1-1 By: Sibley S.B. No. 1775 1-2 (In the Senate - Filed March 12, 1999; March 15, 1999, read 1-3 first time and referred to Committee on Economic Development; 1-4 April 6, 1999, reported adversely, with favorable Committee 1-5 Substitute by the following vote: Yeas 5, Nays 0; April 6, 1999, 1-6 sent to printer.) 1-7 COMMITTEE SUBSTITUTE FOR S.B. No. 1775 By: Carona 1-8 A BILL TO BE ENTITLED 1-9 AN ACT 1-10 relating to the regulation of certain providers of service 1-11 contracts; providing penalties. 1-12 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS: 1-13 SECTION 1. Title 132, Revised Statutes, is amended by adding 1-14 Article 9034 to read as follows: 1-15 Art. 9034. REGULATION OF CERTAIN SERVICE CONTRACT PROVIDERS 1-16 Sec. 1. SHORT TITLE. This article may be cited as the 1-17 "Service Contract Regulatory Act." 1-18 Sec. 2. DEFINITIONS. In this article: 1-19 (1) "Administrator" means the person responsible for 1-20 the administration of a service contract or service contract plan. 1-21 The term includes a person responsible for any filings required by 1-22 this article. 1-23 (2) "Commissioner" means the commissioner of licensing 1-24 and regulation. 1-25 (3) "Commission" means the Texas Commission of 1-26 Licensing and Regulation. 1-27 (4) "Consumer" means an individual who buys, other 1-28 than for purposes of resale, any tangible personal property that 1-29 is: 1-30 (A) distributed in commerce; and 1-31 (B) normally used for personal, family, or 1-32 household purposes and not for business or research purposes. 1-33 (5) "Department" means the Texas Department of 1-34 Licensing and Regulation. 1-35 (6) "Maintenance agreement" means an agreement of 1-36 limited duration that provides only for scheduled maintenance. 1-37 (7) "Person" means an individual or a partnership, 1-38 company, corporation, association, or other group, however 1-39 organized. 1-40 (8) "Premium" means the consideration paid to an 1-41 insurer for a reimbursement insurance policy. 1-42 (9) "Provider" means a person who is contractually 1-43 obligated to the service contract holder under the terms of the 1-44 service contract. 1-45 (10) "Provider fee" means the consideration paid for a 1-46 service contract. 1-47 (11) "Reimbursement insurance policy" means a policy 1-48 of insurance issued to a provider to: 1-49 (A) provide reimbursement to the provider under 1-50 the terms of the insured service contracts issued or sold by the 1-51 provider; or 1-52 (B) pay on behalf of the provider, in the event 1-53 of the provider's nonperformance, all covered contractual 1-54 obligations incurred by the provider under the terms of the insured 1-55 service contracts issued or sold by the provider. 1-56 (12) "Service contract" means an agreement, entered 1-57 into for a separately stated consideration and for a specified 1-58 term, under which a provider agrees to repair, replace, or maintain 1-59 a product, or provide indemnification for the repair, replacement, 1-60 or maintenance of a product, for operational or structural failure 1-61 caused by a defect in materials or workmanship or by normal wear. 1-62 A service contract may additionally provide for incidental payment 1-63 or indemnity under limited circumstances, including towing, rental, 1-64 and emergency road service, or for the repair or replacement of a 2-1 product for damage resulting from power surges or accidental damage 2-2 incurred in handling the product. 2-3 (13) "Service contract holder" means a person who 2-4 purchases or otherwise holds a service contract. 2-5 (14) "Warranty" means, in relation to a product or 2-6 service, an undertaking that guarantees indemnity for defective 2-7 parts, mechanical or electrical breakdown, labor costs, or other 2-8 remedial measures, such as repair or replacement of the product or 2-9 repetition of services, and that is: 2-10 (A) made solely by the manufacturer, importer, 2-11 or seller of the product or services; 2-12 (B) made without payment of additional 2-13 consideration; 2-14 (C) not negotiated or separated from the sale of 2-15 the product or service; and 2-16 (D) incidental to the sale of the product or 2-17 service. 2-18 Sec. 3. POWERS AND DUTIES OF COMMISSIONER. (a) The 2-19 commissioner may adopt rules as necessary to implement this 2-20 article. 2-21 (b) The commissioner may conduct investigations of 2-22 providers, administrators, or other persons as necessary to enforce 2-23 this article and protect service contract holders in this state. 2-24 On request of the commissioner, a provider shall make the 2-25 provider's records maintained under Section 9 of this article 2-26 regarding service contracts sold by the provider available to the 2-27 commissioner as necessary to enable the commissioner to reasonably 2-28 determine compliance with this article. 2-29 Sec. 4. SERVICE CONTRACT PROVIDERS ADVISORY BOARD. (a) The 2-30 service contract providers advisory board is an advisory body to 2-31 the department. The advisory board shall advise: 2-32 (1) the commissioner in adopting rules and enforcing 2-33 and administering this article; and 2-34 (2) the commission in setting fees. 2-35 (b) The advisory board is composed of six members appointed 2-36 by the commissioner as follows: 2-37 (1) two members must be officers, directors, or 2-38 employees of a provider of service contracts that have been 2-39 approved by the commissioner; 2-40 (2) two members must be officers, directors, or 2-41 employees of a retail outlet or other entity located in this state 2-42 that provides to consumers service contracts approved by the 2-43 commissioner for sale to consumers; 2-44 (3) one member must be an officer, director, or 2-45 employee of an entity approved by the Texas Department of Insurance 2-46 to sell reimbursement insurance policies; and 2-47 (4) one member must be a resident of this state who 2-48 has, as a consumer, a service contract in force in this state at 2-49 the time of the appointment that is issued by a provider registered 2-50 under this article. 2-51 (c) A member of the advisory board serves a term of six 2-52 years with terms expiring on February 1 of odd-numbered years. 2-53 (d) The commissioner shall designate one member of the 2-54 advisory board to serve as presiding officer. The commissioner or 2-55 the commissioner's designee shall serve as an ex officio nonvoting 2-56 member of the advisory board. The commissioner shall fill any 2-57 vacancy on the advisory board for the remainder of the unexpired 2-58 term with an individual who represents the same interests with 2-59 which the predecessor was identified. 2-60 (e) The advisory board shall meet at least every six months 2-61 and may meet at other times at the call of the presiding officer. 2-62 The advisory board shall meet at a location in this state 2-63 designated by the advisory board. 2-64 (f) A decision of the advisory board is not effective unless 2-65 it receives the affirmative vote of at least four members. 2-66 (g) The advisory board members serve without compensation. 2-67 A member is entitled to reimbursement for actual and necessary 2-68 expenses incurred in performing functions as a member of the 2-69 advisory board, subject to any applicable limitation on 3-1 reimbursement provided by the General Appropriations Act. 3-2 Sec. 5. REGISTRATION REQUIREMENTS; EXEMPTIONS. (a) A 3-3 person may not operate as a provider of service contracts sold in 3-4 this state unless the person is registered with the department. 3-5 Except for this registration requirement, providers and service 3-6 contract sellers, administrators, and other persons marketing, 3-7 selling, or offering to sell service contracts are exempt from any 3-8 licensing requirements of this state that relate to the activities 3-9 regulated under this article. 3-10 (b) Each applicant for registration shall file a 3-11 registration application with the commissioner in the form 3-12 prescribed by the commissioner that includes evidence satisfactory 3-13 to the commissioner of compliance with the financial security 3-14 requirements adopted under Section 6 of this article. 3-15 (c) Each registered provider shall pay an annual 3-16 registration fee not to exceed $2,000 as set by the commission to 3-17 cover the costs of administrating this article. The commissioner 3-18 shall develop a tiered fee structure under which registration fees 3-19 are assessed on providers based on the number of service contracts 3-20 sold within this state in the prior 12-month period. The 3-21 information submitted to the commissioner under this section 3-22 regarding the number of service contracts sold by a provider may 3-23 only be used by the commissioner and the department in determining 3-24 the tiered fee structure. Information concerning the number of 3-25 service contracts sold by a provider that is submitted under this 3-26 section is a trade secret and subject to Section 552.110, 3-27 Government Code. 3-28 (d) The marketing, sale, offering for sale, issuance, 3-29 making, proposing to make, and administration of service contracts 3-30 are exempt from: 3-31 (1) the Insurance Code and other laws of this state 3-32 regulating the business of insurance; 3-33 (2) Article 6573b, Revised Statutes; and 3-34 (3) Chapter 722, Transportation Code. 3-35 (e) The following contracts and agreements are specifically 3-36 exempt from the application of this article and are only subject to 3-37 other statutes and laws which specifically apply to them: 3-38 (1) warranties; 3-39 (2) maintenance agreements; 3-40 (3) service contracts sold or offered for sale to 3-41 persons other than consumers; 3-42 (4) residential service contracts sold by entities 3-43 licensed by the Texas Real Estate Commission under Article 6573b, 3-44 Revised Statutes; and 3-45 (5) agreements issued by automobile service clubs 3-46 certified under Chapter 722, Transportation Code. 3-47 Sec. 6. FINANCIAL SECURITY REQUIREMENTS. (a) To ensure the 3-48 faithful performance of a provider's obligations to its service 3-49 contract holders, each provider shall comply with one of the 3-50 following financial security requirements: 3-51 (1) insure its service contracts under a reimbursement 3-52 insurance policy issued by an insurer authorized to transact 3-53 insurance in this state or under a surplus lines insurance policy 3-54 issued by an insurer eligible to place coverage in this state as 3-55 regulated under Article 1.14-2, Insurance Code; 3-56 (2)(A) maintain a funded reserve account for its 3-57 obligations under its service contracts issued and outstanding in 3-58 this state. The reserves shall be not less than 40 percent of the 3-59 gross consideration received from consumers, less claims paid, on 3-60 the sale of the service contract for all in-force contracts. The 3-61 reserve account shall be subject to examination and review by the 3-62 commissioner; and 3-63 (B) place in trust with the commissioner a 3-64 financial security deposit, having a value of not less than five 3-65 percent of the gross consideration received from consumers, less 3-66 claims paid, on the sale of the service contract for all service 3-67 contracts issued and outstanding in this state, but not less than 3-68 $25,000, and consisting of: 3-69 (i) a surety bond issued by an authorized 4-1 surety; 4-2 (ii) securities of the type eligible for 4-3 deposit by authorized insurers in this state; 4-4 (iii) a statutory deposit of cash or cash 4-5 equivalents; 4-6 (iv) a letter of credit issued by a 4-7 qualified financial institution; or 4-8 (v) another form of security prescribed by 4-9 rules issued by the commissioner; or 4-10 (3)(A) maintain, or have its parent company maintain, 4-11 a net worth or stockholders' equity of at least $100 million; and 4-12 (B) upon request, provide the commissioner a 4-13 copy of the provider's or the provider's parent company's most 4-14 recent Form 10-K or Form 20-F filed with the Securities and 4-15 Exchange Commission within the last calendar year or, if the 4-16 company does not file with the Securities and Exchange Commission, 4-17 a copy of the provider's or the provider's parent company's audited 4-18 financial statements showing a net worth of the provider or its 4-19 parent company of at least $100 million. If the provider's parent 4-20 company's Form 10-K, Form 20-F, or audited financial statements are 4-21 filed to meet the provider's financial stability requirement, the 4-22 parent company shall agree to guarantee the obligations of the 4-23 provider relating to service contracts sold by the provider in this 4-24 state. 4-25 (b) No other financial security requirements shall be 4-26 required by the commissioner for service contract providers. 4-27 Sec. 7. REIMBURSEMENT INSURANCE POLICY. (a) In order for a 4-28 provider to comply with Section 6 of this article through the use 4-29 of a reimbursement insurance policy, such policy must state that: 4-30 (1) the insurer that issued the reimbursement 4-31 insurance policy shall reimburse or pay on behalf of the provider 4-32 any covered amounts the provider is legally obligated to pay or 4-33 shall provide the service that the provider is legally obligated to 4-34 perform according to the provider's contractual obligations under 4-35 the insured service contract issued or sold by the provider; and 4-36 (2) if the covered service is not provided to a 4-37 service contract holder within 60 days of proof of loss, payment 4-38 shall be made directly from the reimbursement insurer to the 4-39 service contract holder or the reimbursement insurer shall provide 4-40 the required service. 4-41 (b) An insurer that issues a reimbursement insurance policy 4-42 under this article may not cancel the policy until the insurer 4-43 delivers to the provider a written notice of cancellation that 4-44 complies with the requirements adopted for those notices under 4-45 Articles 21.49-2A and 21.49-2B, Insurance Code. The provider shall 4-46 forward a copy of the cancellation notice to the commissioner not 4-47 later than the 15th business day after the date the notice is 4-48 delivered to the provider. The cancellation of a reimbursement 4-49 insurance policy does not reduce the insurer's responsibility for 4-50 service contracts issued by the provider and insured under the 4-51 policy before the date of the cancellation. 4-52 (c) For purposes of this section, the provider is considered 4-53 the agent of the insurer that issues the reimbursement insurance 4-54 policy for purposes of obligating the insurer to service contract 4-55 holders in accordance with the service contract and this article. 4-56 (d) This article does not prevent or limit the right of an 4-57 insurer that issues a reimbursement insurance policy to seek 4-58 indemnification or subrogation against a provider if the insurer 4-59 pays or is obligated to pay a service contract holder any amount 4-60 that the provider is obligated to pay under the terms of the 4-61 service contact. 4-62 Sec. 8. GENERAL PROVIDER OPERATION REQUIREMENTS. (a) A 4-63 provider may appoint an administrator or other designee to be 4-64 responsible for any or all of the administration or sale of service 4-65 contracts and for compliance with this article. 4-66 (b) A service contract may not be issued, sold, or offered 4-67 for sale in this state unless the provider has provided to the 4-68 service contract holder: 4-69 (1) a receipt for, or other written evidence of, the 5-1 purchase of the service contract; and 5-2 (2) a copy of the service contract within a reasonable 5-3 period after the date of purchase. 5-4 Sec. 9. PROVIDER RECORDS. (a) Each provider shall maintain 5-5 accurate accounts, books, and other records regarding transactions 5-6 regulated under this article. The provider's records must include: 5-7 (1) a copy of each unique form of service contract 5-8 sold; 5-9 (2) the name and address of each service contract 5-10 holder, if the name and address have been furnished by the contract 5-11 holder; 5-12 (3) a list of the locations at which the provider's 5-13 service contracts are marketed, sold, or offered for sale; and 5-14 (4) written claims files that contain at least the 5-15 dates and descriptions of claims related to the service contracts. 5-16 (b) Except as provided by Subsection (d) of this section, 5-17 each provider shall retain all records required to be maintained 5-18 under Subsection (a) of this section at least until the first 5-19 anniversary of the expiration date under the contract of the 5-20 specified period of coverage. 5-21 (c) The records required to be maintained under this section 5-22 may be maintained in an electronic medium or through other 5-23 recordkeeping technology. If a record is maintained in a format 5-24 other than hard copy, the provider must be able to reformat the 5-25 record into legible hard copy at the request of the commissioner. 5-26 (d) A provider who discontinues business in this state shall 5-27 maintain its records until the provider furnishes the commissioner 5-28 with proof satisfactory to the commissioner that the provider has 5-29 discharged all obligations to service contract holders in this 5-30 state. 5-31 Sec. 10. REQUIRED DISCLOSURES. (a) Each service contract 5-32 marketed, sold, offered for sale, issued, made, proposed to be 5-33 made, or administered in this state shall be written, printed, or 5-34 typed in clear, understandable language that is easy to read and 5-35 shall disclose the applicable requirements set forth in this 5-36 section. 5-37 (b) A service contract insured under a reimbursement 5-38 insurance policy under Section 6(a) of this article must contain a 5-39 statement substantially similar to the following: "Obligations of 5-40 the provider under this service contract are insured under a 5-41 service contract reimbursement insurance policy." The service 5-42 contract shall state the name and address of the insurer and state 5-43 that in the event covered service is not provided by the service 5-44 contract provider within 60 days of proof of loss by the service 5-45 contract holder, the service contract holder may apply for 5-46 reimbursement directly to the service contract reimbursement 5-47 insurance company. 5-48 (c) A service contract that is not insured under a 5-49 reimbursement insurance policy must contain a statement 5-50 substantially similar to the following: "Obligations of the 5-51 provider under this service contract are backed by the full faith 5-52 and credit of the provider." 5-53 (d) Each service contract shall state the name and address 5-54 of the provider and shall identify any administrator, if different 5-55 from the provider, the service contract seller, and the service 5-56 contract holder, to the extent that the name of the service 5-57 contract holder has been furnished by the service contract holder. 5-58 The identities of those persons are not required to be preprinted 5-59 on the service contract and may be added to the service contract at 5-60 the time of sale. 5-61 (e) Each service contract must state the purchase price of 5-62 the contract and the terms under which the contract is sold. The 5-63 purchase price is not required to be preprinted on the service 5-64 contract and may be negotiated at the time of sale with the service 5-65 contract holder. 5-66 (f) Each service contract must state the terms, 5-67 restrictions, or conditions governing cancellation of the service 5-68 contract by either the provider or the service contract holder 5-69 before the expiration date of the service contract. A provider 6-1 shall mail a written notice of cancellation to the service contract 6-2 holder at the last known address of the service contract holder 6-3 contained in the records of the provider before the fifth day 6-4 preceding the effective date of the cancellation. Prior notice is 6-5 not required if the reason for cancellation is nonpayment of the 6-6 provider fee, a material misrepresentation by the service contract 6-7 holder to the provider, or a substantial breach of duties by the 6-8 service contract holder relating to the covered product or its use. 6-9 The notice must state the effective date of the cancellation and 6-10 the reason for the cancellation. 6-11 (g) Each service contract must: 6-12 (1) state the amount of any deductible, if applicable; 6-13 (2) specify the products and services to be provided 6-14 and any limitations, exceptions, or exclusions; 6-15 (3) specify any restrictions governing the 6-16 transferability of the service contract; 6-17 (4) state the duties of the service contract holder, 6-18 including any duty to protect against any further damage and any 6-19 requirement to follow owner's manual instructions; and 6-20 (5) if applicable, state whether the service contract 6-21 provides for or excludes consequential damages or preexisting 6-22 conditions. 6-23 Sec. 11. VOIDING OF CONTRACT. (a) Each service contract 6-24 shall require the provider to permit the service contract holder to 6-25 return the service contract not later than the 20th day after the 6-26 date the service contract was mailed to the service contract holder 6-27 or, if the service contract is delivered to the service contract 6-28 holder at the time of sale or at a later time permitted under the 6-29 service contract, not later than the 10th day after the date of 6-30 delivery. 6-31 (b) On the timely return of the service contract to the 6-32 provider, if a claim has not been made under the service contract 6-33 before its return to the provider, the service contract is void and 6-34 the provider shall refund to the service contract holder or credit 6-35 to the account of the service contract holder the full purchase 6-36 price of the service contract. The right provided by this section 6-37 to void the service contract is not transferable and applies only 6-38 to the original service contract purchaser. If a service contract 6-39 is voided under this section and the provider does not pay the 6-40 refund or credit the service contract holder's account before the 6-41 46th day after the date of the return of the service contract to 6-42 the provider, the provider is liable to the contract holder for a 6-43 penalty in an amount not to exceed 10 percent of the amount 6-44 outstanding per month. 6-45 Sec. 12. LIMITATIONS ON PROVIDER NAME. (a) A provider may 6-46 not use: 6-47 (1) in its name the words insurance, casualty, surety, 6-48 mutual, or any other words descriptive of the insurance, casualty, 6-49 or surety business; 6-50 (2) a name deceptively similar to the name or 6-51 description of any insurance or surety corporation; or 6-52 (3) a name deceptively similar to the name of any 6-53 other provider. 6-54 (b) A provider may use the word "guaranty" or a similar 6-55 word. 6-56 (c) This section does not apply to a provider that, before 6-57 September 1, 1999, used a word prohibited under this section in its 6-58 name, but that provider must include in each of its service 6-59 contracts a statement in substantially the following form: "This 6-60 agreement is not an insurance contract." 6-61 Sec. 13. PROHIBITED ACTS. (a) A provider, or a provider's 6-62 representative, may not, in the provider's service contracts or 6-63 literature: 6-64 (1) make, permit, or cause to be made any false or 6-65 misleading statement; or 6-66 (2) deliberately omit a material statement that would 6-67 be considered misleading if omitted. 6-68 (b) A person, including a bank, savings and loan 6-69 association, lending institution, manufacturer, or seller of any 7-1 product, may not require the purchase of a service contract as a 7-2 condition of a loan or the sale of any property. 7-3 Sec. 14. ENFORCEMENT. (a) On a finding that a ground for 7-4 disciplinary action exists under one or more provisions of this 7-5 article, the commissioner may impose appropriate administrative 7-6 sanctions, including an administrative penalty as provided by 7-7 Article 9100, Revised Statutes. An administrative penalty imposed 7-8 under this section may not exceed $500 per violation or $10,000 in 7-9 the aggregate for all violations of a similar nature. 7-10 (b) A disciplinary action taken under this article is 7-11 subject to Section 17(d), Article 9100, Revised Statutes. 7-12 (c) The commissioner may bring an action for injunctive 7-13 proceedings under Section 18, Article 9100, Revised Statutes, for a 7-14 threatened or existing violation of this article or the 7-15 commissioner's orders or rules adopted under this article and may 7-16 also bring an action for civil penalties as provided by that 7-17 section. A civil penalty assessed under this subsection may not 7-18 exceed $2,500 per violation or $50,000 in the aggregate for all 7-19 violations of a similar nature. 7-20 (d) For purposes of Subsections (a) and (c) of this section, 7-21 a violation is of a similar nature if the violation consists of the 7-22 same or a similar course of conduct, action, or practice, 7-23 regardless of the number of times the act, conduct, or practice 7-24 determined to be a violation of this article occurred. 7-25 SECTION 2. (a) Article 9034, Revised Statutes, as added by 7-26 this Act, takes effect September 1, 1999, and applies only to a 7-27 service contract entered into on or after January 1, 2000. A 7-28 service contract entered into before that date and renewed after 7-29 that date is not subject to that article. 7-30 (b) A person regulated under Article 9034, Revised Statutes, 7-31 as added by this Act, is not required to comply with that article 7-32 until January 1, 2000, but may implement the requirements of that 7-33 article before January 1, 2000. The failure of a provider or other 7-34 person to comply with that article or otherwise to administer a 7-35 service contract plan in the manner required by that article before 7-36 January 1, 2000, is not admissible in any court, arbitration, or 7-37 alternative dispute resolution proceeding and may not otherwise be 7-38 used to prove that the action of any person or the affected service 7-39 contract was unlawful or otherwise improper. 7-40 SECTION 3. The importance of this legislation and the 7-41 crowded condition of the calendars in both houses create an 7-42 emergency and an imperative public necessity that the 7-43 constitutional rule requiring bills to be read on three several 7-44 days in each house be suspended, and this rule is hereby suspended. 7-45 * * * * *