KMS H.B. 3036 75(R) BILL ANALYSIS INSURANCE H.B. 3036 By: Smithee 4-15-97 Committee Report (Unamended) BACKGROUND Article 1.14-1, Sec. 2, Tex. Ins. Code, defines acts which constitute doing the business of insurance in Texas and specifically exempts certain transactions from the definition so that the transactions are not considered unauthorized insurance. Service contracts do not constitute insurance because they are designed to afford protection from internal defects or failure of a product rather than protection against external perils, and they provide service or product replacement rather than indemnity. Consumers benefit from the economical, accessible and reliable means of product service that a service contract provides. Because existing Texas law does not address service contracts, such contracts are not as widely available in Texas as they would be with clear statutory guidelines as to which service contract transactions are permissible. PURPOSE Texas law is currently silent as to the sale of service contracts, but the Texas Attorney General's Office and the Texas Department of Insurance take the position that the sale of service contracts by the manufacturer or seller of the property covered does not constitute the business of insurance and is not subject to the Insurance Code. HB 3036 codifies this position and provides statutory guidance by amending Article 1.14-1, Sec. 2(b), to exempt the sale of service contracts, with certain provisions. The legislation will open the service contract marketplace to Texas consumers because it defines service contracts and excludes service contract transactions from the definition of insurance. Financial Accounting Standards Board Technical Bulletin No. 90-1 makes third-party obligor arrangements preferable for publicly-owned companies. The bill provides for third-party obligor arrangements, and requires that the third party's obligation be insured by a licensed insurer and be subject to a written agreement with the manufacturer or seller of the property. RULEMAKING AUTHORITY It is the committee's opinion that this bill does not expressly grant any additional rulemaking authority to a state officer, department, agency or institution. SECTION BY SECTION ANALYSIS SECTION 1: Amends Article 1.14-1, Sec. 2(b), Ins. Code, by adding subsection (9) to exclude from the definitions of doing the business of insurance, transactions in this state involving service contracts sold by the manufacturer or seller of the property covered by the service contract where the manufacturer or seller or a third-party is the obligor of the service contract, provided that if a third party is the obligor, the third party's obligation is insured by an insurer licensed to business in this state and the third party obligor is acting through or with the written agreement of the manufacturer or seller of the property. Defines "service contract," which does not include mechanical breakdown insurance agreements. SECTION 2: Emergency clause.