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