subject to that article. (b) Provides that a person regulated under Article 9034, V.T.C.S., as added by this Act, is not required to comply with that article until January 1, 2000, but may implement the requirements of that article before January 1, 2000. Provides that the failure of a provider or other person to comply with that article or otherwise to administer a service contract plan in the manner required by that article before January 1, 2000, is not admissible in any court, arbitration, or alternative dispute resolution proceeding and may not otherwise be used to prove that the action of any person or the affected service contract was unlawful or otherwise improper. SECTION 3. Emergency clause. Effective date: 90 days after adjournment.