The Kentucky Department of Insurance has proposed the repeal of 806 KAR 5:050, which is the administrative regulation that the Department has historically relied upon in regulating vehicle service contracts obligors. The proposed repeal is in keeping with changes enacted earlier this year as a result of the enactment of Kentucky House Bill 417 which was effective on July 12.
Among other things, HB 417 amended Kentucky’s definition of “casualty” insurance which includes a definition of “automobile guaranty”. The 2012 amendments to this statute(304.5-070, KRS), effectively carve out from this definition various types of agreements that are often sold in connection with the purchase of vehicle. Included in this list of agreements are “Service Contracts” and “Vehicle Protection Product” warranties.
The new law exempting these products from the definition of casualty insurance defines these agreements in the following manner:
“Service contract” means a contract or agreement given for consideration in addition to the purchase price of a new or used motor vehicle to provide for repair or replacement service or indemnification for that service for the operation or structural failure of a motor vehicle due to a defect in materials or skill of work or normal wear and tear, but does not include mechanical breakdown insurance or maintenance agreements. A service contract shall not be considered a contract of, or for, insurance.
“Vehicle protection product” means a vehicle protection device, system, or service that is installed on or applied to a vehicle that is designed to deter the theft of the vehicle, and includes a written warranty that provides that if the product fails to deter the theft of the vehicle, the warranty holder shall be paid specified incidental costs by the warrantor as a result of the failure of the device, system, or service to perform pursuant to the terms of the warranty. Vehicle protection products include but are not limited to window etch products and body part marking products. A vehicle protections product shall not be considered a contract of, or for, insurance.
Therefore, service contract obligors are no longer required to insure their VSC obligations through a contractual liability policy and the status of vehicle protection products as not being insurance is now clarified in statute. However, it may be worth noting here that a vehicle service contract that provide “bells and whistles benefits” beyond what has been specifically exempted in the new law may not necessarily be viewed as non-insurance by the Kentucky DOI.
A hearing on the rule is set for late November. It is expected to be adopted without objection.
