PRINTER'S NO. 401
No. 351 Session of 2007
INTRODUCED BY DeLUCA, FRANKEL, FREEMAN, HORNAMAN, JOSEPHS,
KOTIK, LEVDANSKY, MELIO, OLIVER, SIPTROTH AND SOLOBAY,
FEBRUARY 9, 2007
REFERRED TO COMMITTEE ON INSURANCE, FEBRUARY 9, 2007
AN ACT
1 Providing for the regulation of service contracts and for powers
2 and duties of the Insurance Commissioner; and imposing a
3 civil penalty.
4 TABLE OF CONTENTS
5 Section 1. Short title.
6 Section 2. Legislative intent.
7 Section 3. Definitions.
8 Section 4. Exemptions.
9 Section 5. Limited exemption.
10 Section 6. Requirements.
11 Section 7. Reimbursement insurance policies.
12 Section 8. Required disclosures.
13 Section 9. Prohibitions.
14 Section 10. Recordkeeping.
15 Section 11. Cancellation of reimbursement insurance policy.
16 Section 12. Obligation of reimbursement insurance policy
17 insurers.
18 Section 13. Enforcement.
1 Section 14. Applicability.
2 Section 15. Effective date.
3 The General Assembly of the Commonwealth of Pennsylvania
4 hereby enacts as follows:
5 Section 1. Short title.
6 This act shall be known and may be cited as the Service
7 Contract Act.
8 Section 2. Legislative intent.
9 The purpose of this act is to create a legal framework within
10 which service contracts may be marketed, sold, offered for sale,
11 issued, made, proposed to be made and administered in this
12 Commonwealth.
13 Section 3. Definitions.
14 The following words and phrases when used in this act shall
15 have the meanings given to them in this section unless the
16 context clearly indicates otherwise:
17 "Administrator." The person that is responsible for the
18 administration of service contracts or the service contracts
19 plan or is responsible for any submission required by this act.
20 "Commissioner." The Insurance Commissioner of the
21 Commonwealth.
22 "Consumer." A natural person who buys other than for
23 purposes of resale any tangible personal property that is
24 distributed in commerce and that is normally used for personal,
25 family or household purposes and not for business or research
26 purposes.
27 "Contractholder." A person that is the purchaser or holder
28 of a service contract.
29 "Maintenance agreement." A contract of limited duration that
30 provides for scheduled maintenance only and does not provide for
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1 repair or replacement.
2 "Motor vehicle." A motorized device designed to transport up
3 to 15 passengers. The term includes a self-propelled motor home
4 or recreational vehicle, non-self-propelled camping and
5 recreational trailer, off-road vehicle and trailer designed to
6 transport an off-road vehicle. The term also includes any
7 motorized watercraft and non-self-propelled trailer used to
8 transport such watercraft on land.
9 "Motor vehicle manufacturer." A person or entity that:
10 (1) manufactures or produces motor vehicles and sells
11 motor vehicles under its own name or label;
12 (2) is a wholly owned subsidiary of the person that
13 manufactures or produces motor vehicles;
14 (3) is a corporation which owns 100% of the person that
15 manufactures or produces motor vehicles;
16 (4) does not manufacture or produce motor vehicles but
17 sells motor vehicles under the trade name or label of another
18 person that manufactures or produces motor vehicles;
19 (5) manufactures or produces motor vehicles and sells
20 such motor vehicles under the trade name or label of another
21 person that manufactures or produces motor vehicles; or
22 (6) does not manufacture or produce motor vehicles but,
23 pursuant to a written contract, licenses the use of its trade
24 name or label to another person that manufactures or produces
25 motor vehicles and that sells motor vehicles under the
26 licensor's trade name or label.
27 "Nonoriginal manufacturer's parts." Replacement parts not
28 made for or by the original manufacturer of the part, commonly
29 referred to as after-market parts.
30 "Person." An individual, partnership, corporation,
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1 incorporated or unincorporated association, joint stock company,
2 reciprocal, syndicate or any similar entity or combination of
3 entities acting in concert.
4 "Premium." The consideration paid to an insurer for a
5 reimbursement insurance policy.
6 "Provider." A person that is contractually obligated to the
7 contractholder under the terms of the service contract.
8 "Provider fee." The consideration paid for a service
9 contract.
10 "Reimbursement insurance policy." A policy of insurance
11 issued to a provider to either provide reimbursement to the
12 provider under the terms of the insured service contracts issued
13 or sold by the provider or, in the event of the provider's
14 nonperformance, to pay on behalf of the provider all covered
15 contractual obligations incurred by the provider under the terms
16 of the insured service contracts issued or sold by the provider.
17 "Service contract." A contract or agreement for a separately
18 stated consideration for a specific duration to perform the
19 repair, replacement or maintenance of property or
20 indemnification for repair, replacement or maintenance, for the
21 operational or structural failure of any motor vehicle or
22 residential or other property due to a defect in materials,
23 workmanship, inherent defect or normal wear and tear, with or
24 without additional provisions for incidental payment of
25 indemnity under limited circumstances, including, but not
26 limited to, towing, rental and emergency road service and road
27 hazard protection. The term includes contracts that provide for
28 the repair, replacement or maintenance of property for damage
29 resulting from power surges or interruption and accidental
30 damage from handling.
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1 "Warranty." An agreement between the manufacturer, importer
2 or seller of property or services and the consumer that:
3 (1) Is made solely by the manufacturer, importer or
4 seller of property or services without consideration.
5 (2) Is not negotiated or separated from the sale of the
6 product.
7 (3) Is incidental to the sale of the product.
8 (4) Guarantees indemnity for defective parts, mechanical
9 or electrical breakdown, labor or other remedial measures,
10 such as repair or replacement of the property or repetition
11 of services.
12 Section 4. Exemptions.
13 The following agreements are exempt from this act:
14 (1) Warranties.
15 (2) Maintenance agreements.
16 (3) Warranties, service contracts or maintenance
17 agreements offered by public utilities on their transmission
18 devices to the extent they are regulated by the Pennsylvania
19 Public Utility Commission.
20 (4) Service contracts sold or offered for sale to
21 persons other than consumers.
22 (5) Service contracts on tangible property where the
23 tangible property for which the service contract is sold has
24 a purchase price of $100 or less, exclusive of sales tax.
25 (6) Mechanical breakdown insurance policies issued by a
26 licensed insurer.
27 Section 5. Limited exemption.
28 Motor vehicle manufacturer's service contracts on the motor
29 vehicle manufacturer's products need only comply with sections
30 6(f), 8(a), (d), (e), (f), (g), (h), (i), (j), (k) and (l), 9
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1 and 12, as applicable.
2 Section 6. Requirements.
3 (a) Issuance or sale of service contracts.--Service
4 contracts shall not be issued, sold or offered for sale in this
5 Commonwealth unless the provider has:
6 (1) Provided a receipt for or other written evidence of
7 the purchase of the service contract to the contractholder.
8 (2) Provided a copy of the service contract to the
9 contractholder within a reasonable period of time from the
10 date of purchase.
11 (b) Administrator.--A provider may, but is not required to,
12 appoint an administrator or other designee to be responsible for
13 any or all of the administration of service contracts and
14 compliance with this act.
15 (c) Registration.--Each provider of service contracts sold
16 in this Commonwealth shall file a registration with the
17 commissioner consisting of the provider's full name, full
18 corporate address, telephone number and contact person and any
19 designated person located in this Commonwealth for service of
20 process. Each provider shall pay to the commissioner a fee in
21 the amount of $600 upon initial registration and every two years
22 thereafter. The registration need only be updated by written
23 notification to the commissioner if material changes occur in
24 the registration on file.
25 (d) Performance of obligations.--In order to assure the
26 faithful performance of a provider's obligations to its
27 contractholders, each provider shall be responsible for
28 complying with one of the following requirements:
29 (1) Insure all service contracts under a reimbursement
30 insurance policy issued by an insurer licensed, registered or
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1 otherwise authorized to do business in this Commonwealth and
2 either:
3 (i) at the time the policy is filed with the
4 commissioner, and continuously thereafter:
5 (A) maintain surplus as to policyholders and
6 paid-in capital of at least $15,000,000; and
7 (B) annually file copies of the insurer's
8 financial statements, its annual statement to the
9 National Association of Insurance Commissioners and
10 the actuarial certification required by and filed in
11 the insurer's state of domicile; or
12 (ii) at the time the policy is filed with the
13 commissioner, and continuously thereafter:
14 (A) maintain surplus as to policyholders and
15 paid-in capital of less than $15,000,000 but at least
16 equal to $10,000,000;
17 (B) demonstrate to the satisfaction of the
18 commissioner that the company maintains a ratio of
19 net written premiums, wherever written, to surplus as
20 to policyholders and paid-in capital of not greater
21 than 3 to 1; and
22 (C) annually file copies of the insurer's
23 audited financial statements, its annual statement to
24 the National Association of Insurance Commissioners
25 and actuarial certification required by and filed in
26 the insurer's state of domicile.
27 (2) (i) Maintain a funded reserve account for its
28 obligations under its contracts issued and outstanding in
29 this Commonwealth. The reserves shall not be less than
30 40% of gross consideration received, less claims paid, on
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1 the sale of the service contract for all in-force
2 contracts. The reserve account shall be subject to
3 examination and review by the commissioner.
4 (ii) Place in trust with the commissioner a
5 financial security deposit, having a value of not less
6 than 5% of the gross consideration received, less claims
7 paid, on the sale of the service contract for all service
8 contracts issued and in force, but not less than $25,000,
9 consisting of one of the following:
10 (A) A surety bond issued by an authorized
11 surety.
12 (B) Securities of the type eligible for deposit
13 by authorized insurers in this Commonwealth.
14 (C) Cash.
15 (D) A letter of credit issued by a qualified
16 financial institution.
17 (E) Another form of security prescribed by
18 regulations issued by the commissioner.
19 (3) (i) Maintain or, together with its parent company
20 maintain, a net worth or stockholders' equity of
21 $100,000,000.
22 (ii) Upon request, provide the commissioner with a
23 copy of the provider's or the provider's parent company's
24 most recent Form 10-K or Form 20-F filed with the
25 Securities and Exchange Commission (SEC) within the last
26 calendar year or, if the company does not file with the
27 SEC, a copy of the company's financial statements which
28 shows a net worth of the provider or its parent company
29 of at least $100,000,000. If the provider's parent
30 company's Form 10-K, Form 20-F or financial statements
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1 are filed to meet the provider's financial stability
2 requirement, then the parent company shall agree to
3 guarantee the obligations of the provider relating to
4 service contracts sold by the provider in this
5 Commonwealth.
6 (e) Financial security requirements.--Except for the
7 requirements specified in subsections (c) and (d), no other
8 financial security requirements shall be required by the
9 commissioner for service contract providers.
10 (f) Return.--Service contracts shall require the provider to
11 permit the contractholder to return the service contract within
12 20 days of the date the service contract was mailed to the
13 contractholder or within ten days of delivery if the service
14 contract is delivered to the contractholder at the time of sale
15 or within a longer time period permitted under the service
16 contract. Upon return of the service contract to the provider
17 within the applicable time period, if no claim has been made
18 under the service contract prior to its return to the provider,
19 the service contract is void and the provider shall refund to
20 the contractholder, or credit the account of the contractholder,
21 the full purchase price of the service contract. The right to
22 void the service contract provided in this subsection is not
23 transferable and shall apply only to the original service
24 contract purchaser and only if no claim has been made prior to
25 its return to the provider. A 10% penalty per month shall be
26 added to a refund that is not paid or credited within 45 days
27 after return of the service contract to the provider.
28 (g) Premium taxes.--
29 (1) Provider fees collected on service contracts shall
30 not be subject to premium taxes.
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1 (2) Premiums for reimbursement insurance policies shall
2 be subject to applicable taxes.
3 (h) Licensing requirement exemption.--Except for the
4 registration requirements in subsection (c), providers and
5 related service contract sellers, administrators and other
6 persons marketing, selling or offering to sell service contracts
7 are exempt from any licensing requirements of this Commonwealth.
8 (i) Exemption from insurance law.--Service contracts are not
9 insurance contracts in this Commonwealth or otherwise regulated
10 under provisions of law regarding the sale of insurance. Except
11 as may be provided in this act, the marketing, sale, offering
12 for sale, issuance, making, proposing to make and administration
13 of service contracts by providers and related service contract
14 sellers, administrators and other persons shall be exempt from
15 provisions of law of this Commonwealth pertaining to insurance.
16 Section 7. Reimbursement insurance policies.
17 (a) Requirements.--Reimbursement insurance policies insuring
18 service contracts issued, sold or offered for sale in this
19 Commonwealth shall state that the insurer that issued the
20 reimbursement insurance policy shall either reimburse or pay on
21 behalf of the provider any covered sums the provider is legally
22 obligated to pay or, in the event of the provider's
23 nonperformance, shall provide the service which the provider is
24 legally obligated to perform according to the provider's
25 contractual obligations under the service contracts issued or
26 sold by the provider.
27 (b) Direct reimbursement.--In the event covered service is
28 not provided by the service contract provider within 60 days of
29 proof of loss by the contractholder, the contractholder is
30 entitled to apply directly to the reimbursement insurance
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1 company.
2 Section 8. Required disclosures.
3 (a) General rule.--Service contracts marketed, sold, offered
4 for sale, issued, made, proposed to be made or administered in
5 this Commonwealth shall be written, printed or typed in clear,
6 understandable language and shall disclose the requirements set
7 forth in this section, as applicable.
8 (b) Insured service contracts.--All service contracts shall
9 state the name and address of the insurer. Service contracts
10 insured under a reimbursement insurance policy pursuant to
11 section 6(d)(1) shall contain a statement in substantially the
12 following form: Obligations of the provider under this service
13 contract are insured under a service contract reimbursement
14 insurance policy.
15 (c) Uninsured service contracts.--Service contracts not
16 insured under a reimbursement insurance policy pursuant to
17 section 6(d)(1) shall contain a statement in substantially the
18 following form: Obligations of the provider under this service
19 contract are backed by the full faith and credit of the
20 provider.
21 (d) Name and address.--Service contracts shall state the
22 name and address of the provider and shall identify any
23 administrator if different from the provider, the service
24 contract seller and the contractholder to the extent that the
25 name of the contractholder has been furnished by the
26 contractholder. The identities of such parties are not required
27 to be preprinted on the service contract and may be added to the
28 service contract at the time of sale.
29 (e) Total purchase price and terms.--Service contracts shall
30 state the total purchase price and the terms under which a
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1 service contract is sold. The purchase price is not required to
2 be preprinted on the service contract and may be negotiated at
3 the time of sale with the contractholder.
4 (f) Deductible amounts.--Service contracts shall state the
5 existence of any deductible amount, if applicable.
6 (g) Identification of merchandise and services.--Service
7 contracts shall specify the merchandise and services to be
8 provided and any limitations, exceptions or exclusions.
9 (h) Nonoriginal manufacturer's parts.--Service contracts
10 covering motor vehicles shall state whether the use of the
11 nonoriginal manufacturer's parts is allowed.
12 (i) Transferability.--Service contracts shall state any
13 restrictions governing the transferability of the service
14 contract, if applicable.
15 (j) Cancellation.--
16 (1) Service contracts shall state the terms,
17 restrictions or conditions governing cancellation of the
18 service contract prior to the termination or expiration date
19 of the service contract by either the provider or the
20 contractholder. The provider of the service contract shall
21 mail a written notice to the contractholder at the last known
22 address of the contractholder contained in the records of the
23 provider at least 20 days prior to cancellation by the
24 provider.
25 (2) Prior notice is not required if the reason for
26 cancellation is any of the following:
27 (i) Nonpayment of the provider fee.
28 (ii) A material misrepresentation by the
29 contractholder to the provider.
30 (iii) A substantial breach of duties by the
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1 contractholder relating to the covered product or its
2 use.
3 (3) The notice shall state the effective date of the
4 cancellation and the reason for the cancellation.
5 (k) Obligations and duties.--Service contracts shall set
6 forth all the obligations and duties of the contractholder, such
7 as the duty to protect against any further damage and any
8 requirements to follow the owner's manual.
9 (l) Consequential damages.--Service contracts shall state
10 whether or not the service contract provides for or excludes
11 consequential damages, if applicable. Service contracts shall
12 also state whether the agreement accounts for preexisting
13 conditions. Service contracts may, but are not required to,
14 cover damage resulting from rust, corrosion or damage caused by
15 a noncovered part or system.
16 (m) Approval of repair work.--If prior approval of repair
17 work is required, a service contract shall state the procedure
18 for obtaining prior approval and for making a claim, including a
19 toll-free telephone number for claim service and a procedure for
20 obtaining emergency repairs performed outside normal business
21 hours.
22 Section 9. Prohibitions.
23 (a) Descriptions.--A provider shall not use in its name the
24 words "insurance," "casualty," "surety," "mutual" or any other
25 words descriptive of the insurance, casualty or surety business;
26 or a name deceptively similar to the name or description of any
27 insurance or surety corporation or to the name of any other
28 provider. The word "guaranty" or similar word may be used by a
29 provider. This subsection shall not apply to a company that was
30 using any of the prohibited language in its name prior to the
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1 effective date of this act. However, a company using the
2 prohibited language in its name shall include in its service
3 contracts a statement in substantially the following form: This
4 agreement is not an insurance contract.
5 (b) False or misleading statements.--A provider or its
6 representative shall not in its service contracts or literature
7 make, permit or cause to be made any false or misleading
8 statement or deliberately omit any material statement that would
9 be considered misleading if omitted.
10 (c) Purchase not required.--A person shall not require the
11 purchase of a service contract as a condition of a loan or a
12 condition for the sale of any property.
13 Section 10. Recordkeeping.
14 (a) Books and records.--The provider shall keep accurate
15 accounts, books and records concerning transactions regulated
16 under this act.
17 (b) Requirements.--The provider's accounts, books and
18 records shall include the following:
19 (1) Copies of each type of service contract sold.
20 (2) The name and address of each contractholder to the
21 extent that the name and address have been furnished by the
22 contractholder.
23 (3) A list of the locations where service contracts are
24 marketed, sold or offered for sale.
25 (4) Written claims files which shall contain at least
26 the dates and description of claims related to the service
27 contracts.
28 (c) Retaining records.--Except as provided in subsection
29 (d), the provider shall retain all records required to be
30 maintained by this section for at least two years after the
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1 specified period of coverage has expired.
2 (d) Recordkeeping technology.--The records required under
3 this act may be maintained on a computer disk or other
4 recordkeeping technology. If the records are maintained in other
5 than hard copy, the records shall be capable of duplication to
6 legible hard copy at the request of the commissioner.
7 (e) Providers discontinuing business.--A provider
8 discontinuing business in this Commonwealth shall maintain its
9 records until it furnishes the commissioner satisfactory proof
10 that it has discharged all obligations to contractholders in
11 this Commonwealth.
12 Section 11. Cancellation of reimbursement insurance policy.
13 As applicable, an insurer that issued a reimbursement
14 insurance policy shall not terminate the policy until a notice
15 of termination in accordance with 40 Pa.C.S. § 6124(c) (relating
16 to rates and contracts) has been mailed or delivered to the
17 commissioner. The termination of a reimbursement insurance
18 policy shall not reduce the issuer's responsibility for service
19 contracts issued by providers prior to the date of the
20 termination.
21 Section 12. Obligation of reimbursement insurance policy
22 insurers.
23 (a) Payment of provider fees.--Insurers issuing
24 reimbursement insurance to providers are deemed to have received
25 the premiums for such insurance upon the payment of provider
26 fees by consumers for service contracts issued by such insured
27 providers.
28 (b) Indemnification and subrogation.--This act shall not
29 prevent or limit the right of an insurer which issued a
30 reimbursement insurance policy to seek indemnification or
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1 subrogation against a provider if the issuer pays or is
2 obligated to pay the contractholder sums that the provider was
3 obligated to pay pursuant to the provisions of the service
4 contract.
5 Section 13. Enforcement.
6 (a) Examination.--The commissioner may conduct examinations
7 of providers, administrators, insurers or other persons to
8 enforce the provisions of this act and protect contractholders
9 in this Commonwealth. Upon request of the commissioner, the
10 provider shall make all accounts, books and records concerning
11 service contracts sold by the provider available to the
12 commissioner which are necessary to enable the commissioner to
13 reasonably determine compliance or noncompliance with this act.
14 (b) Other action.--The commissioner may take action
15 authorized by law which is necessary or appropriate to enforce
16 this act and the commissioner's regulations and orders and to
17 protect contractholders in this Commonwealth.
18 (c) Orders.--The commissioner may issue any of the following
19 orders to a provider that violates this act or the
20 commissioner's regulations or orders:
21 (1) An order to cease and desist from committing
22 violations of this act or the commissioner's regulations or
23 orders.
24 (2) An order prohibiting the provider from selling or
25 offering for sale service contracts in violation of this act.
26 (3) An order imposing a civil penalty on the provider.
27 (d) Aggrieved persons.--A person aggrieved by an order
28 issued under this section may request a hearing before the
29 commissioner. The hearing request shall be filed with the
30 commissioner within 20 days of the date the commissioner's order
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1 is effective.
2 (e) Order pending hearing outcome.--If a hearing is
3 requested under subsection (d), an order issued by the
4 commissioner under this section shall be suspended from the
5 original effective date of the order until completion of the
6 hearing and final decision of the commissioner.
7 (f) Justification of order.--At the hearing, the burden
8 shall be on the commissioner to show why the order issued
9 pursuant to this section is justified. The procedural provisions
10 of the act of May 17, 1921 (P.L.682, No.284), known as The
11 Insurance Company Law of 1921, shall apply to a hearing
12 requested under this section.
13 (g) Actions initiated by commissioner.--The commissioner may
14 bring an action in any court of competent jurisdiction for an
15 injunction or other appropriate relief to enjoin threatened or
16 existing violations of this act or of the commissioner's orders
17 or regulations. An action filed under this subsection may also
18 seek restitution on behalf of persons aggrieved by a violation
19 of this act or orders or regulations of the commissioner.
20 (h) Penalty.--A person that is found to have violated this
21 act or orders or regulations of the commissioner may be assessed
22 a civil penalty in an amount determined by the commissioner of
23 not more than $1,000 per violation and no more than $25,000 in
24 the aggregate for all violations of a similar nature. For
25 purposes of this section, violations shall be of a similar
26 nature if the violation consists of the same or similar course
27 of conduct, action or practice, irrespective of the number of
28 times the act, conduct or practice which is determined to be a
29 violation of this act occurred.
30 Section 14. Applicability.
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1 (a) General rule.--This act shall apply to service contracts
2 issued on or after the effective date of this section.
3 (b) Limited grandfather provision.--A person engaged in the
4 service contract business, as a provider or otherwise, in this
5 Commonwealth on or before the effective date of this section,
6 which submits an application for registration as a provider
7 pursuant to this act within 30 days after the commissioner makes
8 the application available, may continue to engage in business as
9 a provider in this Commonwealth until final agency action is
10 taken by the commissioner regarding the registration application
11 and all rights to administrative and judicial review related to
12 that final agency action have been exhausted or have expired.
13 Section 15. Effective date.
14 This act shall take effect in 60 days.
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