Bill Text: CA AB2111 | 2009-2010 | Regular Session | Introduced

NOTE: There are more recent revisions of this legislation. Read Latest Draft

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Bill Title: Service contracts.

Spectrum: Partisan Bill (Republican 1-0)

Status: (Passed) 2010-09-29 - Chaptered by Secretary of State - Chapter 543, Statutes of 2010. [AB2111 Detail]

Download: California-2009-AB2111-Introduced.html

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BILL NUMBER: AB 2111	INTRODUCED
	BILL TEXT


INTRODUCED BY   Assembly Member Smyth

                        FEBRUARY 18, 2010

   An act to amend Sections 9855, 9855.2, and 9855.9 of the Business
and Professions Code, to amend Section 1794.41 of the Civil Code, and
to amend Sections 12800 and 12830 of, and to repeal Section 116.5
of, the Insurance Code, relating to service contracts.


	LEGISLATIVE COUNSEL'S DIGEST


   AB 2111, as introduced, Smyth. Service contracts.
   (1) Existing law regulates service contracts, as defined, relating
to maintenance or repair of specified sets and appliances. A service
contract may include provisions for incidental payment of indemnity,
not exceeding the retail value of $250 per year. Existing law
prohibits a service contract administrator, as defined, from being an
obligor on a service contract.
   This bill would change the definition of service contract by
expanding the items a contract may cover to include accessories of
electronic sets or appliances. The bill would delete the $250 per
year limit on incidental payments. The bill would also change the
definition of service contract administrator to no longer exclude
service contract sellers and insurers admitted to do business in the
state. The bill would authorize a service contract administrator to
be an obligor on a service contract where all service contracts under
which the service contract administrator is obligated to perform are
insured under a service contract reimbursement insurance policy.
   The bill would make other technical and clarifying changes.
   (2) Existing law prohibits a service contract seller from issuing
a service contract without complying with specific requirements. The
provisions regarding service contracts are in effect until January 1,
2013.
   This bill would instead prohibit a service contract seller from
issuing a service contract unless the obligor under the contract has
complied with specific requirements. The bill would extend the repeal
date for the provisions regarding service contracts to January 1,
2018.
   (3) Existing law prohibits a service contract covering any motor
vehicle, home appliance, or home electronic product purchased for use
in this state from being offered for sale or sold unless several
elements exist, including that the contract is cancelable by the
purchaser under certain conditions.
   This bill would change the required conditions of a cancellation
in that the seller would no longer be required to indicate in the
contract which of specified bases for a pro rata refund the seller is
using.
   (4) Existing law provides that an express warranty warranting a
motor vehicle lubricant, treatment, fluid, or additive that covers
incidental or consequential damage resulting from a failure of the
lubricant, treatment, fluid, or additive, is automobile insurance,
unless certain requirements are met.
   This bill would delete those provisions.
   (5) Existing law defines vehicle service contract for purposes of
provisions relating to sellers of vehicles.
   This bill would add to the definition of a vehicle service
contract an agreement, provided with or without separate
consideration, that promises to repair, replace, or maintain a motor
vehicle or watercraft, or to indemnify for the repair, replacement,
or maintenance of a motor vehicle or watercraft, conditioned upon the
use of a specific brand or brands of lubricant, treatment, fluid, or
additive.
   (6) Existing law requires that prior to incurring an obligation
under a vehicle service contract, an obligor file with the Insurance
Commissioner, and receive the commissioner's approval to use, a copy
of an insurance policy covering 100% of the obligor's vehicle service
contract obligations. An obligor is authorized to have on file with
the commissioner only one active policy from one insurer at any time.
Any violation of this provision is a crime.
   This bill would authorize an obligor to have more than one policy
on file with the commissioner where the obligor annually files with
the commissioner a report certified as accurate by an officer or
director of the obligor that lists each of its insured vehicle
service contract programs and the corresponding insurance policy
under which each program is insured. Because this bill would create a
new crime, it would impose a state-mandated local program.
   (7) The California Constitution requires the state to reimburse
local agencies and school districts for certain costs mandated by the
state. Statutory provisions establish procedures for making that
reimbursement.
   This bill would provide that no reimbursement is required by this
act for a specified reason.
   Vote: majority. Appropriation: no. Fiscal committee: yes.
State-mandated local program: yes.


THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:

  SECTION 1.  Section 9855 of the Business and Professions Code is
amended to read:
   9855.  The definitions used in this section shall govern the
construction and terms as used in this chapter:
   (a)  (1)    "Service contract"
means a contract in writing to perform, over a fixed period of time
or for a specified duration, services relating to the maintenance,
replacement, or repair of  a   an electronic
 set or appliance, as defined by this chapter,  and their
accessories  or of furniture, jewelry, lawn and garden
equipment, power tools, fitness equipment, telephone equipment, small
kitchen appliances and tools, or home health care products, and may
include provisions for incidental payment of indemnity under limited
circumstances, including, but not limited to, power surges, food
spoilage, or accidental damage from handling. 
   (2) Incidental payment of indemnity under paragraph (1) shall not
exceed a retail value of two hundred fifty dollars ($250) per year.

   (b) "Service contract administrator" or "administrator" means a
person  , other than a service contract seller or an insurer
admitted to do business in this state,  who performs or
arranges, or has an affiliate who performs or arranges, the
collection, maintenance, or disbursement of moneys to compensate any
party for claims or repairs pursuant to a service contract, and who
also performs or arranges, or has an affiliate who performs or
arranges, any of the following activities on behalf of service
contract sellers:
   (1) Providing service contract sellers with service contract
forms.
   (2) Participating in the adjustment of claims arising from service
contracts.
   (3) Arranging on behalf of service contract sellers the insurance
required by Section 9855.2.
   A service contract administrator shall not be an obligor on a
service contract  unless all   service contracts under
which the service contract administrator is obligated to perform are
insured under a service contract reimbursement insurance po 
 licy  .
   (c)  (1)    "Service contract seller" or "seller"
means a person who sells or offers to sell a service contract to a
service contractholder, including a person who is the obligor under a
service contract sold by the seller, manufacturer, or repairer of
the product covered by the service contract. 
   (2) "Service contract seller" or "seller" also includes a third
party, including an obligor, who is not the seller, manufacturer, or
repairer of the product. 
   (d) "Service contractholder" means a person who purchases or
receives a service contract from a service contract seller.
   (e) "Service contractor" means a service contract administrator or
a service contract seller.
   (f) "Service contract reimbursement insurance policy" means a
policy of insurance issued by an insurer admitted to do business in
this state providing coverage for all obligations and liabilities
incurred by a service contract seller under the terms of the service
contracts sold in this state by the service contract seller to a
service contractholder. The service contract reimbursement insurance
policy shall either cover all service contracts sold or specifically
cover those contracts sold to residents of the State of California.
   (g) "Obligor" is the entity financially and legally obligated
under the terms of a service contract.
   (h) The terms "consumer goods," "manufacturer," "retail seller,"
"retailer," and "sale" shall have the same meanings ascribed to them
in Section 1791 of the Civil Code.
  SEC. 2.  Section 9855.2 of the Business and Professions Code is
amended to read:
   9855.2.  (a) A service contract seller shall not issue, sell, or
offer for sale a service contract unless  he or she complies
  the obligor under the service contract has complied
 with one of the following requirements:
   (1) Files with the director one of the following:
   (A) The most recent annual report on Form 10-K required by the
Securities and Exchange Commission, reflecting a net worth greater
than the sum of the deferred revenues from service contracts in
force. If the service contractor is a foreign corporation that files
a comparable audited financial statement with its home government or
with the United States government, the director may deem that
statement an acceptable substitute for Form 10-K.
   (B) The most recent audited financial statement reflecting a net
worth of not less than one hundred million dollars ($100,000,000).
The financial statement shall be certified by a certified public
accountant who is licensed in the state where the service contract
seller maintains its principal place of business or the seller's
state of domestic incorporation.
   (2) Obtains a service contract reimbursement insurance policy.
   (3) Sells service contracts that are administered by a service
contract administrator who has obtained a service contract
reimbursement insurance policy covering the seller's service
contracts.
   (4) Maintains and annually verifies to the director a funded
account held in escrow equal to a minimum of 25 percent of the
deferred revenues from the service contracts in force.
   (b) A service contract administrator shall not administer service
contracts sold in this state unless a service contract reimbursement
insurance policy covering these service contracts has been obtained.
  SEC. 3.  Section 9855.9 of the Business and Professions Code is
amended to read:
   9855.9.  This article shall remain in effect only until January 1,
 2013,   2018,  and as of that date is
repealed, unless a later enacted statute, that is enacted before
January 1,  2013,   2018,  deletes or
extends that date.
  SEC. 4.  Section 1794.41 of the Civil Code is amended to read:
   1794.41.  (a) No service contract covering any motor vehicle, home
appliance or home electronic product purchased for use in this state
may be offered for sale or sold unless all of the following elements
exist:
   (1) The contract shall contain the disclosures specified in
Section 1794.4 and shall disclose in the manner described in that
section the buyer's cancellation and refund rights provided by this
section.
   (2) The contract shall be available for inspection by the buyer
prior to purchase and either the contract, or a brochure which
specifically describes the terms, conditions, and exclusions of the
contract, and the provisions of this section relating to contract
delivery, cancellation, and refund, shall be delivered to the buyer
at or before the time of purchase of the contract. Within 60 days
after the date of purchase, the contract itself shall be delivered to
the buyer. If a service contract for a home appliance or a home
electronic product is sold by means of a telephone solicitation, the
seller may elect to satisfy the requirements of this paragraph by
mailing or delivering the contract to the buyer not later than 30
days after the date of the sale of the contract.
   (3) The contract is applicable only to items, costs, and time
periods not covered by the express warranty. However, a service
contract may run concurrently with or overlap an express warranty if
(A) the contract covers items or costs not covered by the express
warranty or (B) the contract provides relief to the purchaser not
available under the express warranty, such as automatic replacement
of a product where the express warranty only provides for repair.
   (4) The contract shall be cancelable by the purchaser under the
following conditions:
   (A) Unless the contract provides for a longer period, within the
first 60 days after receipt of the contract, or with respect to a
contract covering a used motor vehicle without manufacturer
warranties, a home appliance, or a home electronic product, within
the first 30 days after receipt of the contract, the full amount paid
shall be refunded by the seller to the purchaser if the purchaser
provides a written notice of cancellation to the person specified in
the contract, and if no claims have been made against the contract.
If a claim has been made against the contract either within the first
60 days after receipt of the contract, or with respect to a used
motor vehicle without manufacturer warranties, home appliance, or
home electronic product, within the first 30 days after receipt of
the contract, a pro rata refund, based on either elapsed time or an
objective measure of use, such as mileage or the retail value of any
service performed, at the seller's option  as indicated in
the contract  , shall be made by the seller to the purchaser
if the purchaser provides a written notice of cancellation to the
person specified in the contract.
   (B) Unless the contract provides for a longer period for obtaining
a full refund, after the first 60 days after receipt of the
contract, or with respect to a contract covering a used motor vehicle
without manufacturer warranties, a home appliance, or a home
electronic product, after the first 30 days after the receipt of the
contract, a pro rata refund, based on either elapsed time or an
objective measure of use, such as mileage or the retail value of any
service performed, at the seller's option  as indicated in
the contract  , shall be made by the seller to the purchaser
if the purchaser provides a written notice of cancellation to the
person specified in the contract. In addition, the seller may assess
a cancellation or administrative fee, not to exceed 10 percent of the
price of the service contract or twenty-five dollars ($25),
whichever is less.
   (C) If the purchase of the service contract was financed, the
seller may make the refund payable to the purchaser, the assignee, or
lender of record, or both.
   (b) Nothing in this section shall apply to a home protection plan
that is issued by a home protection company which is subject to Part
7 (commencing with Section 12740) of Division 2 of the Insurance
Code. 
   (c) The amendments to this section made at the 1988 portion of the
1987-88 Regular Session of the Legislature that extend the
application of this section to service contracts on home appliances
and home electronic products shall become operative on July 1, 1989.
 
   (d) 
    (c)  If any provision of this section conflicts with any
provision of Part 8 (commencing with Section 12800) of Division 2 of
the Insurance Code, the provision of the Insurance Code shall apply
instead of this section.
  SEC. 5.  Section 116.5 of the Insurance Code is repealed. 
   116.5.  An express warranty warranting a motor vehicle lubricant,
treatment, fluid, or additive that covers incidental or consequential
damage resulting from a failure of the lubricant, treatment, fluid,
or additive, shall constitute automobile insurance, unless all of the
following requirements are met:
   (a) The obligor is the primary manufacturer of the product. For
the purpose of this section, "manufacturer" means a person who can
prove clearly and convincingly that the per unit cost of owned or
leased capital goods, including the factory, used to produce the
product, plus the per unit cost of nonsubcontracted labor used to
produce the product, exceeds twice the per unit cost of raw materials
used to produce the product. "Manufacturer" also means a person who
has formulated or produced, and continuously offered in this state
for more than nine years, a motor vehicle lubricant, treatment,
fluid, or additive.
   (b) The commissioner has issued a written determination that the
obligor is a manufacturer as defined in subdivision (a). An obligor
shall provide the commissioner with all information, documents, and
affidavits reasonably necessary for this determination to be made.
Approval by the commissioner shall be obtained prior to January 1,
2004, or prior to the issuance of a warranty subject to this section,
whichever is later. If the commissioner determines that the obligor
is not a manufacturer, the obligor may obtain a hearing in accordance
with Chapter 4.5 (commencing with Section 11400) of Part 1 of
Division 3 of Title 2 of the Government Code.
   (c) The agreement covers only damage incurred while the product
was in the vehicle.
   (d) The agreement is provided automatically with the product at no
extra charge. 
  SEC. 6.  Section 12800 of the Insurance Code is amended to read:
   12800.  The following definitions apply for purposes of this part:

   (a) "Motor vehicle" means a self-propelled device operated solely
or primarily upon land and may include both self-propelled motor
homes or recreational vehicles, non-self-propelled camping and
recreational trailers, off-road vehicles, and trailers designed to
transport off-road vehicles. However, "motor vehicle" shall not
include a self-propelled vehicle, or a component part of such a
vehicle, that has any of the following characteristics:
   (1) Has a gross vehicle weight rating of 30,000 pounds or more,
and is not a recreational vehicle as defined by Section 18010 of the
Health and Safety Code.
   (2) Is designed to transport more than 15 passengers, including
the driver.
   (3) Is used in the transportation of materials considered
hazardous pursuant to the Hazardous Materials Transportation Act (49
U.S.C. Sec. 5101 et seq.), as amended.
   (b) "Watercraft" means a vessel, as defined in Section 21 of the
Harbors and Navigation Code, and may include any non-self-propelled
trailer used to transport such watercraft upon land.
   (c) (1) "Vehicle service contract" means a contract or agreement
for a separately stated consideration and for a specific duration to
repair, replace, or maintain a motor vehicle or watercraft, or to
indemnify for the repair, replacement, or maintenance of a motor
vehicle or watercraft, necessitated by an operational or structural
failure due to a defect in materials or workmanship, or due to normal
wear and tear.
   (2) A vehicle service contract may also provide for the incidental
payment of indemnity under limited circumstances only in the form of
the following additional benefits: coverage for towing, substitute
transportation, emergency road service, rental car reimbursement,
reimbursement of deductible amounts under a manufacturer's warranty,
and reimbursement for travel, lodging, or meals.
   (3) "Vehicle service contract" also includes an agreement of a
term of at least one year, for separately stated consideration, that
promises routine maintenance. 
   (4) "Vehicle service contract" also includes an agreement,
provided with or without separate consideration, that promises to
repair, replace, or maintain a motor vehicle or watercraft, or to
indemnify for the repair, replacement, or maintenance of a motor
vehicle or watercraft, conditioned upon the use of a specific brand
or brands of lubricant, treatment, fluid, or additive.  

   (4) 
    (5)  Notwithstanding Section 116, and paragraphs (1) and
(2) of this subdivision, a vehicle service contract also includes
one or more of the following:
   (A) An agreement that promises the repair or replacement of a tire
or wheel necessitated by wear and tear, defect, or damage caused by
a road hazard. However, an agreement that promises the repair or
replacement of a tire necessitated by wear and tear, defect, or
damage caused by a road hazard, in which the obligor is the tire
manufacturer, is exempt from the requirements of this part. A
warranty provided by a tire or wheel distributor or retailer is
exempt from the requirements of this part as long as the warranty
covers only defects in the material or workmanship of the tire or
wheel.
   (B) An agreement that promises the repair or replacement of glass
on a vehicle necessitated by wear and tear, defect, or damage caused
by a road hazard. However, a warranty provided by a vehicle glass
manufacturer is exempt from the requirements of this part. A warranty
provided by a vehicle glass distributor or retailer is exempt from
the requirements of this part as long as the warranty covers only
defects in the material or workmanship of the vehicle glass.
   (C) An agreement that promises the removal of a dent, ding, or
crease without affecting the existing paint finish using paintless
dent repair techniques, and which expressly excludes the replacement
of vehicle body panels, sanding, bonding, or painting.
   (d) "Service contract administrator" or "administrator" means any
person, other than an obligor, who performs or arranges, directly or
indirectly, the collection, maintenance, or disbursement of moneys to
compensate any party for claims or repairs pursuant to a vehicle
service contract, and who also performs or arranges, directly or
indirectly, any of the following activities with respect to vehicle
service contracts in which a seller located within this state is the
obligor:
   (1) Providing sellers with service contract forms.
   (2) Participating in the adjustment of claims arising from service
contracts.
   (e) "Purchaser" means any person who purchases a vehicle service
contract from a seller.
   (f) "Seller" means either of the following:
   (1) With respect to motor vehicles, a dealer or lessor-retailer
licensed in one of those capacities by the Department of Motor
Vehicles and who sells vehicle service contracts incidental to his or
her business of selling or leasing motor vehicles.
   (2) With respect to watercraft, a person who sells vehicle service
contracts incidental to that person's business of selling or leasing
watercraft vehicles.
   (g) "Obligor" means the entity legally obligated under the terms
of a service contract.
  SEC. 7.  Section 12830 of the Insurance Code is amended to read:
   12830.  (a) Prior to incurring an obligation under a vehicle
service contract, an obligor shall file with the commissioner, to the
attention of the legal division, and receive the commissioner's
approval to use, a copy of an insurance policy covering 100 percent
of the obligor's vehicle service contract obligations. The policy
must be issued by an insurer admitted in this state and authorized by
the commissioner to issue that insurance in this state. The policy
may also be issued by a risk retention group, as that term is defined
in 15 U.S.C. Sec. 3901(a)(4), as long as that risk retention group
is in full compliance with the federal Liability Risk Retention Act
of 1986 (15 U.S.C. Sec. 3901 and following), is in good standing in
its domiciliary jurisdiction, and has registered with the
commissioner pursuant to Chapter 1.5 (commencing with Section 125) of
Part 1 of Division 1. The insurance required by this subdivision
shall be subject to the following:
   (1) The insurer or risk retention group shall, at the time the
policy is filed with the commissioner, and continuously thereafter,
be rated "B++" or better by A. M. Best Company, Inc., maintain
surplus as to policyholders and paid-in capital of at least fifteen
million dollars ($15,000,000), and annually file audited financial
statements with the commissioner.
   (2) The commissioner may authorize an insurer or risk retention
group that has surplus as to policyholders and paid-in capital of
less than fifteen million dollars ($15,000,000) but at least equal to
ten million dollars ($10,000,000) to issue the insurance required by
this paragraph if the insurer or risk retention group demonstrates
to the satisfaction of the commissioner that the company maintains a
ratio of direct written premiums, wherever written, to surplus as to
policyholders and paid-in capital of not more than 3 to 1.
   (3) An obligor required to maintain insurance pursuant to this
paragraph who is an affiliate of a distributor of new motor vehicles
licensed as such in any state prior to January 1, 2003, and
continuously thereafter, is exempt from the requirement that its
insurer or risk retention group satisfy the rating, surplus, and
paid-in capital requirements of paragraph (1). This exemption shall
apply only if the distributor sold or distributed at least 25,000 new
motor vehicles to licensed dealers in the preceding five years. For
the purpose of this paragraph, "affiliate" has the meaning set forth
in subdivision (a) of Section 1215.
   (b) An insurance policy filed with the commissioner pursuant to
subdivision (a) shall state the name of the obligor. The policy shall
provide that all purchasers of vehicle service contracts shall be
entitled to satisfaction by the insurer of any and all obligations
arising under vehicle service contracts of the named obligor, upon
the existence of all of the following conditions and no others:
   (1) The service contract obligor refuses or fails to satisfy an
obligation arising under the vehicle service contract within 60 days
of the date the purchaser submits proof of loss to the obligor.
   (2) The purchaser provides written notice to the insurer that the
obligor has failed to comply with an obligation under the vehicle
service contract.
   (3) The purchaser possesses a vehicle service contract sold after
the inception and prior to any cancellation of the insurance policy
required by subdivision (a), and the vehicle service contract recites
the name of the obligor that is insured by the policy as the obligor
of the service contract.
   (c) An insurer's liability under a policy filed pursuant to
subdivision (a) shall not be negated by any failure of the seller, an
administrator, the obligor, or agents of any of these persons, to
report the issuance of a vehicle service contract or to remit moneys
to another person pursuant to a contractual agreement. The policy
must state that the insurer is deemed to have received the premium
for the policy upon payment by the purchaser for a vehicle service
contract insured by that policy.
   (d) An obligor may have on file with the commissioner only one
active policy from one insurer at any time  unless the obligor
files with the commissioner annually a report certified   as
accurate by an officer or director of the obligor that lists each of
its insured vehicle service contract programs and the corresponding
insurance policy under which each program is insured  .
   (e) No policy cancellation by an insurer shall be valid unless a
notice of the intent to cancel the policy was filed with the
commissioner 30 days prior to the effective date of the cancellation,
or 10 days prior in the event that the cancellation is due to fraud,
material misrepresentation, or defalcation by the obligor or its
administrator, if any.
  SEC. 8.  No reimbursement is required by this act pursuant to
Section 6 of Article XIII B of the California Constitution because
the only costs that may be incurred by a local agency or school
district will be incurred because this act creates a new crime or
infraction, eliminates a crime or infraction, or changes the penalty
for a crime or infraction, within the meaning of Section 17556 of the
Government Code, or changes the definition of a crime within the
meaning of Section 6 of Article XIII B of the California
Constitution.