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                                  * * * * *