Providers (obligors) of such contracts would be required to register with the Department of Banking and Insurance and meet one of three financial responsibility requirements:  1)  insure contracts under a reimbursement insurance policy; 2) maintain an unearned reserve;  or 3) demonstrate and maintain a net worth of $100 million dollars.

While the disclosures within a service contract would be governed by the new law, the legislation does not deem them subject of filing with, or prior approval of, the Department.   Under the new law, such contracts would be specifically exempt from treatment as insurance. 

Further, the legislation provides that a violation of the new law  constitutes an unlawful practice pursuant to the state’s Consumer Fraud Act, punishable by monetary penalties of up to $10,000 for the first offense and up to $20,000 for subsequent offenses, as well as, cease and desist orders issued by the state Attorney General.

The ancillary protection product (“APP”) warranty  would allow a warrantor to cover incidental costs that result from the failure of the protection product to prevent loss or damage to a motor vehicle from specific causes.  Ancillary protection products include such things as chemical additives, alarm systems, steering locks, window etch products and ignition kill switches. 

The legislation provides that covered incidental costs may include insurance deductibles, rental vehicle costs, sales or registration taxes associated with replacing a vehicle as well as the difference between the ACV and replacement cost of a stolen vehicle.

Under this bill, the APP service contract could include such benefits or services as repair or replacement of tires or wheels due to road hazards; paintless dent removal and repair of windshield chips or cracks. 

The legislation would permit an APP warranty or service contract to be offered on a stand-alone basis or offered in conjunction with the purchase of a vehicle service contract.  Vehicle service contracts are currently regulated by the Insurance Department under the Nebraska Vehicle Service Contract Reimbursement Act and are required to be insured under a first-dollar reimbursement insurance policy.The content of  VSC consumer disclosures are regulated as well.  The legislation does not change this with regard to VSCs.   However, it appears that if an APP warranty or APP service contract is offered on a stand-alone basis, there would be no reimbursement insurance requirement or other terms and conditions disclosure requirements.

SB 796 proposes to add to the list of prohibited practices the enforcement of, or the attempt to enforce,  an agreement that provide services to a consumer which contains an automatic renewal provision, unless the consumer signs an acknowledgement of such a provision before entering into the agreement and at least 30 days before the end of the term of an agreement,  a notice is sent to the consumer  that indicates that the agreement will automatically be renewed unless the consumer terminates the agreement.   The legislation provides that such notice may be sent electronically to the last known electronic mail address of the consumer, or by certified mail, to the last known address of the consumer.  Neither current law, nor this legislation, define “agreement”.  However, current law defines “trade and commerce” as “the conduct of a business providing goods, property, or service primarily for personal, family, or household purposes and includes the advertising, solicitation, offering for sale or rent, sale, lease, or distribution of a service or property, tangible or intangible, real, personal, or mixed, or any other article, or a business opportunity.” 

Although not specifically addressed in this legislation, it is worth noting that Michigan’s Consumer Protection Act  currently addresses companies engaged in trade or commerce by providing service contracts to consumers,  and requires that a service contract for the repair or maintenance of a home appliance must contain a provision that states that if performance of the service contract is interrupted because of a strike or work stoppage at the company’s place of business, the effective period of the service contract shall be extended for the period of the strike or work stoppage.

The legislation does not seek to change existing registration requirements for providers (obligors) of such contracts.

In the case of a consumer goods service warranty, the legislation provides that refunds can be made by a variety of means, including store credit or gift cards.  However, it does not mandate that specific records be maintained about the refund.    And in the case of a home warranty, the legislation would now similarly allow refunds to be processed through the retail seller of the home warranty, (which is not currently provided for under current law), but does not mandate specific records relating to such refunds.

The new law also removes a current mandate that the Office of Insurance Regulation examine service warranty companies every five years and instead, provides authority to the Office to do so at its discretion.

The new law enacts a regulatory framework much like what has been adopted in a number of states for regulating all forms of service contracts.  However, this new law applies only to home service contracts and does not change ore repeal current requirements applicable to obligor companies (service warranty associations) offering service warranties (service contracts) covering motor vehicles or consumer goods. 

The new law requiresa three-year registration of the provider (oblig0r) which includes demonstrating compliance with one of three financial responsibility methods:  1) insuring the program through a contractual liability policy;  2) maintaining an  unearned premium reserve AND posting a security deposit with the Insurance Commissioner, or 3) maintaining net worth of at least $25 million.    The net worth of an obigor’s parent company may be considered when meeting this net worth standard. 

The new law also establishes certain requirements for the content (consumer disclosures) of a home service contract as well as any contractual liability policy used to qualify as an obligor/provider.  In addition, an insurer that writes such a CLP must meet minimum capital and surplus requirements as well.

The draft of language amending Chapter 690C of the Nevada Administrative Code, defines “affiliate” as:

“a person who directly or indirectly, through one or more intermediaries, controls or is controlled by or is under common control with another designated person.”  

In addition, the proposed language defines “control” as:

“ownership of shares of a corporation possessing 10% or more of the total voting power of all classes of shares entitled to vote or possessing 10% or more of  the total value of the outstanding shares of the corporation; and ownership of 10% or more by value of the beneficial interests in a partnership, trust, or estate.”

The Division is accepting comments regarding the proposed regulation no later than November 16, 2011

The new law, which applies to motor vehicle, consumer goods and home service contract programs, maintains the ability to insure a service contract program through a contractual liability policy or for a provider to demonstrate a $100M net worth. However, the new law now prohibits use of a contractual liability policy issued by an insurer affiliate.

The Nevada Division of Insurance is considering how the term “affiliate” will be defined and will likely do so through administrative rulemaking. The Division also has indicated, at least as of this time, that it does not believe the new law provides for “grandfathering” of the reserve option for contracts that are in-force at the time the new law becomes effective.  However, the Division is considering a plan to synchronize the enforcement of the new law with the renewal date of a provider’s registration, following October 1, 2011.

The final version of this legislation makes it unlawful for a motor vehicle extended service contract provider to fail to deliver a fully executed VSC to the consumer within a “commercially feasible time period” which is defined as no more than 45 days from the date of purchase. A prior version of this bill allowed for only 30 days.  The legislation also makes it unlawful for any provider, administrator, or retail seller who sells such contracts to fail to deliver an unsigned copy (sample) of the VSC to the consumer, if requested, prior to the sale.  Sellers would be permitted to direct the consumer to a website containing an unsigned copy of the VSC. 

The legislation modifies the “free look” period provision for reviewing a VSC by requiring that every contract contain a free look provision that allows the purchaser to return the contract to the provider within 20 business days of the mailing date of the contract, or the purchase date if the contract is executed and delivered at the time of sale.  If a claim is made under the contract during the free look period, the provider must refund the full purchase price less any claims that have been paid. The legislation also provides that a VSC must state that a service contract holder may cancel the contract after the free look period at any time and the provider must refund 100% of the unearned pro rata cost of the VSC, less any claims paid. A reasonable administrative fee may be surcharged by the provider in an amount not to exceed $50.  The final version of the legislation clarifies that a 10% penalty will be due to the consumer if a provider fails to return, within 45 days,  the amount outstanding and due to the consumer when a VSC is returned by a consumer under the “free look” provision. 

Under the legislation, a provider will be required maintain a “register” of appointed VSC producers who are authorized to sell such contracts in the state. Within 30 days of a provider authorizing a producer to sell its VSC contracts, the provider will be required to enter the name and license number of the producer in the company registry of appointed VSC producers. Within 30 days of a provider terminating a producer’s appointment, the provider will be required to update the registry with the effective date of the termination. Under the act, providers having information relating to any cause for discipline of an appointed producer will be required to notify the director of this information in writing.