This recently filed legislation defines “ancillary protection product warranty” and “ancillary protection product service contract” and creates a carve-out from regulation under the Insurance Code for such agreements.    

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.  The Nebraska Department of Insurance plans to amend its regulations concerning vehicle service contracts to incorporate this new legislation, and they are expected to include a requirement that such APP warranty contracts must be insured under a first-dollar reimbursement insurance policy as are all vehicle service contracts offered in Nebraska.

Current law exempts from licensure as a Service Warranty Association, any contracts wherein the obligor provides documentation that it has $100M in net assets.  Current law does not require any ongoing proof of such an entity’s net assets; however, this legislation establishes an annual requirement, every May 1, requiring any entity that has applied for, and received, an exemption under Section 6602, to file updated audited financial statements and any other information required by the Department of Insurance in order to document and verify that the contracts of the entity do not meet the definition of “service warranty” and that the entity still qualifies for the exemption. 

This legislation has an effective date of November 1, 2012.

Oklahoma’s current law, entitled the Service Warranty Insurance Act, would be repealed under Senate Bill 1475, and an almost identical statutory scheme for regulating these contracts would be codified in another section of law, as the Service Warranty Act.  Under this legislation, service warranties would continue to be regulated by the Insurance Commissioner and all licensing and other operational requirements  applicable to service warranty associations offering these types of contracts, including the filing of quarterly and annual reports and the use of statutory accounting, would remain the same.    The bill would enact a provision that makes clear that the marketing, sale, issuance and administration of motor vehicle and consumer goods service warranties, and related warranty retail sellers, are exempt from the Insurance Code. 

The bill replaces the current definition of “premium”, as the consideration for a service warranty, with the term “provider fee”.   However, the bill does not change the applicability of a 2% administrative fee which, prospectively, would be due relative to gross provider fees written in Oklahoma by a service warranty association.  The legislation does not remove the exception to this requirement for all service warranty associations having a contractual liability in place prior to March 31, 2009.  Service warranty associations qualifying for this exception will still be able to pay a flat administrative fee of $3,000, in lieu of the 2% administrative fee, under this legislation if enacted.

Lastly, the bill also makes technical cross-reference changes to the term “service contract” in the current law governing home service contracts, vehicle protection products and portable electronics insurance.   This bass has an effective date of November 1, 2012.

The legislation also amends the manner in which a MV service agreement association effectuates refunds.  Specifically, if it does so through the issuing salesperson or agent, (which is already authorized under current law), then the MV service agreement association must send the unearned pro rata premium refund, less any unearned pro rata commission, to the salesperson or agent effectuating the refund.  The salesperson, in turn, must send the entire unearned pro rata refund (pro rata premium, commission and sales tax) to the consumer.  The legislation also establishes certain recordkeeping requirements for the MV salesperson relative to these refunds

Further, the legislation also adds language that express authorizes home warranty associations and service (consumer goods) warranty associations to also effectuate refunds through their issuing sales representatives, but does not specify the detail as outlined above for MV sales persons.   The legislation does provide that, in the instance of a service warranty association only, that such refunds may be effectuated in the form of cash, check, store credit, gift card or other “similar means”.    The legislation is silent as to the form that a refund from a home warranty sales representative or home warranty association must take.

Lastly, the bill amends the frequency in which the Office of the Insurance Regulation (OIR) must examine service agreement associations and service warranty companies by providing that they may be examined at the OIR’s discretion.  The legislation also provides that such examinations may only cover the most recent five years and the cost of such examination to the company may not exceed 10 % of the company’s reported net income for the prior year.

This legislation will be effective July 1, 2012.

Additional, the current versions of these bills do not contain any amendment to the financial responsibility requirements for service contract providers, as was originally contained in the bills as introduced.

Specifically, House Bill 820 provides that in lieu of insuring its vehicle service contracts under a CLP, an auto dealer that is licensed under Georgia law as a retail installment seller, may sell and offer VSCs provided that it:

• Maintains, or has a parent company that maintains, a net worth of at least $100 million;
• Files a copy of either its Form 10K or 20F disclosure statements as would be filed with the SEC if applicable, or if not a publicly-traded company, provides a copy of its audited financial statements demonstrating the required minimum net worth;
• Registers with the Insurance Commissioner and files copies of the VSCs; and
• Posts a security deposit or surety bond in an amount not to exceed $250,000 upon request of the Insurance Commissioner. 

The bill does not specify the circumstances under which the Insurance Commissioner will or may require the $250,000 deposit or bond.

If enacted, this legislation would be effective November 1, 2012.

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.

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.