SRC-LBB C.S.S.B. 597 78(R)BILL ANALYSIS
Senate Research CenterC.S.S.B. 597
78R8385 SLO-FBy: Duncan
State Affairs
3/11/2003
Committee Report (Substituted)
DIGEST AND PURPOSE
Currently, legal service contracts are regulated by the Texas Department
of Insurance. However, the contracts are not considered to be traditional
insurance products. C.S.S.B. 597 transfers regulation of for-profit legal
service contracts to the Texas Department of Licensing and Regulation
(TDLR). TDLR has broad enforcement powers over companies and sales
representatives who sell legal service contracts. Companies and sales
representatives that sell legal service contracts are required to register
with TDLR, to post financial security, maintain books and records, and
include certain language in contracts.
RULEMAKING AUTHORITY
Rulemaking authority is expressly granted to the executive director of the
Texas Department of Licensing and Regulation in SECTION 1 (Sections
953.005, 953.056, 953.057, and 953.162, Title 5B, Occupations Code) of
this bill.
SECTION BY SECTION ANALYSIS
SECTION 1. Amends Title 5B, Occupations Code, by adding Chapter 953, as
follows:
CHAPTER 953. REGULATION OF FOR-PROFIT LEGAL SERVICE CONTRACT COMPANIES
SUBCHAPTER A. GENERAL PROVISIONS
Sec. 953.001. DEFINITIONS. Defines "administrator,"
"company," "contracting attorney," "department," "executive director,"
"financial security," "legal service contract," "legal service contract
holder," "person," and "sales representative."
Sec. 953.002. EXEMPTIONS. Provides a list of entities and contracts that
this chapter does not apply to.
Sec. 953.003. EXEMPTIONS FROM CERTAIN OTHER LAWS. Provides that the sale
of legal service contracts under this chapter are exempt from the
Insurance Code and other laws of this state regulating the business of
insurance.
Sec. 953.004. PREPAID LEGAL SERVICE CONTRACT PROGRAMS. (a) Requires an
insurer who issues or renews prepaid legal service contracts under Article
5.13-1 (Legal Service Contracts), Insurance Code, to notify the
commissioner of insurance in writing not later than the 60th day before
transferring regulation of the insurer's legal service contracts from the
Texas Department of Insurance to the Texas Department of Licensing and
Regulation. Provides that an insurer that complies with this section is
exempt from the requirements of Articles 21.49-2 (Declination,
Cancellation, and Nonrenewal of Certain Policies) 21.49-2A (Cancellation
and Nonrenewal of Certain Liability Insurance Coverage), 21.49-2B
(Cancellation and Nonrenewal of Certain Property and Casualty Policies,
21.49-2D (Prohibition on Certain Cancellations and Nonrenewals), and
21.49-2E (Requirements for Written Statement of Reason for Cancellation,
Declination, or Renewal), and Chapter 827 (Withdrawal and Restriction
Plans), Insurance Code.
(b) Provides that the exemptions described by Subsection (a) begin on the
date the commissioner receives the notice under Subsection (a) and apply
until the insurer registers with the department as required by Section
953.052.
Sec. 953.005. POWERS AND DUTIES OF EXECUTIVE DIRECTOR. (a) Authorizes
the executive director of the Texas Department of Licensing and Regulation
(executive director) to investigate a company, administrator, sales
representative, or other person as necessary to enforce this chapter and
protect legal service contract holders in this state.
(b) Requires a company or sales representative, on request of the
executive director, to make the records relevant to the regulation of
legal service contracts in this state available to the executive director
as necessary to enable the executive director to reasonably determine
compliance with this chapter.
(c) Authorizes the executive director, after contacting the company that
has contracted with the contracting attorney, to refer a complaint
received by the department concerning the performance of a contracting
attorney to the State Bar of Texas, the appropriate licensing agency of
another jurisdiction, if applicable or
any person designated by law to receive complaints from the public
concerning the performance of an attorney.
(d) Authorizes the executive director to adopt rules as necessary to
implement this chapter.
[Reserves Sections 953.006-953.050 for expansion]
SUBCHAPTER B. REGISTRATION REQUIREMENTS
Sec. 953.051. REGISTRATION REQUIRED. (a) Prohibits a person to
operate as a company or sales representative of legal service contracts
sold in this state unless the person is registered with the department.
Authorizes a company's contract to only be sold by a sales representative
who is registered with the department.
(b) Provides that a person who collects commissions for the sale of legal
service contracts but who does not actively sell or solicit legal service
contracts is not required to register under this subchapter.
Sec. 953.052. APPLICATION FOR REGISTRATION. (a) Requires an applicant
for registration to submit an application to the department. Requires the
application to be in a form prescribed by the executive director.
(b) Provides that an application for registration as a company must
include evidence satisfactory to the executive director of compliance with
the applicable financial security requirements prescribed by Subchapter C.
(c) Requires an application for registration as a sales representative to
include a list of the companies for which the sales representative will
sell or solicit legal service contracts.
Sec. 953.053. FEES. (a) Requires the executive director to develop a
tiered fee schedule of annual registration fees under which a company's
registration fee is based on the number of legal service contracts the
company sold in this state during the preceding 12-month period. Requires
the executive director to set the amounts of the fees required by this
subsection to cover the costs of administering this chapter.
(b) Requires the executive director, in addition to the annual
registration fee required by Subsection (a), to collect from each company
a fee equal to 1.7 percent of the annual price of each legal service
contract the company sells in this state. Requires the executive director
to establish a schedule and procedure for collecting this fee.
(c) Requires a company to pay the appropriate fees required by this
section
to be registered.
Sec. 953.054. INFORMATION CONCERNING NUMBER OF LEGAL SERVICE CONTRACTS
SOLD. Provides that information concerning the number of legal service
contracts sold by a company that is submitted under Section 953.053 is a
trade secret to which Section 552.110 (Exception: Trade Secrets; Certain
Commercial or Financial Information), Government Code, applies.
Sec. 953.055. ADDITIONAL REQUIREMENTS FOR SALES REPRESENTATIVES. (a)
Authorizes the executive director to deny an application from a sales
representative who commits certain acts.
(b) Requires each registered sales representative to pay an annual
registration fee in the amount set by the executive director to cover the
costs of administering this chapter.
Sec. 953.056. MODIFICATION OF REGISTRATION INFORMATION. Authorizes the
executive director to adopt rules regarding the procedures and fees a
company or sales representative must follow and pay when requesting a
modification to the company's or sales representative's registration
information that is on file with the department.
Sec. 953.057. RENEWAL OF REGISTRATION. Requires the executive director
to adopt rules for the renewal of a company's or sales representative's
registration, including a rule that addresses late renewals.
[Reserves Sections 953.058-953.100 for expansion]
SUBCHAPTER C. FINANCIAL SECURITY REQUIREMENTS FOR LEGAL SERVICE CONTRACT
COMPANIES
Sec. 953.101. FINANCIAL SECURITY REQUIREMENTS. (a) Requires each
company to deposit and maintain a form of financial security with the
executive director. Requires the financial security deposited with the
director to maintain certain market values at all times.
(b) Requires a company that had no gross revenue in this state from the
sale of legal service contracts in the preceding year previously generated
revenue from the sale of prepaid legal service contracts under Article
5.13-1, Insurance Code, to deposit an amount of financial security based
on the revenue generated from the sale of prepaid legal service contracts
under the Insurance Code in the preceding year.
(c) Provides that the department is responsible for the safeguarding of
financial security deposited with the executive director under this
section. Provides that financial security is not subject to taxation and
is to be used exclusively to guarantee the company's performance of its
obligations to its legal service contract holders.
(d) Authorizes the executive director to order an increase in the amount
of financial security required of a company under this section if the
executive director finds that there has been a substantial change in a
company, including an increase in the amount of fees the company is
charging consumers or an increase in the company's annual gross revenue.
(e) Authorizes a company, not later than the 30th day after the date the
executive director orders a financial security increase under Subsection
(d), to request a hearing on the issue. Requires the executive director
to hold a hearing not later than the 30th day after the date a company
requests a hearing.
(f) Provides that if a company does not meet the financial security
requirements within a specified time a company's registration may be
revoked.
Sec. 953.102. REPLACEMENT OR RENEWAL OF FINANCIAL SECURITY. (a) Requires
a company whose financial security under Section 953.101 is issued or
written for a specified term, not later than the 90th day before the date
the term expires, to replace the financial security or notify the
executive director of the company's intention to renew the financial
security.
(b) Authorizes the executive director to draw on the company's financial
security to the extent necessary to ensure that the company's obligations
to its legal service contract holders are met in accordance with this
chapter if, not later than the 60th day before the date the term of a
company's financial security expires, the executive director does not
receive satisfactory notification of a company's renewal or replacement of
the financial security.
Sec. 953.103. DURATION OF DEPOSIT OF FINANCIAL SECURITY. Requires the
executive director to maintain a company's financial security deposit so
long as the company continues to do business in this state. Requires the
executive director to release the deposited financial security to the
company when a company ceases to do business in this state and furnishes
the executive director with satisfactory proof that the company has
discharged or otherwise adequately met all obligations to its legal
service contract holders in this state.
Sec. 953.104. SUIT ON FINANCIAL SECURITY. (a) Authorizes the state, on
behalf of a legal service contract holder injured because of a company's
violation of this chapter, to bring a suit for payment from the company's
financial security deposit held by the executive director.
(b) Provides that the state is the only party that may bring suit for
payment from a company's financial security deposit held by the executive
director. Provides that this chapter does not create a private right of
action.
(c) Authorizes the state to only seek damages for the cost of the legal
services the company failed to provide to a legal service contract holder
under the terms of the legal service contract.
(d) Requires the court to determine the amount the executive director is
required to pay the consumer from the company's financial security deposit
held by the executive director.
[Reserves Sections 953.105-953.150 for expansion]
SUBCHAPTER D. PRACTICE BY LEGAL SERVICE CONTRACT COMPANIES
Sec. 953.151. COMPANY REQUIREMENTS. (a) Prohibits a company from
selling, offering for sale, or issuing a legal service contract in this
state unless the company gives the legal service contract holder a receipt
for, or other written evidence of, the purchase of the contract and a copy
of the legal service contract.
(b) Requires a company to perform the services as stated in the legal
service contract.
Sec. 953.152. GROUP LEGAL SERVICE CONTRACTS. Authorizes a company to
issue group legal service contracts. Requires a company to provide a
legal service contract holder who obtains a group contract with a document
that describes the company's services and complies with the requirements
of this chapter.
Sec. 953.153. CONTRACTING ATTORNEY REQUIREMENTS. Requires a contracting
attorney to be licensed in the jurisdiction in which the legal services
are performed, be in good standing with the entity that licenses attorneys
in that jurisdiction and maintain professional liability and errors and
omissions insurance with minimum annual limits of $100,000 for each
occurrence and $300,000 in the aggregate.
Sec. 953.154. COMPANY INTERFERENCE WITH ATTORNEY'S DUTIES PROHIBITED.
Prohibits a company from interfering with the attorney-client relationship
or with the contracting attorney's independent exercise of professional
judgment.
Sec. 953.155. COMPANY RECORDS. (a) Requires a company to maintain
accurate accounts, books, and other records regarding transactions
regulated under this chapter. Requires a company's records to include
certain information.
(b) Authorizes the records required by this section to be maintained in
an electronic medium or through other recordkeeping technology. Requires
a company to be able to reformat the record into a legible hard copy at
the request of the executive director, if a record is not in a hard copy.
(c) Requires a company to retain the records required by this section
until at least the second anniversary of the termination date of the
specified period of coverage under the legal service contract, except as
provided by Subsection (d).
(d) Requires a company that discontinues business in this state to retain
its records until the company furnishes the executive director with proof
satisfactory to the executive director that the provider has discharged
all obligations to legal service contract holders in this state.
Sec. 953.156. FORM OF LEGAL SERVICE CONTRACT AND REQUIRED DISCLOSURES.
(a) Requires a legal service contract to be filed with the executive
director before it is marketed, sold, offered for sale, administered, or
issued in this state. Requires any subsequent endorsement or attachment
to the contract to also be filed with the executive director before the
endorsement or attachment is delivered to legal service contract holders.
(b) Requires a legal service contract marketed, sold, offered for sale,
administered, or issued in this state to meet certain requirements.
Sec. 953.157. TERMINATING A LEGAL SERVICE CONTRACT. Authorizes a legal
service contract holder to terminate the legal service contract if the
legal service contract holder provides the company with written notice of
the legal service contract holder's intention of terminating the contract
not later than the seventh day after the date the legal service contract
holder receives the contract.
Sec. 953.158. VOIDING A LEGAL SERVICE CONTRACT. (a) Provides that if a
legal service contract holder terminates a legal service contract in
accordance with Section 953.157 and the holder has not sought legal
services under the contract before the contract is terminated, the
contract is void.
(b) Authorizes a legal service contract holder to void the legal service
contract at a later time as provided by the contract.
(c) Requires a company to refund to the legal service contract holder or
credit to the account of the legal service contract holder the full
purchase price of the contract, if a legal service contract is voided.
Provides that if the company does not pay the refund or credit the legal
service contract holder's account before the 46th day after the date the
contract is voided, the company is liable to the legal service contract
holder for a penalty each month an amount remains outstanding. Provides
that the monthly penalty may not exceed 10 percent of the amount
outstanding.
(d) Provides that the right to void a legal service contract is not
transferable.
Sec. 953.159. CANCELING A LEGAL SERVICE CONTRACT. (a) Authorizes a
company to cancel a legal service contract by mailing a written notice of
cancellation to the legal service contract holder at the legal service
contract holder's last known address according to the records of the
company. Requires a company to mail the notice before the fifth day
preceding the effective date of the cancellation. Requires the notice to
state the effective date of the cancellation and the reason for the
cancellation.
(b) Provides that a company is not required to provide prior notice of
cancellation if the legal service contract is canceled due to certain
circumstances.
Sec. 953.160. LIMITATIONS ON COMPANY NAME. (a) Prohibits a company from
using a name that includes "insurance," "casualty," "surety," or "mutual"
or any other word descriptive of the insurance, casualty, or surety
business or is deceptively similar to the name or description of an
insurance or surety corporation or to the name of any other company.
(b) Provides that this section does not apply to a company that, before
September 1, 2003, included a word prohibited under this section in its
name. Requires a company described by this subsection to include in each
legal service contract a statement substantially similar to the following:
"This agreement is not an insurance contract."
Sec. 953.161. MISLEADING STATEMENTS PROHIBITED. Prohibits a company, a
sales representative, or a representative of a sales representative, in
the company's contracts or marketing to make, permit, or cause to be made
any false or misleading statement or deliberately omit a material
statement if the omission would be considered misleading.
Sec. 953.162. APPOINTMENT AND RESPONSIBILITIES OF ADMINISTRATOR. (a)
Authorizes a company to appoint an administrator or designate a person to
be responsible for all or any part of the administration or sale of legal
service contracts and
compliance with this chapter.
(b) Authorizes the executive director to adopt rules regarding the
registration of an administrator with the department.
[Reserves Sections 953.163-953.200 for expansion]
SUBCHAPTER E. DISCIPLINARY ACTION
Sec. 953.201. DISCIPLINARY ACTION. Authorizes the executive director to
impose an administrative sanction, including any administrative penalty,
as provided by Chapter 51 on a finding that a ground for disciplinary
action exists under this chapter.
Sec. 953.202. EMERGENCY CEASE AND DESIST ORDER. (a) Authorizes the
executive director to issue an emergency cease and desist order to enforce
this chapter if the executive director determines that an emergency exists
requiring immediate action to protect the public.
(b) Authorizes the executive director to issue the emergency cease and
desist order without notice and hearing if the executive director
determines that an immediate issuance is necessary under the
circumstances.
(c) Requires the executive director to set the time and place for a
hearing to affirm, modify, or set aside an emergency cease and desist
order that was issued without a hearing.
Sec. 953.203. INJUNCTIVE RELIEF; CIVIL PENALTY. (a) Authorizes the
executive director to institute an action against a company or sales
representative for injunctive relief under Section 51.352 to restrain a
violation or a threatened violation of this chapter or an order issued or
rule adopted under this chapter.
(b) Authorizes the executive director to institute an action for a civil
penalty as provided by Section 51.352, in addition to the injunctive
relief provided by Subsection (a).
Sec. 953.204. ADMINISTRATIVE PROCEDURE. Provides that Sections 51.310,
51.353, and 51.354 apply to a disciplinary action taken under this
chapter.
Sec. 953.205. APPEAL. Authorizes a person affected by a ruling, order,
decision, or other action of the executive director or department to
appeal by filing a petition in a district court in Travis County.
SECTION 2. Amends Article 5.13-1, Insurance Code, by adding Subsection
(h) to prohibit an
insurer from issuing a prepaid legal service contract under this article
after March 1, 2004.
SECTION 3. Amends Section 951.003(b), Occupations Code, to provide that a
law pertaining to legal service contracts under Chapter 953 or insurance
does not apply to a program under this chapter.
SECTION 4. (a) Provides that Chapter 953, Occupations Code, as added by
this Act, applies only to a legal service contract entered into on or
after March 1, 2004, or a legal service contract entered into before
March 1, 2004, that meets the requirements of Subsection (c) of this
section.
(b) Provides that a person regulated under Chapter 953, Occupations Code,
as added by this Act, is not required to comply with that chapter until
March 1, 2004, but may implement the requirements of that chapter before
March 1, 2004. Provides that the failure of a legal service contract
company or other person to comply with Chapter 953, Occupations Code, as
added by this Act, or otherwise to administer a legal service contract
plan in the manner required by that chapter before March 1, 2004, is not
admissible in any court, arbitration, or alternative dispute resolution
proceeding and may not otherwise be used to prove that the action of any
person or the affected legal service contract was unlawful or otherwise
improper.
(c) Authorizes the Texas Department of Licensing and Regulation and the
Texas Department of Insurance to enter into a memorandum of understanding
for a transition plan to transfer the regulation of legal service
contracts from the Texas Department of Insurance to the Texas Department
of Licensing and Regulation. Requires the transition plan to meet certain
minimum standards.
SECTION 5. Effective date: September 1, 2003.
SUMMARY OF COMMITTEE CHANGES
SECTION 1. Amends As Filed S.B. 597, proposed Section 953.004,
Occupations Code, to include an insurer who renews prepaid legal service
contracts in addition to an insurer who issues prepaid legal service
contracts. Provides that the transfer of regulation of the insurer's
legal service contracts will be from the Texas Department of Insurance to
the Texas Department of Licensing and Regulation.
Amends proposed Section 953.156, Occupations Code, to require any
subsequent endorsement or attachment to the contract to be filed with the
executive director before the endorsement or attachment is delivered to
legal service contract holders.
Amends proposed Section 953.157, Occupations Code, to extend the time in
which a legal service contract holder provides a company with written
notice of termination from the third day to the seventh day after the date
the legal service contract holder receives the contract.
SECTION 2. No changes.
SECTION 3. No changes.
SECTION 4. Amends proposed Subsection (c) to authorize, rather than
require, the Texas Department of Licensing and Regulation and the Texas
Department of Insurance to enter into a memorandum of understanding in
relation to a transition plan to transfer the regulation of legal service
contracts.
SECTION 5. No changes.