By Sibley S.B. No. 1775
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.