By Sibley S.B. No. 1775 Substitute the following for S.B. No. 1775: By Haggerty C.S.S.B. No. 1775 A BILL TO BE ENTITLED 1-1 AN ACT 1-2 relating to the regulation of certain providers of service 1-3 contracts; providing penalties. 1-4 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS: 1-5 SECTION 1. SECTION 1. Title 132, Revised Statutes, is 1-6 amended by adding 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 licensing 1-16 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 or a 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: 2-17 (A) provide reimbursement to the provider under 2-18 the terms of the insured service contracts issued or sold by the 2-19 provider; or 2-20 (B) pay on behalf of the provider, in the event 2-21 of the provider's nonperformance, all covered contractual 2-22 obligations incurred by the provider under the terms of the insured 2-23 service contracts issued or sold by the provider. 2-24 (12) "Service contract" means an agreement, entered 2-25 into for a separately stated consideration and for a specified 2-26 term, under which a provider agrees to repair, replace, or maintain 2-27 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 3-27 providers, administrators, or other persons as necessary to enforce 4-1 this article and protect service contract holders in this state. 4-2 On request of the commissioner, a provider shall make the 4-3 provider's records maintained under Section 9 of this article 4-4 regarding service contracts sold by the provider available to the 4-5 commissioner as necessary to enable the commissioner to reasonably 4-6 determine compliance with this article. 4-7 Sec. 4. SERVICE CONTRACT PROVIDERS ADVISORY BOARD. (a) The 4-8 service contract providers advisory board is an advisory body to 4-9 the department. The advisory board shall advise: 4-10 (1) the commissioner in adopting rules and enforcing 4-11 and administering this article; and 4-12 (2) the commission in setting fees. 4-13 (b) The advisory board is composed of six members appointed 4-14 by the commissioner as follows: 4-15 (1) two members must be officers, directors, or 4-16 employees of a provider of service contracts that have been 4-17 approved by the commissioner; 4-18 (2) two members must be officers, directors, or 4-19 employees of a retail outlet or other entity located in this state 4-20 that provides to consumers service contracts approved by the 4-21 commissioner for sale to consumers; 4-22 (3) one member must be an officer, director, or 4-23 employee of an entity approved by the Texas Department of Insurance 4-24 to sell reimbursement insurance policies; and 4-25 (4) one member must be a resident of this state who 4-26 has, as a consumer, a service contract in force in this state at 4-27 the time of the appointment that is issued by a provider registered 5-1 under this article. 5-2 (c) A member of the advisory board serves a term of six 5-3 years with terms expiring on February 1 of odd-numbered years. 5-4 (d) The commissioner shall designate one member of the 5-5 advisory board to serve as presiding officer. The commissioner or 5-6 the commissioner's designee shall serve as an ex officio nonvoting 5-7 member of the advisory board. The commissioner shall fill any 5-8 vacancy on the advisory board for the remainder of the unexpired 5-9 term with an individual who represents the same interests with 5-10 which the predecessor was identified. 5-11 (e) The advisory board shall meet at least every six months 5-12 and may meet at other times at the call of the presiding officer. 5-13 The advisory board shall meet at a location in this state 5-14 designated by the advisory board. 5-15 (f) A decision of the advisory board is not effective unless 5-16 it receives the affirmative vote of at least four members. 5-17 (g) The advisory board members serve without compensation. 5-18 A member is entitled to reimbursement for actual and necessary 5-19 expenses incurred in performing functions as a member of the 5-20 advisory board, subject to any applicable limitation on 5-21 reimbursement provided by the General Appropriations Act. 5-22 Sec. 5. REGISTRATION REQUIREMENTS; EXEMPTIONS. (a) A 5-23 person may not operate as a provider of service contracts sold in 5-24 this state unless the person is registered with the department. 5-25 Except for this registration requirement, providers and service 5-26 contract sellers, administrators, and other persons marketing, 5-27 selling, or offering to sell service contracts are exempt from any 6-1 licensing requirements of this state that relate to the activities 6-2 regulated under this article. 6-3 (b) Each applicant for registration shall file a 6-4 registration application with the commissioner in the form 6-5 prescribed by the commissioner that includes evidence satisfactory 6-6 to the commissioner of compliance with the financial security 6-7 requirements adopted under Section 6 of this article. 6-8 (c) Each registered provider shall pay an annual 6-9 registration fee not to exceed $2,000 as set by the commission to 6-10 cover the costs of administrating this article. The commissioner 6-11 shall develop a tiered fee structure under which registration fees 6-12 are assessed on providers based on the number of service contracts 6-13 sold within this state in the prior 12-month period. The 6-14 information submitted to the commissioner under this section 6-15 regarding the number of service contracts sold by a provider may 6-16 only be used by the commissioner and the department in determining 6-17 the tiered fee structure. Information concerning the number of 6-18 service contracts sold by a provider that is submitted under this 6-19 section is a trade secret and subject to Section 552.110, 6-20 Government Code. 6-21 (d) The marketing, sale, offering for sale, issuance, 6-22 making, proposing to make, and administration of service contracts 6-23 are exempt from: 6-24 (1) the Insurance Code and other laws of this state 6-25 regulating the business of insurance; 6-26 (2) Article 6573b, Revised Statutes; and 6-27 (3) Chapter 722, Transportation Code. 7-1 (e) The following contracts and agreements are specifically 7-2 exempt from the application of this article and are only subject to 7-3 other statutes and laws which specifically apply to them: 7-4 (1) warranties; 7-5 (2) maintenance agreements; 7-6 (3) service contracts sold or offered for sale to 7-7 persons other than consumers; 7-8 (4) residential service contracts sold by entities 7-9 licensed by the Texas Real Estate Commission under Article 6573b, 7-10 Revised Statutes; 7-11 (5) agreements issued by automobile service clubs 7-12 certified under Chapter 722, Transportation Code; 7-13 (6) service contracts sold by a motor vehicle dealer 7-14 on vehicles sold by that dealer if the dealer is the provider and 7-15 is licensed as a motor vehicle dealer pursuant to Subchapter D, 7-16 Texas Motor Vehicle Commission Code (Article 4413(36), Vernon's 7-17 Texas Civil Statutes), and covers its obligations under the service 7-18 contract with a reimbursement insurance policy as defined by 7-19 Section 2(11) of this article; and 7-20 (7) contracts or agreements offered by local exchange 7-21 telephone companies providing repair for inside telephone wiring 7-22 for which the term does not exceed one month and which the consumer 7-23 can terminate before commencing a new term without liability except 7-24 for payment of charges for the current term. 7-25 Sec. 6. FINANCIAL SECURITY REQUIREMENTS. (a) To ensure the 7-26 faithful performance of a provider's obligations to its service 7-27 contract holders, each provider shall comply with one of the 8-1 following financial security requirements: 8-2 (1) insure its service contracts under a reimbursement 8-3 insurance policy issued by an insurer authorized to transact 8-4 insurance in this state or under a surplus lines insurance policy 8-5 issued by an insurer eligible to place coverage in this state as 8-6 regulated under Article 1.14-2, Insurance Code; 8-7 (2)(A) maintain a funded reserve account for its 8-8 obligations under its service contracts issued and outstanding in 8-9 this state. The reserves shall be not less than 40 percent of the 8-10 gross consideration received from consumers, less claims paid, on 8-11 the sale of the service contract for all in-force contracts. The 8-12 reserve account shall be subject to examination and review by the 8-13 commissioner; and 8-14 (B) place in trust with the commissioner a 8-15 financial security deposit, having a value of not less than five 8-16 percent of the gross consideration received from consumers, less 8-17 claims paid, on the sale of the service contract for all service 8-18 contracts issued and outstanding in this state, but not less than 8-19 $25,000, and consisting of: 8-20 (i) a surety bond issued by an authorized 8-21 surety; 8-22 (ii) securities of the type eligible for 8-23 deposit by authorized insurers in this state; 8-24 (iii) a statutory deposit of cash or cash 8-25 equivalents; 8-26 (iv) a letter of credit issued by a 8-27 qualified financial institution; or 9-1 (v) another form of security prescribed by 9-2 rules issued by the commissioner; or 9-3 (3)(A) maintain, or have its parent company maintain, 9-4 a net worth or stockholders' equity of at least $100 million; and 9-5 (B) upon request, provide the commissioner a 9-6 copy of the provider's or the provider's parent company's most 9-7 recent Form 10-K or Form 20-F filed with the Securities and 9-8 Exchange Commission within the last calendar year or, if the 9-9 company does not file with the Securities and Exchange Commission, 9-10 a copy of the provider's or the provider's parent company's audited 9-11 financial statements showing a net worth of the provider or its 9-12 parent company of at least $100 million. If the provider's parent 9-13 company's Form 10-K, Form 20-F, or audited financial statements are 9-14 filed to meet the provider's financial stability requirement, the 9-15 parent company shall agree to guarantee the obligations of the 9-16 provider relating to service contracts sold by the provider in this 9-17 state. 9-18 (b) No other financial security requirements shall be 9-19 required by the commissioner for service contract providers. 9-20 Sec. 7. REIMBURSEMENT INSURANCE POLICY. (a) In order for a 9-21 provider to comply with Section 6 of this article through the use 9-22 of a reimbursement insurance policy, such policy must state that: 9-23 (1) the insurer that issued the reimbursement 9-24 insurance policy shall reimburse or pay on behalf of the provider 9-25 any covered amounts the provider is legally obligated to pay or 9-26 shall provide the service that the provider is legally obligated to 9-27 perform according to the provider's contractual obligations under 10-1 the insured service contract issued or sold by the provider; and 10-2 (2) if the covered service is not provided to a 10-3 service contract holder within 60 days of proof of loss, payment 10-4 shall be made directly from the reimbursement insurer to the 10-5 service contract holder or the reimbursement insurer shall provide 10-6 the required service. 10-7 (b) An insurer that issues a reimbursement insurance policy 10-8 under this article may not cancel the policy until the insurer 10-9 delivers to the provider a written notice of cancellation that 10-10 complies with the requirements adopted for those notices under 10-11 Articles 21.49-2A and 21.49-2B, Insurance Code. The provider shall 10-12 forward a copy of the cancellation notice to the commissioner not 10-13 later than the 15th business day after the date the notice is 10-14 delivered to the provider. The cancellation of a reimbursement 10-15 insurance policy does not reduce the insurer's responsibility for 10-16 service contracts issued by the provider and insured under the 10-17 policy before the date of the cancellation. 10-18 (c) For purposes of this section, the provider is considered 10-19 the agent of the insurer that issues the reimbursement insurance 10-20 policy for purposes of obligating the insurer to service contract 10-21 holders in accordance with the service contract and this article. 10-22 (d) This article does not prevent or limit the right of an 10-23 insurer that issues a reimbursement insurance policy to seek 10-24 indemnification or subrogation against a provider if the insurer 10-25 pays or is obligated to pay a service contract holder any amount 10-26 that the provider is obligated to pay under the terms of the 10-27 service contract. 11-1 Sec. 8. GENERAL PROVIDER OPERATION REQUIREMENTS. (a) A 11-2 provider may appoint an administrator or other designee to be 11-3 responsible for any or all of the administration or sale of service 11-4 contracts and for compliance with this article. 11-5 (b) A service contract may not be issued, sold, or offered 11-6 for sale in this state unless the provider has provided to the 11-7 service contract holder: 11-8 (1) a receipt for, or other written evidence of, the 11-9 purchase of the service contract; and 11-10 (2) a copy of the service contract within a reasonable 11-11 period after the date of purchase. 11-12 Sec. 9. PROVIDER RECORDS. (a) Each provider shall maintain 11-13 accurate accounts, books, and other records regarding transactions 11-14 regulated under this article. The provider's records must include: 11-15 (1) a copy of each unique form of service contract 11-16 sold; 11-17 (2) the name and address of each service contract 11-18 holder, if the name and address have been furnished by the contract 11-19 holder; 11-20 (3) a list of the locations at which the provider's 11-21 service contracts are marketed, sold, or offered for sale; and 11-22 (4) written claims files that contain at least the 11-23 dates and descriptions of claims related to the service contracts. 11-24 (b) Except as provided by Subsection (d) of this section, 11-25 each provider shall retain all records required to be maintained 11-26 under Subsection (a) of this section at least until the first 11-27 anniversary of the expiration date under the contract of the 12-1 specified period of coverage. 12-2 (c) The records required to be maintained under this section 12-3 may be maintained in an electronic medium or through other 12-4 recordkeeping technology. If a record is maintained in a format 12-5 other than hard copy, the provider must be able to reformat the 12-6 record into legible hard copy at the request of the commissioner. 12-7 (d) A provider who discontinues business in this state shall 12-8 maintain its records until the provider furnishes the commissioner 12-9 with proof satisfactory to the commissioner that the provider has 12-10 discharged all obligations to service contract holders in this 12-11 state. 12-12 Sec. 10. REQUIRED DISCLOSURES. (a) Each service contract 12-13 marketed, sold, offered for sale, issued, made, proposed to be 12-14 made, or administered in this state shall be written, printed, or 12-15 typed in clear, understandable language that is easy to read and 12-16 shall disclose the applicable requirements set forth in this 12-17 section. 12-18 (b) A service contract insured under a reimbursement 12-19 insurance policy under Section 6(a) of this article must contain a 12-20 statement substantially similar to the following: "Obligations of 12-21 the provider under this service contract are insured under a 12-22 service contract reimbursement insurance policy." The service 12-23 contract shall state the name and address of the insurer and state 12-24 that in the event covered service is not provided by the service 12-25 contract provider within 60 days of proof of loss by the service 12-26 contract holder, the service contract holder may apply for 12-27 reimbursement directly to the service contract reimbursement 13-1 insurance company. 13-2 (c) A service contract that is not insured under a 13-3 reimbursement insurance policy must contain a statement 13-4 substantially similar to the following: "Obligations of the 13-5 provider under this service contract are backed by the full faith 13-6 and credit of the provider." 13-7 (d) Each service contract shall state the name and address 13-8 of the provider and shall identify any administrator, if different 13-9 from the provider, the service contract seller, and the service 13-10 contract holder, to the extent that the name of the service 13-11 contract holder has been furnished by the service contract holder. 13-12 The identities of those persons are not required to be preprinted 13-13 on the service contract and may be added to the service contract at 13-14 the time of sale. 13-15 (e) Each service contract must state the purchase price of 13-16 the contract and the terms under which the contract is sold. The 13-17 purchase price is not required to be preprinted on the service 13-18 contract and may be negotiated at the time of sale with the service 13-19 contract holder. 13-20 (f) Each service contract must state the terms, 13-21 restrictions, or conditions governing cancellation of the service 13-22 contract by either the provider or the service contract holder 13-23 before the expiration date of the service contract. A provider 13-24 shall mail a written notice of cancellation to the service contract 13-25 holder at the last known address of the service contract holder 13-26 contained in the records of the provider before the fifth day 13-27 preceding the effective date of the cancellation. Prior notice is 14-1 not required if the reason for cancellation is nonpayment of the 14-2 provider fee, a material misrepresentation by the service contract 14-3 holder to the provider, or a substantial breach of duties by the 14-4 service contract holder relating to the covered product or its use. 14-5 The notice must state the effective date of the cancellation and 14-6 the reason for the cancellation. 14-7 (g) Each service contract must: 14-8 (1) state the amount of any deductible, if applicable; 14-9 (2) specify the products and services to be provided 14-10 and any limitations, exceptions, or exclusions; 14-11 (3) specify any restrictions governing the 14-12 transferability of the service contract; 14-13 (4) state the duties of the service contract holder, 14-14 including any duty to protect against any further damage and any 14-15 requirement to follow owner's manual instructions; and 14-16 (5) if applicable, state whether the service contract 14-17 provides for or excludes consequential damages or preexisting 14-18 conditions. 14-19 Sec. 11. VOIDING OF CONTRACT. (a) Each service contract 14-20 shall require the provider to permit the service contract holder to 14-21 return the service contract not later than the 20th day after the 14-22 date the service contract was mailed to the service contract holder 14-23 or, if the service contract is delivered to the service contract 14-24 holder at the time of sale, not later than the 10th day after the 14-25 date of delivery. A service contract holder may void the service 14-26 contract at a later time as permitted by the service contract. 14-27 (b) If a contract holder returns a service contract under 15-1 Subsection (a) of this section and a claim has not been made under 15-2 the service contract before its return to the provider, the service 15-3 contract is void and the provider shall refund to the service 15-4 contract holder or credit to the account of the service contract 15-5 holder the full purchase price of the service contract. The right 15-6 provided by this section to void the service contract is not 15-7 transferable and applies only to the original service contract 15-8 purchaser. If a service contract is voided under this section and 15-9 the provider does not pay the refund or credit the service contract 15-10 holder's account before the 46th day after the date of the return 15-11 of the service contract to the provider, the provider is liable to 15-12 the contract holder for a penalty in an amount not to exceed 10 15-13 percent of the amount outstanding per month. 15-14 Sec. 12. LIMITATIONS ON PROVIDER NAME. (a) A provider may 15-15 not use: 15-16 (1) in its name the words insurance, casualty, surety, 15-17 mutual, or any other words descriptive of the insurance, casualty, 15-18 or surety business; 15-19 (2) a name deceptively similar to the name or 15-20 description of any insurance or surety corporation; or 15-21 (3) a name deceptively similar to the name of any 15-22 other provider. 15-23 (b) A provider may use the word "guaranty" or a similar 15-24 word. 15-25 (c) This section does not apply to a provider that, before 15-26 September 1, 1999, used a word prohibited under this section in its 15-27 name, but that provider must include in each of its service 16-1 contracts a statement in substantially the following form: "This 16-2 agreement is not an insurance contract." 16-3 Sec. 13. PROHIBITED ACTS. (a) A provider, or a provider's 16-4 representative, may not, in the provider's service contracts or 16-5 literature: 16-6 (1) make, permit, or cause to be made any false or 16-7 misleading statement; or 16-8 (2) deliberately omit a material statement that would 16-9 be considered misleading if omitted. 16-10 (b) A person, including a bank, savings and loan 16-11 association, lending institution, manufacturer, or seller of any 16-12 product, may not require the purchase of a service contract as a 16-13 condition of a loan or the sale of any property. 16-14 Sec. 14. ENFORCEMENT. (a) On a finding that a ground for 16-15 disciplinary action exists under one or more provisions of this 16-16 article, the commissioner may impose appropriate administrative 16-17 sanctions, including an administrative penalty as provided by 16-18 Article 9100, Revised Statutes. An administrative penalty imposed 16-19 under this section may not exceed $500 per violation or $10,000 in 16-20 the aggregate for all violations of a similar nature. 16-21 (b) A disciplinary action taken under this article is 16-22 subject to Section 17(d), Article 9100, Revised Statutes. 16-23 (c) The commissioner may bring an action for injunctive 16-24 proceedings under Section 18, Article 9100, Revised Statutes, for a 16-25 threatened or existing violation of this article or the 16-26 commissioner's orders or rules adopted under this article and may 16-27 also bring an action for civil penalties as provided by that 17-1 section. A civil penalty assessed under this subsection may not 17-2 exceed $2,500 per violation or $50,000 in the aggregate for all 17-3 violations of a similar nature. 17-4 (d) For purposes of Subsections (a) and (c) of this section, 17-5 a violation is of a similar nature if the violation consists of the 17-6 same or a similar course of conduct, action, or practice, 17-7 regardless of the number of times the act, conduct, or practice 17-8 determined to be a violation of this article occurred. 17-9 SECTION 2. Section 348.208, Finance Code, is amended by 17-10 adding Subsection (c) to read as follows: 17-11 (c) Notwithstanding any other law, service contracts sold by 17-12 a retail seller of a motor vehicle to a retail buyer are not 17-13 subject to 1.14-1, Insurance Code. 17-14 SECTION 3. (a) Article 9034, Revised Statutes, as added by 17-15 this Act, takes effect September 1, 1999, and applies only to a 17-16 service contract entered into on or after January 1, 2000. A 17-17 service contract entered into before that date and renewed after 17-18 that date is not subject to that article. 17-19 (b) A person regulated under Article 9034, Revised Statutes, 17-20 as added by this Act, is not required to comply with that article 17-21 until January 1, 2000, but may implement the requirements of that 17-22 article before January 1, 2000. The failure of a provider or other 17-23 person to comply with that article or otherwise to administer a 17-24 service contract plan in the manner required by that article before 17-25 January 1, 2000, is not admissible in any court, arbitration, or 17-26 alternative dispute resolution proceeding and may not otherwise be 17-27 used to prove that the action of any person or the affected service 18-1 contract was unlawful or otherwise improper. 18-2 SECTION 4. The importance of this legislation and the 18-3 crowded condition of the calendars in both houses create an 18-4 emergency and an imperative public necessity that the 18-5 constitutional rule requiring bills to be read on three several 18-6 days in each house be suspended, and this rule is hereby suspended.