HBA-MPA C.S.S.B. 1775 76(R)    BILL ANALYSIS


Office of House Bill AnalysisC.S.S.B. 1775
By: Sibley
Licensing & Administrative Procedures
4/30/1999
Committee Report (Substituted)



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. 

C.S.S.B. 1775 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.  Requires the commissioner to develop a tiered
fee structure under which registration fees are assessed on providers based
on the number of service contracts sold by providers within the state in
the previous 12-month period.  Provides that information submitted to the
commissioner may be used only to determine the tiered system and is subject
to certain restrictions. 
 
(d)  Provides that the marketing, sale, offering for sale, issuance,
making, proposing to make, and administration of service contracts are
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 one of the financial security requirements adopted under this
section to ensure the faithful performance of a provider's obligations to
its service contract holders, as follows: 
 
(1) 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;  

 (2)(A)  maintain a funded reserve account for its issued and outstanding
obligations. Requires the reserve to 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 require that a reserve
account maintained under this subsection is subject to examination and
review by the commissioner; and  

(B) place in trust with the commissioner a deposit having a value 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 but not less than $25,000, and must meet certain
specified conditions; or 

(3)(A) maintain, either itself or through its parent company, net worth or
stockholders' equity of at least $100 million; and 

(B) provide 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 a copy
of the provider's or the provider's parent company's audited financial
statements showing a net worth of at least $100 million 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.  

(b) Requires no other financial security requirements to be required by the
commissioner for service contract providers. 

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 Casualty Policies),
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(a)  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,
not later than the 10th day after the date of delivery.  Authorizes a
service contract holder to void the service contract at a later time as
permitted by the service contract 
 
(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 if a contract holder returns a service
contract under Subsection (a) and 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.  Amends Section 348.208, Finance Code, by adding Subsection (c),
to provide that service contracts sold by a retail seller of a motor
vehicle to a retail buyer are not subject to Article 1.14-1 (Unauthorized
Insurance), Insurance Code. 

SECTION 3.  (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 4. Emergency clause.
  Effective date: 90 days after adjournment.

COMPARISON OF ORIGINAL TO SUBSTITUTE

C.S.H.B. 2845 differs from the original bill in SECTION 1 (proposed Article
9034,V.T.C.S.), as follows: 

Section 5. The substitute, in proposed Subsection (e), adds new Subdivision
(7), concerning service contracts sold by local exchange telephone
companies, to the list of contracts and agreements exempt from application
of this article. 

Section 11. The substitute adds a provision to proposed Subsection (a)
authorizing a service contract holder to void the service contract at a
later time as permitted by the service contract, and makes a conforming
change to proposed Subsection (b).