By Brimer H.B. No. 2845 76R6163 MXM-F A BILL TO BE ENTITLED 1-1 AN ACT 1-2 relating to the regulation of certain providers of service 1-3 contracts. 1-4 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS: 1-5 SECTION 1. Title 132, Revised Statutes, is amended by adding 1-6 Article 9034 to read as follows: 1-7 Art. 9034. REGULATION OF CERTAIN SERVICE CONTRACT PROVIDERS 1-8 Sec. 1. SHORT TITLE. This article may be cited as the 1-9 "Service Contract Regulatory Act." 1-10 Sec. 2. DEFINITIONS. In this article: 1-11 (1) "Administrator" means the person responsible for 1-12 the administration of a service contract or service contract plan. 1-13 The term includes a person responsible for any filings required by 1-14 this article. 1-15 (2) "Commissioner" means the commissioner of the Texas 1-16 Department of Licensing and Regulation. 1-17 (3) "Commission" means the Texas Commission of 1-18 Licensing and Regulation. 1-19 (4) "Consumer" means an individual who buys, other 1-20 than for purposes of resale, any tangible personal property that 1-21 is: 1-22 (A) distributed in commerce; and 1-23 (B) normally used for personal, family, or 1-24 household purposes and not for business or research purposes. 2-1 (5) "Department" means the Texas Department of 2-2 Licensing and Regulation. 2-3 (6) "Maintenance agreement" means an agreement of 2-4 limited duration that provides only for scheduled maintenance. 2-5 (7) "Person" means an individual, partnership, 2-6 company, corporation, association, or other group, however 2-7 organized. 2-8 (8) "Premium" means the consideration paid to an 2-9 insurer for a reimbursement insurance policy. 2-10 (9) "Provider" means a person who is contractually 2-11 obligated to the service contract holder under the terms of the 2-12 service contract. 2-13 (10) "Provider fee" means the consideration paid for a 2-14 service contract. 2-15 (11) "Reimbursement insurance policy" means a policy 2-16 of insurance issued to a provider to reimburse the provider for, or 2-17 to pay on behalf of the provider, all contractual obligations 2-18 incurred by the provider under the terms of service contracts 2-19 issued or sold by the provider that are covered by the policy. 2-20 (12) "Service contract" means an agreement, entered 2-21 into for a separately stated consideration and for a specified 2-22 term, under which a provider agrees to repair, replace, or maintain 2-23 a product or provide indemnification for the repair, replacement, 2-24 or maintenance of a product, for operational or structural failure 2-25 caused by a defect in materials or workmanship, or by normal wear. 2-26 A service contract may additionally provide for incidental payment 2-27 or indemnity under limited circumstances, including towing, rental, 3-1 and emergency road service, or for the repair or replacement of a 3-2 product for damage resulting from power surges or accidental damage 3-3 incurred in handling the product. 3-4 (13) "Service contract holder" means a person who 3-5 purchases or otherwise holds a service contract. 3-6 (14) "Warranty" means, in relation to a product or 3-7 service, an undertaking that guarantees indemnity for defective 3-8 parts, mechanical or electrical breakdown, labor costs, or other 3-9 remedial measures, such as repair or replacement of the product or 3-10 repetition of services, that is: 3-11 (A) made solely by the manufacturer, importer, 3-12 or seller of the product or services; 3-13 (B) made without payment of additional 3-14 consideration; 3-15 (C) not negotiated or separated from the sale of 3-16 the product or services; and 3-17 (D) incidental to the sale of the product or 3-18 services. 3-19 Sec. 3. POWERS AND DUTIES OF COMMISSIONER. (a) The 3-20 commissioner may adopt rules as necessary to implement this 3-21 article. 3-22 (b) The commissioner may conduct investigations of 3-23 providers, administrators, or other persons as necessary to enforce 3-24 this article and protect service contract holders in this state. On 3-25 request of the commissioner, a provider shall make the provider's 3-26 records maintained under Section 9 of this article regarding 3-27 service contracts sold by the provider available to the 4-1 commissioner as necessary to enable the commissioner to reasonably 4-2 determine compliance with this article. 4-3 Sec. 4. SERVICE CONTRACT PROVIDERS ADVISORY BOARD. (a) The 4-4 service contract providers advisory board is an advisory body to 4-5 the department. The advisory board shall advise: 4-6 (1) the commissioner in adopting rules and enforcing 4-7 and administering this article; and 4-8 (2) the commission in setting fees. 4-9 (b) The advisory board is composed of six members appointed 4-10 by the commissioner as follows: 4-11 (1) two members must be officers, directors, or 4-12 employees of a provider of service contracts that have been 4-13 approved by the commissioner; 4-14 (2) two members must be officers, directors, or 4-15 employees of a retail outlet or other entity located in this state 4-16 that provides to consumers service contracts approved by the 4-17 commissioner for sale to consumers; 4-18 (3) one member must be an officer, director, or 4-19 employee of an entity approved by the Texas Department of Insurance 4-20 to sell reimbursement insurance policies; and 4-21 (4) one member must be a resident of this state who 4-22 has, as a consumer, a service contract in force in this state at 4-23 the time of the appointment that is issued by a provider registered 4-24 under this article. 4-25 (c) A member of the advisory board serves a term of six 4-26 years with terms expiring on February 1 of odd-numbered years. 4-27 (d) The commissioner shall designate one member of the 5-1 advisory board to serve as presiding officer. The commissioner or 5-2 the commissioner's designee shall serve as an ex officio nonvoting 5-3 member of the advisory board. The commissioner shall fill any 5-4 vacancy on the advisory board for the remainder of the unexpired 5-5 term with an individual who represents the same interests with 5-6 which the predecessor was identified. 5-7 (e) The advisory board shall meet at least every six months 5-8 and may meet at other times at the call of the presiding officer. 5-9 The advisory board shall meet at a location in this state 5-10 designated by the advisory board. 5-11 (f) A decision of the advisory board is not effective unless 5-12 it receives the affirmative vote of at least four members. 5-13 (g) The advisory board members serve without compensation. A 5-14 member is entitled to reimbursement for actual and necessary 5-15 expenses incurred in performing functions as a member of the 5-16 advisory board, subject to any applicable limitation on 5-17 reimbursement provided by the General Appropriations Act. 5-18 Sec. 5. REGISTRATION REQUIREMENTS; EXEMPTIONS. (a) A 5-19 person may not operate as a provider of service contracts sold in 5-20 this state unless the person is registered with the department. 5-21 Except for this registration requirement, providers and service 5-22 contract sellers, administrators, and other persons marketing, 5-23 selling, or offering to sell service contracts are exempt from any 5-24 licensing requirements of this state that relate to the activities 5-25 regulated under this article. 5-26 (b) Each applicant for registration shall file a 5-27 registration application with the commissioner in the form 6-1 prescribed by the commissioner that includes evidence satisfactory 6-2 to the commissioner of compliance with the financial security 6-3 requirements adopted under Section 6 of this article. 6-4 (c) Each registered provider shall pay an annual 6-5 registration fee not to exceed $2,000 as set by the commission to 6-6 cover the costs of administrating this article. 6-7 (d) The marketing, sale, offering for sale, issuance, 6-8 making, proposing to make, and administration of service contracts 6-9 by providers, service contract sellers, administrators, and other 6-10 persons regulated under this article is exempt from: 6-11 (1) the Insurance Code and other laws of this state 6-12 regulating the business of insurance; 6-13 (2) Article 6573b, Revised Statutes; and 6-14 (3) Chapter 722, Transportation Code. 6-15 (e) The following contracts and agreements are specifically 6-16 exempt from the application of this article: 6-17 (1) warranties; 6-18 (2) maintenance agreements; 6-19 (3) service contracts sold or offered for sale to 6-20 persons other than consumers; 6-21 (4) residential service contracts sold by entities 6-22 licensed by the Texas Real Estate Commission under Article 6573b, 6-23 Revised Statutes; and 6-24 (5) agreements issued by automobile service clubs 6-25 certified by Chapter 722, Transportation Code. 6-26 Sec. 6. FINANCIAL SECURITY REQUIREMENTS. (a) To ensure the 6-27 faithful performance of a provider's obligations to its service 7-1 contract holders, each provider shall comply with the financial 7-2 security requirements adopted under this section. 7-3 (b) A provider may insure service contracts under a 7-4 reimbursement insurance policy issued by an insurer authorized to 7-5 engage in the business of insurance in this state or under a 7-6 surplus lines insurance policy issued by an insurer eligible to 7-7 place coverage in this state under Article 1.14-2, Insurance Code. 7-8 (c) Instead of insurance under Subsection (b) of this 7-9 section, a provider may maintain a funded reserve account as 7-10 provided by Subsection (d) of this section for its obligations 7-11 under its service contracts issued and outstanding in this state, 7-12 and may: 7-13 (1) place in trust with the commissioner a security 7-14 deposit that meets the requirements of Subsection (e) of this 7-15 section; or 7-16 (2) maintain, either itself or through its parent 7-17 company, a net worth or stockholders' equity of at least 7-18 $100,000,000 as evidenced in the manner provided by Subsection (f) 7-19 of this section. 7-20 (d) The reserves in a funded reserve account established 7-21 under Subsection (c) of this section must equal at least 40 percent 7-22 of the total consideration received on the sale of a service 7-23 contract, less claims paid on that contract, for all in-force 7-24 contracts. A reserve account maintained under this subsection is 7-25 subject to examination and review by the commissioner. 7-26 (e) A security deposit used under Subsection (c)(1) of this 7-27 section must have a value of at least the greater of $25,000 or the 8-1 amount equal to five percent of the total consideration received on 8-2 the sale of the service contract, less the claims paid on the 8-3 contract, for all service contracts issued and in force, and must 8-4 consist of: 8-5 (1) a surety bond issued by an authorized surety; 8-6 (2) securities of the type eligible for deposit by 8-7 authorized insurers in this state; 8-8 (3) a deposit of cash or cash equivalents; 8-9 (4) a letter of credit issued by a qualified financial 8-10 institution; or 8-11 (5) another form of security prescribed by rules 8-12 issued by the commissioner. 8-13 (f) If the provider establishes financial security by 8-14 meeting the net worth required under Subsection (c)(2) of this 8-15 section, the provider shall transmit to the commissioner on 8-16 request a copy of the provider's or the provider's parent company's 8-17 most recent Form 10-K or Form 20-F, filed with the Securities and 8-18 Exchange Commission within the last calendar year. If the company 8-19 does not file with the Securities and Exchange Commission, the 8-20 provider shall submit a copy of the provider's or the provider's 8-21 parent company's audited financial statements showing a net worth 8-22 of the provider or its parent company. If the provider's parent 8-23 company's Form 10-K, Form 20-F or audited financial statements are 8-24 filed to meet the provider's financial security requirement under 8-25 this section, the parent company must agree to guarantee the 8-26 obligations of the provider relating to service contracts sold by 8-27 the provider in this state. 9-1 Sec. 7. REIMBURSEMENT INSURANCE POLICY. (a) A 9-2 reimbursement insurance policy used to comply with Section 6 of 9-3 this article must state that: 9-4 (1) the insurer issuing the policy shall: 9-5 (A) reimburse or pay on behalf of the provider 9-6 any covered amounts the provider is legally obligated to pay; or 9-7 (B) provide the service that the provider is 9-8 legally obligated to perform according to the provider's 9-9 contractual obligation under the insured service contract issued or 9-10 sold by the provider; and 9-11 (2) if the covered service is not provided to the 9-12 service contract holder before the 61st day after the date on which 9-13 the contract holder submits proof of loss to the provider, the 9-14 insurer shall make the payment directly to the service contract 9-15 holder or provide the required service. 9-16 (b) An insurer who issues a reimbursement insurance policy 9-17 under this article may not cancel the policy until the insurer 9-18 delivers to the provider a written notice of cancellation that 9-19 complies with the requirements adopted for those notices under 9-20 Articles 21.49-2A and 21.49-2B, Insurance Code. The provider shall 9-21 forward a copy of the cancellation notice to the commissioner not 9-22 later than the 15th business day after the date the notice is 9-23 delivered to the provider. The cancellation of a reimbursement 9-24 insurance policy does not reduce the insurer's responsibility for 9-25 service contracts issued by the provider and insured under the 9-26 policy before the date of the cancellation. 9-27 (c) For purposes of this section, the provider is considered 10-1 the agent of the insurer who issues the reimbursement insurance 10-2 policy for purposes of obligating the insurer to service contract 10-3 holders in accordance with the service contract and this article. 10-4 (d) This article does not prevent or limit the right of an 10-5 insurer who issues a reimbursement insurance policy to seek 10-6 indemnification or subrogation against a provider if the insurer 10-7 pays or is obligated to pay a service contract holder any amount 10-8 that the provider is obligated to pay under the terms of the 10-9 service contract. 10-10 Sec. 8. GENERAL PROVIDER OPERATION REQUIREMENTS. (a) A 10-11 provider may appoint an administrator or other designee to be 10-12 responsible for any or all of the administration or sale of service 10-13 contracts and for compliance with this article. 10-14 (b) A service contract may not be issued, sold, or offered 10-15 for sale in this state unless the provider has provided to the 10-16 service contract holder: 10-17 (1) a receipt for, or other written evidence of, the 10-18 purchase of the service contract; and 10-19 (2) a copy of the service contract within a reasonable 10-20 period from the date of purchase. 10-21 Sec. 9. PROVIDER RECORDS. (a) Each provider shall maintain 10-22 accurate accounts, books, and other records regarding transactions 10-23 regulated under this article. The provider's records must include: 10-24 (1) a copy of each unique form of service contract 10-25 sold; 10-26 (2) the name and address of each service contract 10-27 holder, if the name and address have been furnished by the contract 11-1 holder; 11-2 (3) a list of the locations at which the provider's 11-3 service contracts are marketed, sold, or offered for sale; and 11-4 (4) written claims files that contain at least the 11-5 dates and description of claims related to the service contracts. 11-6 (b) Except as provided by Subsection (d) of this section, 11-7 each provider shall retain all records required to be maintained 11-8 under Subsection (a) of this section at least until the first 11-9 anniversary of the expiration date under the contract of the 11-10 specified period of coverage. 11-11 (c) The records required to be maintained under this section 11-12 may be maintained in an electronic medium or through other 11-13 record-keeping technology. If a record is maintained in a format 11-14 other than hard copy, the provider must be able to reformat the 11-15 record into legible hard copy at the request of the commissioner. 11-16 (d) A provider who discontinues business in this state shall 11-17 maintain its records until the provider furnishes the commissioner 11-18 with proof satisfactory to the commissioner that the provider has 11-19 discharged all obligations to service contract holders in this 11-20 state. 11-21 Sec. 10. REQUIRED DISCLOSURES. (a) Each service contract 11-22 marketed, sold, offered for sale, issued, made, proposed to be 11-23 made, or administered in this state shall be written, printed, or 11-24 typed in clear understandable language that is easy to read and 11-25 shall disclose the applicable requirements set forth in this 11-26 section. 11-27 (b) A service contract insured under a reimbursement 12-1 insurance policy under Section 6(b) of this article must contain a 12-2 statement substantially similar to the following: "Obligations of 12-3 the provider under this service contract are insured under a 12-4 service contract reimbursement insurance policy." The service 12-5 contract must state the name and address of the insurer and state 12-6 that if covered service is not provided by the service contract 12-7 provider before the 61st day after the date of submission to the 12-8 provider of proof of loss by the service contract holder, the 12-9 service contract holder may apply for reimbursement directly to the 12-10 service contract reimbursement insurance company. 12-11 (c) A service contract that is not insured under a 12-12 reimbursement insurance policy must contain a statement 12-13 substantially similar to the following: "Obligations of the 12-14 provider under this service contract are backed by the full faith 12-15 and credit of the provider." 12-16 (d) Each service contract shall state the name and address 12-17 of the provider and shall identify any administrator if different 12-18 from the provider, the service contract seller, and the service 12-19 contract holder to the extent that the name of the service contract 12-20 holder has been furnished by the service contract holder. The 12-21 identities of those persons are not required to be preprinted on 12-22 the service contract and may be added to the service contract at 12-23 the time of sale. 12-24 (e) Each service contract must state the purchase price of 12-25 the contract and the terms under which the contract is sold. The 12-26 purchase price is not required to be preprinted on the service 12-27 contract and may be negotiated at the time of sale with the service 13-1 contract holder. 13-2 (f) Each service contract must state the terms, 13-3 restrictions, or conditions governing cancellation of the service 13-4 contract by either the provider or by the service contract holder 13-5 before the expiration date of the service contract. A provider 13-6 shall mail a written notice of cancellation to the service contract 13-7 holder at the last known address of the service contract holder 13-8 contained in the records of the provider before the fifth day 13-9 preceding the effective date of the cancellation. Prior notice is 13-10 not required if the reason for cancellation is nonpayment of the 13-11 provider fee, a material misrepresentation by the service contract 13-12 holder to the provider, or a substantial breach of duties by the 13-13 service contract holder relating to the covered product or its use. 13-14 The notice must state the effective date of the cancellation and 13-15 the reason for the cancellation. 13-16 (g) Each service contract must: 13-17 (1) state the amount of any deductible, if applicable; 13-18 (2) specify the products and services to be provided 13-19 and any limitations, exceptions, or exclusions; 13-20 (3) specify any restrictions governing the 13-21 transferability of the service contract; 13-22 (4) state the duties of the service contract holder, 13-23 including any duty to protect against any further damage and any 13-24 requirement to follow owner's manual instructions; and 13-25 (5) if applicable, state whether the service contract 13-26 provides for or excludes consequential damages or preexisting 13-27 conditions. 14-1 Sec. 11. VOIDING OF CONTRACT. (a) Each service contract 14-2 shall require the provider to permit the service contract holder to 14-3 return the service contract not later than the 20th day after the 14-4 date the service contract was mailed to the service contract holder 14-5 or, if the service contract is delivered to the service contract 14-6 holder at the time of sale or at a later time permitted under the 14-7 service contract, not later than the 10th day after the date of 14-8 delivery. 14-9 (b) On the timely return of the service contract to the 14-10 provider, if a claim has not been made under the service contract 14-11 before its return to the provider, the service contract is void and 14-12 the provider shall refund to the service contract holder or credit 14-13 the account of the service contract holder with the full purchase 14-14 price of the service contract. The right provided by this section 14-15 to void the service contract is not transferable and applies only 14-16 to the original service contract purchaser. If a service contract 14-17 is voided under this section and the provider does not pay the 14-18 refund or credit the service contract holder's account before the 14-19 46th day after the date of the return of the service contract to 14-20 the provider, the provider is liable to the contract holder for a 14-21 penalty in an amount not to exceed 10 percent of the amount 14-22 outstanding per month. 14-23 Sec. 12. LIMITATIONS ON PROVIDER NAME. (a) A provider may 14-24 not use: 14-25 (1) in its name the words insurance, casualty, surety, 14-26 mutual, or any other words descriptive of the insurance, casualty, 14-27 or surety business; 15-1 (2) a name deceptively similar to the name or 15-2 description of any insurance or surety corporation; or 15-3 (3) a name deceptively similar to the name of any 15-4 other provider. 15-5 (b) A provider may use the word "guaranty" or a similar 15-6 word. 15-7 (c) This section does not apply to a provider that, before 15-8 September 1, 1999, used a word prohibited under this section in its 15-9 name, but that provider must include in each of its service 15-10 contracts a statement in substantially the following form: "This 15-11 agreement is not an insurance contract." 15-12 Sec. 13. PROHIBITED ACTS. (a) A provider, or a provider's 15-13 representative, may not, in the provider's service contracts or 15-14 literature: 15-15 (1) make, permit, or cause to be made any false or 15-16 misleading statement; or 15-17 (2) deliberately omit a material statement that would 15-18 be considered misleading if omitted. 15-19 (b) A person, including a bank, savings and loan 15-20 association, lending institution, manufacturer, or seller of any 15-21 product, may not require the purchase of a service contract as a 15-22 condition of a loan or the sale of any property. 15-23 Sec. 14. ENFORCEMENT. (a) On a finding that a ground for 15-24 disciplinary action exists under one or more provisions of this 15-25 article, the commissioner may impose appropriate administrative 15-26 sanctions, including an administrative penalty as provided by 15-27 Article 9100, Revised Statutes. An administrative penalty imposed 16-1 under this section may not exceed $500 per violation or $10,000 in 16-2 the aggregate for all violations of a similar nature. 16-3 (b) A disciplinary action taken under this article is 16-4 subject to Section 17(d), Article 9100, Revised Statutes. 16-5 (c) The commissioner may bring an action for injunctive 16-6 proceedings under Section 18, Article 9100, Revised Statutes, for a 16-7 threatened or existing violation of this article or the 16-8 commissioner's orders or rules adopted under this article and may 16-9 also bring an action for civil penalties as provided by that 16-10 section. A civil penalty assessed under this subsection may not 16-11 exceed $2,500 per violation or $50,000 in the aggregate for all 16-12 violations of a similar nature. 16-13 (d) For purposes of Subsections (a) and (c) of this section, 16-14 a violation is of a similar nature if the violation consists of the 16-15 same or a similar course of conduct, action, or practice, 16-16 regardless of the number of times the act, conduct, or practice 16-17 determined to be a violation of this article occurred. 16-18 SECTION 2. (a) Article 9034, Revised Statutes, as added by 16-19 this Act, takes effect September 1, 1999, and applies only to a 16-20 service contract entered into on or after January 1, 2000. A 16-21 service contract entered into before that date, and renewed after 16-22 that date, is not subject to that article. 16-23 (b) A person regulated under Article 9034, Revised Statutes, 16-24 as added by this Act, is not required to comply with that article 16-25 until January 1, 2000, but may implement the requirements of that 16-26 article before January 1, 2000. The failure of a provider or other 16-27 person to comply with that article or otherwise to administer a 17-1 service contract plan in the manner required by that article before 17-2 January 1, 2000, is not admissible in any court, arbitration, or 17-3 alternative dispute resolution proceeding and may not otherwise be 17-4 used to prove that the action of any person or the affected service 17-5 contract was unlawful or otherwise improper. 17-6 SECTION 3. The importance of this legislation and the 17-7 crowded condition of the calendars in both houses create an 17-8 emergency and an imperative public necessity that the 17-9 constitutional rule requiring bills to be read on three several 17-10 days in each house be suspended, and this rule is hereby suspended.