AN ACT 1-1 relating to the regulation of certain providers of service 1-2 contracts; providing penalties. 1-3 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS: 1-4 SECTION 1. Chapter 20, Title 132, Revised Statutes, is 1-5 amended by adding Article 9034 to read as follows: 1-6 Art. 9034. REGULATION OF CERTAIN SERVICE CONTRACT PROVIDERS 1-7 Sec. 1. SHORT TITLE. This article may be cited as the 1-8 "Service Contract Regulatory Act." 1-9 Sec. 2. DEFINITIONS. In this article: 1-10 (1) "Administrator" means the person responsible for 1-11 the administration of a service contract or service contract plan. 1-12 The term includes a person responsible for any filings required by 1-13 this article. 1-14 (2) "Commissioner" means the commissioner of licensing 1-15 and regulation. 1-16 (3) "Commission" means the Texas Commission of 1-17 Licensing and Regulation. 1-18 (4) "Consumer" means an individual who buys, other 1-19 than for purposes of resale, any tangible personal property that 1-20 is: 1-21 (A) distributed in commerce; and 1-22 (B) normally used for personal, family, or 1-23 household purposes and not for business or research purposes. 1-24 (5) "Department" means the Texas Department of 2-1 Licensing and Regulation. 2-2 (6) "Maintenance agreement" means an agreement of 2-3 limited duration that provides only for scheduled maintenance. 2-4 (7) "Person" means an individual or a partnership, 2-5 company, corporation, association, or other group, however 2-6 organized. 2-7 (8) "Premium" means the consideration paid to an 2-8 insurer for a reimbursement insurance policy. 2-9 (9) "Provider" means a person who is contractually 2-10 obligated to the service contract holder under the terms of the 2-11 service contract. 2-12 (10) "Provider fee" means the consideration paid for a 2-13 service contract. 2-14 (11) "Reimbursement insurance policy" means a policy 2-15 of insurance issued to a provider to: 2-16 (A) provide reimbursement to the provider under 2-17 the terms of the insured service contracts issued or sold by the 2-18 provider; or 2-19 (B) pay on behalf of the provider, in the event 2-20 of the provider's nonperformance, all covered contractual 2-21 obligations incurred by the provider under the terms of the insured 2-22 service contracts issued or sold by the provider. 2-23 (12) "Service contract" means an agreement, entered 2-24 into for a separately stated consideration and for a specified 2-25 term, under which a provider agrees to repair, replace, or maintain 2-26 a product, or provide indemnification for the repair, replacement, 3-1 or maintenance of a product, for operational or structural failure 3-2 caused by a defect in materials or workmanship or by normal wear. 3-3 A service contract may additionally provide for incidental payment 3-4 or indemnity under limited circumstances, including towing, rental, 3-5 and emergency road service, or for the repair or replacement of a 3-6 product for damage resulting from power surges or accidental damage 3-7 incurred in handling the product. 3-8 (13) "Service contract holder" means a person who 3-9 purchases or otherwise holds a service contract. 3-10 (14) "Warranty" means, in relation to a product or 3-11 service, an undertaking that guarantees indemnity for defective 3-12 parts, mechanical or electrical breakdown, labor costs, or other 3-13 remedial measures, such as repair or replacement of the product or 3-14 repetition of services, and that is: 3-15 (A) made solely by the manufacturer, importer, 3-16 or seller of the product or services; 3-17 (B) made without payment of additional 3-18 consideration; 3-19 (C) not negotiated or separated from the sale of 3-20 the product or service; and 3-21 (D) incidental to the sale of the product or 3-22 service. 3-23 Sec. 3. POWERS AND DUTIES OF COMMISSIONER. (a) The 3-24 commissioner may adopt rules as necessary to implement this 3-25 article. 3-26 (b) The commissioner may conduct investigations of 4-1 providers, administrators, or other persons as necessary to enforce 4-2 this article and protect service contract holders in this state. 4-3 On request of the commissioner, a provider shall make the 4-4 provider's records maintained under Section 9 of this article 4-5 regarding service contracts sold by the provider available to the 4-6 commissioner as necessary to enable the commissioner to reasonably 4-7 determine compliance with this article. 4-8 Sec. 4. SERVICE CONTRACT PROVIDERS ADVISORY BOARD. (a) The 4-9 service contract providers advisory board is an advisory body to 4-10 the department. The advisory board shall advise: 4-11 (1) the commissioner in adopting rules and enforcing 4-12 and administering this article; and 4-13 (2) the commission in setting fees. 4-14 (b) The advisory board is composed of six members appointed 4-15 by the commissioner as follows: 4-16 (1) two members must be officers, directors, or 4-17 employees of a provider of service contracts that have been 4-18 approved by the commissioner; 4-19 (2) two members must be officers, directors, or 4-20 employees of a retail outlet or other entity located in this state 4-21 that provides to consumers service contracts approved by the 4-22 commissioner for sale to consumers; 4-23 (3) one member must be an officer, director, or 4-24 employee of an entity approved by the Texas Department of Insurance 4-25 to sell reimbursement insurance policies; and 4-26 (4) one member must be a resident of this state who 5-1 has, as a consumer, a service contract in force in this state at 5-2 the time of the appointment that is issued by a provider registered 5-3 under this article. 5-4 (c) A member of the advisory board serves a term of six 5-5 years with terms expiring on February 1 of odd-numbered years. 5-6 (d) The commissioner shall designate one member of the 5-7 advisory board to serve as presiding officer. The commissioner or 5-8 the commissioner's designee shall serve as an ex officio nonvoting 5-9 member of the advisory board. The commissioner shall fill any 5-10 vacancy on the advisory board for the remainder of the unexpired 5-11 term with an individual who represents the same interests with 5-12 which the predecessor was identified. 5-13 (e) The advisory board shall meet at least every six months 5-14 and may meet at other times at the call of the presiding officer. 5-15 The advisory board shall meet at a location in this state 5-16 designated by the advisory board. 5-17 (f) A decision of the advisory board is not effective unless 5-18 it receives the affirmative vote of at least four members. 5-19 (g) The advisory board members serve without compensation. 5-20 A member is entitled to reimbursement for actual and necessary 5-21 expenses incurred in performing functions as a member of the 5-22 advisory board, subject to any applicable limitation on 5-23 reimbursement provided by the General Appropriations Act. 5-24 Sec. 5. REGISTRATION REQUIREMENTS; EXEMPTIONS. (a) A 5-25 person may not operate as a provider of service contracts sold in 5-26 this state unless the person is registered with the department. 6-1 Except for this registration requirement, providers and service 6-2 contract sellers, administrators, and other persons marketing, 6-3 selling, or offering to sell service contracts are exempt from any 6-4 licensing requirements of this state that relate to the activities 6-5 regulated under this article. 6-6 (b) Each applicant for registration shall file a 6-7 registration application with the commissioner in the form 6-8 prescribed by the commissioner that includes evidence satisfactory 6-9 to the commissioner of compliance with the financial security 6-10 requirements adopted under Section 6 of this article. 6-11 (c) Each registered provider shall pay an annual 6-12 registration fee not to exceed $2,000 as set by the commission to 6-13 cover the costs of administrating this article. The commissioner 6-14 shall develop a tiered fee structure under which registration fees 6-15 are assessed on providers based on the number of service contracts 6-16 sold within this state in the prior 12-month period. The 6-17 information submitted to the commissioner under this section 6-18 regarding the number of service contracts sold by a provider may 6-19 only be used by the commissioner and the department in determining 6-20 the tiered fee structure. Information concerning the number of 6-21 service contracts sold by a provider that is submitted under this 6-22 section is a trade secret and subject to Section 552.110, 6-23 Government Code. 6-24 (d) The marketing, sale, offering for sale, issuance, 6-25 making, proposing to make, and administration of service contracts 6-26 are exempt from: 7-1 (1) the Insurance Code and other laws of this state 7-2 regulating the business of insurance; 7-3 (2) Article 6573b, Revised Statutes; and 7-4 (3) Chapter 722, Transportation Code. 7-5 (e) The following contracts and agreements are specifically 7-6 exempt from the application of this article and are only subject to 7-7 other statutes and laws which specifically apply to them: 7-8 (1) warranties; 7-9 (2) maintenance agreements; 7-10 (3) service contracts sold or offered for sale to 7-11 persons other than consumers; 7-12 (4) residential service contracts sold by entities 7-13 licensed by the Texas Real Estate Commission under Article 6573b, 7-14 Revised Statutes; 7-15 (5) agreements issued by automobile service clubs 7-16 certified under Chapter 722, Transportation Code; 7-17 (6) service contracts sold by a motor vehicle dealer 7-18 on vehicles sold by that dealer if the dealer is the provider and 7-19 is licensed as a motor vehicle dealer pursuant to Subchapter D, 7-20 Texas Motor Vehicle Commission Code (Article 4413(36), Vernon's 7-21 Texas Civil Statutes), and covers its obligations under the service 7-22 contract with a reimbursement insurance policy as defined by 7-23 Section 2(11) of this article; and 7-24 (7) contracts or agreements offered by local exchange 7-25 telephone companies providing repair for inside telephone wiring 7-26 for which the term does not exceed one month and which the consumer 8-1 can terminate before commencing a new term without liability except 8-2 for payment of charges for the current term. 8-3 Sec. 6. FINANCIAL SECURITY REQUIREMENTS. (a) To ensure the 8-4 faithful performance of a provider's obligations to its service 8-5 contract holders, each provider shall comply with one of the 8-6 following financial security requirements: 8-7 (1) insure its service contracts under a reimbursement 8-8 insurance policy issued by an insurer authorized to transact 8-9 insurance in this state or under a surplus lines insurance policy 8-10 issued by an insurer eligible to place coverage in this state as 8-11 regulated under Article 1.14-2, Insurance Code; 8-12 (2)(A) maintain a funded reserve account for its 8-13 obligations under its service contracts issued and outstanding in 8-14 this state. The reserves shall be not less than 40 percent of the 8-15 gross consideration received from consumers, less claims paid, on 8-16 the sale of the service contract for all in-force contracts. The 8-17 reserve account shall be subject to examination and review by the 8-18 commissioner; and 8-19 (B) place in trust with the commissioner a 8-20 financial security deposit, having a value of not less than five 8-21 percent of the gross consideration received from consumers, less 8-22 claims paid, on the sale of the service contract for all service 8-23 contracts issued and outstanding in this state, but not less than 8-24 $25,000, and consisting of: 8-25 (i) a surety bond issued by an authorized 8-26 surety; 9-1 (ii) securities of the type eligible for 9-2 deposit by authorized insurers in this state; 9-3 (iii) a statutory deposit of cash or cash 9-4 equivalents; 9-5 (iv) a letter of credit issued by a 9-6 qualified financial institution; or 9-7 (v) another form of security prescribed by 9-8 rules issued by the commissioner; or 9-9 (3)(A) maintain, or have its parent company maintain, 9-10 a net worth or stockholders' equity of at least $100 million; and 9-11 (B) upon request, provide the commissioner a 9-12 copy of the provider's or the provider's parent company's most 9-13 recent Form 10-K or Form 20-F filed with the Securities and 9-14 Exchange Commission within the last calendar year or, if the 9-15 company does not file with the Securities and Exchange Commission, 9-16 a copy of the provider's or the provider's parent company's audited 9-17 financial statements showing a net worth of the provider or its 9-18 parent company of at least $100 million. If the provider's parent 9-19 company's Form 10-K, Form 20-F, or audited financial statements are 9-20 filed to meet the provider's financial stability requirement, the 9-21 parent company shall agree to guarantee the obligations of the 9-22 provider relating to service contracts sold by the provider in this 9-23 state. 9-24 (b) No other financial security requirements shall be 9-25 required by the commissioner for service contract providers. 9-26 Sec. 7. REIMBURSEMENT INSURANCE POLICY. (a) In order for a 10-1 provider to comply with Section 6 of this article through the use 10-2 of a reimbursement insurance policy, such policy must state that: 10-3 (1) the insurer that issued the reimbursement 10-4 insurance policy shall reimburse or pay on behalf of the provider 10-5 any covered amounts the provider is legally obligated to pay or 10-6 shall provide the service that the provider is legally obligated to 10-7 perform according to the provider's contractual obligations under 10-8 the insured service contract issued or sold by the provider; and 10-9 (2) if the covered service is not provided to a 10-10 service contract holder within 60 days of proof of loss, payment 10-11 shall be made directly from the reimbursement insurer to the 10-12 service contract holder or the reimbursement insurer shall provide 10-13 the required service. 10-14 (b) An insurer that issues a reimbursement insurance policy 10-15 under this article may not cancel the policy until the insurer 10-16 delivers to the provider a written notice of cancellation that 10-17 complies with the requirements adopted for those notices under 10-18 Articles 21.49-2A and 21.49-2B, Insurance Code. The provider shall 10-19 forward a copy of the cancellation notice to the commissioner not 10-20 later than the 15th business day after the date the notice is 10-21 delivered to the provider. The cancellation of a reimbursement 10-22 insurance policy does not reduce the insurer's responsibility for 10-23 service contracts issued by the provider and insured under the 10-24 policy before the date of the cancellation. 10-25 (c) For purposes of this section, the provider is considered 10-26 the agent of the insurer that issues the reimbursement insurance 11-1 policy for purposes of obligating the insurer to service contract 11-2 holders in accordance with the service contract and this article. 11-3 (d) This article does not prevent or limit the right of an 11-4 insurer that issues a reimbursement insurance policy to seek 11-5 indemnification or subrogation against a provider if the insurer 11-6 pays or is obligated to pay a service contract holder any amount 11-7 that the provider is obligated to pay under the terms of the 11-8 service contract. 11-9 Sec. 8. GENERAL PROVIDER OPERATION REQUIREMENTS. (a) A 11-10 provider may appoint an administrator or other designee to be 11-11 responsible for any or all of the administration or sale of service 11-12 contracts and for compliance with this article. 11-13 (b) A service contract may not be issued, sold, or offered 11-14 for sale in this state unless the provider has provided to the 11-15 service contract holder: 11-16 (1) a receipt for, or other written evidence of, the 11-17 purchase of the service contract; and 11-18 (2) a copy of the service contract within a reasonable 11-19 period after the date of purchase. 11-20 Sec. 9. PROVIDER RECORDS. (a) Each provider shall maintain 11-21 accurate accounts, books, and other records regarding transactions 11-22 regulated under this article. The provider's records must include: 11-23 (1) a copy of each unique form of service contract 11-24 sold; 11-25 (2) the name and address of each service contract 11-26 holder, if the name and address have been furnished by the contract 12-1 holder; 12-2 (3) a list of the locations at which the provider's 12-3 service contracts are marketed, sold, or offered for sale; and 12-4 (4) written claims files that contain at least the 12-5 dates and descriptions of claims related to the service contracts. 12-6 (b) Except as provided by Subsection (d) of this section, 12-7 each provider shall retain all records required to be maintained 12-8 under Subsection (a) of this section at least until the first 12-9 anniversary of the expiration date under the contract of the 12-10 specified period of coverage. 12-11 (c) The records required to be maintained under this section 12-12 may be maintained in an electronic medium or through other 12-13 recordkeeping technology. If a record is maintained in a format 12-14 other than hard copy, the provider must be able to reformat the 12-15 record into legible hard copy at the request of the commissioner. 12-16 (d) A provider who discontinues business in this state shall 12-17 maintain its records until the provider furnishes the commissioner 12-18 with proof satisfactory to the commissioner that the provider has 12-19 discharged all obligations to service contract holders in this 12-20 state. 12-21 Sec. 10. REQUIRED DISCLOSURES. (a) Each service contract 12-22 marketed, sold, offered for sale, issued, made, proposed to be 12-23 made, or administered in this state shall be written, printed, or 12-24 typed in clear, understandable language that is easy to read and 12-25 shall disclose the applicable requirements set forth in this 12-26 section. 13-1 (b) A service contract insured under a reimbursement 13-2 insurance policy under Section 6(a) of this article must contain a 13-3 statement substantially similar to the following: "Obligations of 13-4 the provider under this service contract are insured under a 13-5 service contract reimbursement insurance policy." The service 13-6 contract shall state the name and address of the insurer and state 13-7 that in the event covered service is not provided by the service 13-8 contract provider within 60 days of proof of loss by the service 13-9 contract holder, the service contract holder may apply for 13-10 reimbursement directly to the service contract reimbursement 13-11 insurance company. 13-12 (c) A service contract that is not insured under a 13-13 reimbursement insurance policy must contain a statement 13-14 substantially similar to the following: "Obligations of the 13-15 provider under this service contract are backed by the full faith 13-16 and credit of the provider." 13-17 (d) Each service contract shall state the name and address 13-18 of the provider and shall identify any administrator, if different 13-19 from the provider, the service contract seller, and the service 13-20 contract holder, to the extent that the name of the service 13-21 contract holder has been furnished by the service contract holder. 13-22 The identities of those persons are not required to be preprinted 13-23 on the service contract and may be added to the service contract at 13-24 the time of sale. 13-25 (e) Each service contract must state the purchase price of 13-26 the contract and the terms under which the contract is sold. The 14-1 purchase price is not required to be preprinted on the service 14-2 contract and may be negotiated at the time of sale with the service 14-3 contract holder. 14-4 (f) Each service contract must state the terms, 14-5 restrictions, or conditions governing cancellation of the service 14-6 contract by either the provider or the service contract holder 14-7 before the expiration date of the service contract. A provider 14-8 shall mail a written notice of cancellation to the service contract 14-9 holder at the last known address of the service contract holder 14-10 contained in the records of the provider before the fifth day 14-11 preceding the effective date of the cancellation. Prior notice is 14-12 not required if the reason for cancellation is nonpayment of the 14-13 provider fee, a material misrepresentation by the service contract 14-14 holder to the provider, or a substantial breach of duties by the 14-15 service contract holder relating to the covered product or its use. 14-16 The notice must state the effective date of the cancellation and 14-17 the reason for the cancellation. 14-18 (g) Each service contract must: 14-19 (1) state the amount of any deductible, if applicable; 14-20 (2) specify the products and services to be provided 14-21 and any limitations, exceptions, or exclusions; 14-22 (3) specify any restrictions governing the 14-23 transferability of the service contract; 14-24 (4) state the duties of the service contract holder, 14-25 including any duty to protect against any further damage and any 14-26 requirement to follow owner's manual instructions; and 15-1 (5) if applicable, state whether the service contract 15-2 provides for or excludes consequential damages or preexisting 15-3 conditions. 15-4 Sec. 11. VOIDING OF CONTRACT. (a) Each service contract 15-5 shall require the provider to permit the service contract holder to 15-6 return the service contract not later than the 20th day after the 15-7 date the service contract was mailed to the service contract holder 15-8 or, if the service contract is delivered to the service contract 15-9 holder at the time of sale, not later than the 10th day after the 15-10 date of delivery. A service contract holder may void the service 15-11 contract at a later time as permitted by the service contract. 15-12 (b) If a contract holder returns a service contract under 15-13 Subsection (a) of this section and a claim has not been made under 15-14 the service contract before its return to the provider, the service 15-15 contract is void and the provider shall refund to the service 15-16 contract holder or credit to the account of the service contract 15-17 holder the full purchase price of the service contract. The right 15-18 provided by this section to void the service contract is not 15-19 transferable and applies only to the original service contract 15-20 purchaser. If a service contract is voided under this section and 15-21 the provider does not pay the refund or credit the service contract 15-22 holder's account before the 46th day after the date of the return 15-23 of the service contract to the provider, the provider is liable to 15-24 the contract holder for a penalty in an amount not to exceed 10 15-25 percent of the amount outstanding per month. 15-26 Sec. 12. LIMITATIONS ON PROVIDER NAME. (a) A provider may 16-1 not use: 16-2 (1) in its name the words insurance, casualty, surety, 16-3 mutual, or any other words descriptive of the insurance, casualty, 16-4 or surety business; 16-5 (2) a name deceptively similar to the name or 16-6 description of any insurance or surety corporation; or 16-7 (3) a name deceptively similar to the name of any 16-8 other provider. 16-9 (b) A provider may use the word "guaranty" or a similar 16-10 word. 16-11 (c) This section does not apply to a provider that, before 16-12 September 1, 1999, used a word prohibited under this section in its 16-13 name, but that provider must include in each of its service 16-14 contracts a statement in substantially the following form: "This 16-15 agreement is not an insurance contract." 16-16 Sec. 13. PROHIBITED ACTS. (a) A provider, or a provider's 16-17 representative, may not, in the provider's service contracts or 16-18 literature: 16-19 (1) make, permit, or cause to be made any false or 16-20 misleading statement; or 16-21 (2) deliberately omit a material statement that would 16-22 be considered misleading if omitted. 16-23 (b) A person, including a bank, savings and loan 16-24 association, lending institution, manufacturer, or seller of any 16-25 product, may not require the purchase of a service contract as a 16-26 condition of a loan or the sale of any property. 17-1 Sec. 14. ENFORCEMENT. (a) On a finding that a ground for 17-2 disciplinary action exists under one or more provisions of this 17-3 article, the commissioner may impose appropriate administrative 17-4 sanctions, including an administrative penalty as provided by 17-5 Article 9100, Revised Statutes. An administrative penalty imposed 17-6 under this section may not exceed $500 per violation or $10,000 in 17-7 the aggregate for all violations of a similar nature. 17-8 (b) A disciplinary action taken under this article is 17-9 subject to Section 17(d), Article 9100, Revised Statutes. 17-10 (c) The commissioner may bring an action for injunctive 17-11 proceedings under Section 18, Article 9100, Revised Statutes, for a 17-12 threatened or existing violation of this article or the 17-13 commissioner's orders or rules adopted under this article and may 17-14 also bring an action for civil penalties as provided by that 17-15 section. A civil penalty assessed under this subsection may not 17-16 exceed $2,500 per violation or $50,000 in the aggregate for all 17-17 violations of a similar nature. 17-18 (d) For purposes of Subsections (a) and (c) of this section, 17-19 a violation is of a similar nature if the violation consists of the 17-20 same or a similar course of conduct, action, or practice, 17-21 regardless of the number of times the act, conduct, or practice 17-22 determined to be a violation of this article occurred. 17-23 SECTION 2. Section 348.208, Finance Code, is amended by 17-24 adding Subsection (c) to read as follows: 17-25 (c) Notwithstanding any other law, service contracts sold by 17-26 a retail seller of a motor vehicle to a retail buyer are not 18-1 subject to 1.14-1, Insurance Code. 18-2 SECTION 3. (a) Article 9034, Revised Statutes, as added by 18-3 this Act, takes effect September 1, 1999, and applies only to a 18-4 service contract entered into on or after January 1, 2000. A 18-5 service contract entered into before that date and renewed after 18-6 that date is not subject to that article. 18-7 (b) A person regulated under Article 9034, Revised Statutes, 18-8 as added by this Act, is not required to comply with that article 18-9 until January 1, 2000, but may implement the requirements of that 18-10 article before January 1, 2000. The failure of a provider or other 18-11 person to comply with that article or otherwise to administer a 18-12 service contract plan in the manner required by that article before 18-13 January 1, 2000, is not admissible in any court, arbitration, or 18-14 alternative dispute resolution proceeding and may not otherwise be 18-15 used to prove that the action of any person or the affected service 18-16 contract was unlawful or otherwise improper. 18-17 SECTION 4. The importance of this legislation and the 18-18 crowded condition of the calendars in both houses create an 18-19 emergency and an imperative public necessity that the 18-20 constitutional rule requiring bills to be read on three several 18-21 days in each house be suspended, and this rule is hereby suspended. _______________________________ _______________________________ President of the Senate Speaker of the House I hereby certify that S.B. No. 1775 passed the Senate on April 14, 1999, by a viva-voce vote; and that the Senate concurred in House amendment on May 28, 1999, by a viva-voce vote. _______________________________ Secretary of the Senate I hereby certify that S.B. No. 1775 passed the House, with amendment, on May 26, 1999, by a non-record vote. _______________________________ Chief Clerk of the House Approved: _______________________________ Date _______________________________ Governor