THE GENERAL ASSEMBLY OF PENNSYLVANIA

SENATE BILL

INTRODUCED BY GREENLEAF AND BOSCOLA, JANUARY 12, 2011

REFERRED TO BANKING AND INSURANCE, JANUARY 12, 2011  

AN ACT

Providing for the regulation of service contracts and for powers

and duties of the Insurance Commissioner; and imposing a

civil penalty.

TABLE OF CONTENTS

Section 1.  Short title.

Section 2.  Legislative intent.

Section 3.  Definitions.

Section 4.  Exemptions.

Section 5.  Limited exemption.

Section 6.  Requirements.

Section 7.  Reimbursement insurance policies.

Section 8.  Required disclosures.

Section 9.  Prohibitions.

Section 10.  Recordkeeping.

Section 11.  Cancellation of reimbursement insurance policy.

Section 12.  Obligation of reimbursement insurance policy

insurers.

Section 13.  Enforcement.

Section 14.  Applicability.

Section 15.  Effective date.

The General Assembly of the Commonwealth of Pennsylvania

hereby enacts as follows:

Section 1.  Short title.

This act shall be known and may be cited as the Service

Contract Act.

Section 2.  Legislative intent.

The purpose of this act is to create a legal framework within

which service contracts may be marketed, sold, offered for sale,

issued, made, proposed to be made and administered in this

Commonwealth.

Section 3.  Definitions.

The following words and phrases when used in this act shall

have the meanings given to them in this section unless the

context clearly indicates otherwise:

"Administrator."  The person that is responsible for the

administration of service contracts or the service contracts

plan or is responsible for any submission required by this act.

"Commissioner."  The Insurance Commissioner of the

Commonwealth.

"Consumer."  A natural person who buys other than for

purposes of resale any tangible personal property that is

distributed in commerce and that is normally used for personal,

family or household purposes and not for business or research

purposes.

"Contractholder."  A person that is the purchaser or holder

of a service contract.

"Maintenance agreement."  A contract of limited duration that

provides for scheduled maintenance only and does not provide for

repair or replacement.

"Motor vehicle."  A motorized device designed to transport up

to 15 passengers. The term includes a self-propelled motor home

or recreational vehicle, non-self-propelled camping and

recreational trailer, off-road vehicle and trailer designed to

transport an off-road vehicle. The term also includes any

motorized watercraft and non-self-propelled trailer used to

transport such watercraft on land.

"Motor vehicle manufacturer."  A person or entity that:

(1)  manufactures or produces motor vehicles and sells

motor vehicles under its own name or label;

(2)  is a wholly owned subsidiary of the person that

manufactures or produces motor vehicles;

(3)  is a corporation which owns 100% of the person that

manufactures or produces motor vehicles;

(4)  does not manufacture or produce motor vehicles but

sells motor vehicles under the trade name or label of another

person that manufactures or produces motor vehicles;

(5)  manufactures or produces motor vehicles and sells

such motor vehicles under the trade name or label of another

person that manufactures or produces motor vehicles; or

(6)  does not manufacture or produce motor vehicles but,

pursuant to a written contract, licenses the use of its trade

name or label to another person that manufactures or produces

motor vehicles and that sells motor vehicles under the

licensor's trade name or label.

"Nonoriginal manufacturer's parts."  Replacement parts not

made for or by the original manufacturer of the part, commonly

referred to as after-market parts.

"Person."  An individual, partnership, corporation,

incorporated or unincorporated association, joint stock company,

reciprocal, syndicate or any similar entity or combination of

entities acting in concert.

"Premium."  The consideration paid to an insurer for a

reimbursement insurance policy.

"Provider."  A person that is contractually obligated to the

contractholder under the terms of the service contract.

"Provider fee."  The consideration paid for a service

contract.

"Reimbursement insurance policy."  A policy of insurance

issued to a provider to either provide reimbursement to the

provider under the terms of the insured service contracts issued

or sold by the provider or, in the event of the provider's

nonperformance, to pay on behalf of the provider all covered

contractual obligations incurred by the provider under the terms

of the insured service contracts issued or sold by the provider.

"Service contract."  A contract or agreement for a separately

stated consideration for a specific duration to perform the

repair, replacement or maintenance of property or

indemnification for repair, replacement or maintenance, for the

operational or structural failure of any motor vehicle or

residential or other property due to a defect in materials,

workmanship, inherent defect or normal wear and tear, with or

without additional provisions for incidental payment of

indemnity under limited circumstances, including, but not

limited to, towing, rental and emergency road service and road

hazard protection. The term includes contracts that provide for

the repair, replacement or maintenance of property for damage

resulting from power surges or interruption and accidental

damage from handling.

"Warranty."  An agreement between the manufacturer, importer

or seller of property or services and the consumer that:

(1)  Is made solely by the manufacturer, importer or

seller of property or services without consideration.

(2)  Is not negotiated or separated from the sale of the

product.

(3)  Is incidental to the sale of the product.

(4)  Guarantees indemnity for defective parts, mechanical

or electrical breakdown, labor or other remedial measures,

such as repair or replacement of the property or repetition

of services.

Section 4.  Exemptions.

The following agreements are exempt from this act:

(1)  Warranties.

(2)  Maintenance agreements.

(3)  Warranties, service contracts or maintenance

agreements offered by public utilities on their transmission

devices to the extent they are regulated by the Pennsylvania

Public Utility Commission.

(4)  Service contracts sold or offered for sale to

persons other than consumers.

(5)  Service contracts on tangible property where the

tangible property for which the service contract is sold has

a purchase price of $100 or less, exclusive of sales tax.

(6)  Mechanical breakdown insurance policies issued by a

licensed insurer.

Section 5.  Limited exemption.

Motor vehicle manufacturer's service contracts on the motor

vehicle manufacturer's products need only comply with sections

6(f), 8(a), (d), (e), (f), (g), (h), (i), (j), (k) and (l), 9

and 12, as applicable.

Section 6.  Requirements.

(a)  Issuance or sale of service contracts.--Service

contracts shall not be issued, sold or offered for sale by a

provider in this Commonwealth unless the provider has:

(1)  Provided a receipt for or other written evidence of

the purchase of the service contract to the contractholder.

(2)  Provided a copy of the service contract to the

contractholder within a reasonable period of time from the

date of purchase.

(b)  Administrator.--A provider may, but is not required to,

appoint an administrator or other designee to be responsible for

any or all of the administration of service contracts and

compliance with this act.

(c)  Registration.--Each provider of service contracts sold

in this Commonwealth shall file a registration with the

commissioner consisting of the provider's full name, full

corporate address, telephone number and contact person and any

designated person located in this Commonwealth for service of

process. Each provider shall pay to the commissioner a fee in

the amount of $600 upon initial registration and every two years

thereafter. The registration need only be updated by written

notification to the commissioner if material changes occur in

the registration on file.

(d)  Performance of obligations.--In order to assure the

faithful performance of a provider's obligations to its

contractholders, each provider shall satisfy one of the

following requirements:

(1)  Insure all service contracts under a reimbursement

insurance policy issued by an insurer licensed, registered or

otherwise authorized to do business in this Commonwealth and

either:

(i)  at the time the policy is filed with the

commissioner, and continuously thereafter:

(A)  maintain surplus as to policyholders and

paid-in capital of at least $15,000,000; and

(B)  annually file copies of the insurer's

financial statements, its annual statement to the

National Association of Insurance Commissioners and

the actuarial certification required by and filed in

the insurer's state of domicile; or

(ii)  at the time the policy is filed with the

commissioner, and continuously thereafter:

(A)  maintain surplus as to policyholders and

paid-in capital of less than $15,000,000 but at least

equal to $10,000,000;

(B)  demonstrate to the satisfaction of the

commissioner that the company maintains a ratio of

net written premiums, wherever written, to surplus as

to policyholders and paid-in capital of not greater

than 3 to 1; and

(C)  annually file copies of the insurer's

audited financial statements, its annual statement to

the National Association of Insurance Commissioners

and actuarial certification required by and filed in

the insurer's state of domicile.

(2)  (i)  Maintain a funded reserve account for its

obligations under its contracts issued and outstanding in

this Commonwealth. The reserves shall not be less than

40% of gross consideration received, less claims paid, on

the sale of the service contract for all in-force

contracts. The reserve account shall be subject to

examination and review by the commissioner.

(ii)  Place in trust with the commissioner a

financial security deposit, having a value of not less

than 5% of the gross consideration received, less claims

paid, on the sale of the service contract for all service

contracts issued and in force, but not less than $25,000,

consisting of one of the following:

(A)  A surety bond issued by an authorized

surety.

(B)  Securities of the type eligible for deposit

by authorized insurers in this Commonwealth.

(C)  Cash.

(D)  A letter of credit issued by a qualified

financial institution.

(E)  Another form of security prescribed by

regulations issued by the commissioner.

(3)  (i)  Maintain or, together with its parent company

maintain, a net worth or stockholders' equity of

$100,000,000.

(ii)  Upon request, provide the commissioner with a

copy of the provider's or the provider's parent company's

most recent Form 10-K or Form 20-F filed with the

Securities and Exchange Commission (SEC) within the last

calendar year or, if the company does not file with the

SEC, a copy of the company's financial statements which

shows a net worth of the provider or its parent company

of at least $100,000,000. If the provider's parent

company's Form 10-K, Form 20-F or financial statements

are filed to meet the provider's financial stability

requirement, then the parent company shall agree to

guarantee the obligations of the provider relating to

service contracts sold by the provider in this

Commonwealth.

(e)  Financial security requirements.--Except for the

requirements specified in subsections (c) and (d), no other

financial security requirements shall be required by the

commissioner for service contract providers.

(f)  Return.--

(1)  Service contracts shall require the provider to

permit the contractholder to return the service contract

within 20 days of the date the service contract was mailed to

the contractholder or within ten days of delivery if the

service contract is delivered to the contractholder at the

time of sale or within a longer time period permitted under

the service contract.

(2)  Upon return of the service contract to the provider

within the applicable time period, if no claim has been made

under the service contract prior to its return to the

provider, the service contract is void and the provider shall

refund to the contractholder, or credit the account of the

contractholder, the full purchase price of the service

contract.

(3)  The right to void the service contract provided in

this subsection is not transferable and shall apply only to

the original service contract purchaser and only if no claim

has been made prior to its return to the provider.

(4)  A 10% penalty per month shall be added to a refund

that is not paid or credited within 45 days after return of

the service contract to the provider.

(g)  Premium taxes.--

(1)  Provider fees collected on service contracts shall

not be subject to premium taxes.

(2)  Premiums for reimbursement insurance policies shall

be subject to applicable taxes.

(h)  Licensing requirement exemption.--Except for the

registration requirements in subsection (c), providers and

related service contract sellers, administrators and other

persons marketing, selling or offering to sell service contracts

are exempt from any licensing requirements of this Commonwealth.

Section 7.  Reimbursement insurance policies.

(a)  Requirements.--Reimbursement insurance policies insuring

service contracts issued, sold or offered for sale in this

Commonwealth shall state that the insurer that issued the

reimbursement insurance policy shall either reimburse or pay on

behalf of the provider any covered sums the provider is legally

obligated to pay or, in the event of the provider's

nonperformance, shall provide the service which the provider is

legally obligated to perform according to the provider's

contractual obligations under the service contracts issued or

sold by the provider.

(b)  Direct reimbursement.--In the event covered service is

not provided by the service contract provider within 60 days of

proof of loss by the contractholder, the contractholder is

entitled to apply directly to the reimbursement insurance

company.

Section 8.  Required disclosures.

(a)  General rule.--Service contracts marketed, sold, offered

for sale, issued, made, proposed to be made or administered in

this Commonwealth shall be written, printed or typed in clear,

understandable language and shall disclose the requirements set

forth in this section, as applicable.

(b)  Insured service contracts.--All service contracts shall

state the name and address of the insurer. Service contracts

insured under a reimbursement insurance policy pursuant to

section 6(d)(1) shall contain a statement in substantially the

following form:  Obligations of the provider under this service

contract are insured under a service contract reimbursement

insurance policy.

(c)  Uninsured service contracts.--Service contracts not

insured under a reimbursement insurance policy pursuant to

section 6(d)(1) shall contain a statement in substantially the

following form:  Obligations of the provider under this service

contract are backed by the full faith and credit of the

provider.

(d)  Name and address.--Service contracts shall state the

name and address of the provider and shall identify any

administrator if different from the provider, the service

contract seller and the contractholder to the extent that the

name of the contractholder has been furnished by the

contractholder. The identities of such parties are not required

to be preprinted on the service contract and may be added to the

service contract at the time of sale.

(e)  Total purchase price and terms.--Service contracts shall

state the total purchase price and the terms under which a

service contract is sold. The purchase price is not required to

be preprinted on the service contract and may be negotiated at

the time of sale with the contractholder.

(f)  Deductible amounts.--Service contracts shall state the

existence of any deductible amount, if applicable.

(g)  Identification of merchandise and services.--Service

contracts shall specify the merchandise and services to be

provided and any limitations, exceptions or exclusions.

(h)  Nonoriginal manufacturer's parts.--Service contracts

covering motor vehicles shall state whether the use of the

nonoriginal manufacturer's parts is allowed.

(i)  Transferability.--Service contracts shall state any

restrictions governing the transferability of the service

contract, if applicable.

(j)  Cancellation.--

(1)  (i)  Service contracts shall state the terms,

restrictions or conditions governing cancellation of the

service contract prior to the termination or expiration

date of the service contract by either the provider or

the contractholder.

(ii)  The provider of the service contract shall mail

a written notice to the contractholder at the last known

address of the contractholder contained in the records of

the provider at least 20 days prior to cancellation by

the provider.

(2)  Prior notice is not required if the reason for

cancellation is any of the following:

(i)  Nonpayment of the provider fee.

(ii)  A material misrepresentation by the

contractholder to the provider.

(iii)  A substantial breach of duties by the

contractholder relating to the covered product or its

use.

(3)  The notice shall state the effective date of the

cancellation and the reason for the cancellation.

(k)  Obligations and duties.--Service contracts shall set

forth all the obligations and duties of the contractholder, such

as the duty to protect against any further damage and any

requirements to follow the owner's manual.

(l)  Consequential damages.--Service contracts shall state

whether or not the service contract provides for or excludes

consequential damages, if applicable. Service contracts shall

also state whether the agreement accounts for preexisting

conditions. Service contracts may, but are not required to,

cover damage resulting from rust, corrosion or damage caused by

a noncovered part or system.

(m)  Approval of repair work.--If prior approval of repair

work is required, a service contract shall state the procedure

for obtaining prior approval and for making a claim, including a

toll-free telephone number for claim service and a procedure for

obtaining emergency repairs performed outside normal business

hours.

Section 9.  Prohibitions.

(a)  Descriptions.--

(1)  A provider shall not use in its name the words

"insurance," "casualty," "surety," "mutual" or any other

words descriptive of the insurance, casualty or surety

business; or a name deceptively similar to the name or

description of any insurance or surety corporation or to the

name of any other provider. The word "guaranty" or similar

word may be used by a provider.

(2)  This subsection shall not apply to a company that

was using any of the prohibited language in its name prior to

the effective date of this act. However, a company using the

prohibited language in its name shall include in its service

contracts a statement in substantially the following form:

This agreement is not an insurance contract.

(b)  False or misleading statements.--A provider or its

representative shall not in its service contracts or literature

make, permit or cause to be made any false or misleading

statement or deliberately omit any material statement that would

be considered misleading if omitted.

(c)  Purchase not required.--A person shall not require the

purchase of a service contract as a condition of a loan or a

condition for the sale of any property.

Section 10.  Recordkeeping.

(a)  Books and records.--The provider shall keep accurate

accounts, books and records concerning transactions regulated

under this act.

(b)  Requirements.--The provider's accounts, books and

records shall include the following:

(1)  Copies of each type of service contract sold.

(2)  The name and address of each contractholder to the

extent that the name and address have been furnished by the

contractholder.

(3)  A list of the locations where service contracts are

marketed, sold or offered for sale.

(4)  Written claims files which shall contain at least

the dates and description of claims related to the service

contracts.

(c)  Retaining records.--Except as provided in subsection

(d), the provider shall retain all records required to be

maintained by this section for at least two years after the

specified period of coverage has expired.

(d)  Recordkeeping technology.--The records required under

this act may be maintained on a computer disk or other

recordkeeping technology. If the records are maintained in other

than hard copy, the records shall be capable of duplication to

legible hard copy at the request of the commissioner.

(e)  Providers discontinuing business.--A provider

discontinuing business in this Commonwealth shall maintain its

records until it furnishes the commissioner satisfactory proof

that it has discharged all obligations to contractholders in

this Commonwealth.

Section 11.  Cancellation of reimbursement insurance policy.

As applicable, an insurer that issued a reimbursement

insurance policy shall not terminate the policy until a notice

of termination in accordance with 40 Pa.C.S. § 6124(c) (relating

to rates and contracts) has been mailed or delivered to the

commissioner. The termination of a reimbursement insurance

policy shall not reduce the issuer's responsibility for service

contracts issued by providers prior to the date of the

termination.

Section 12.  Obligation of reimbursement insurance policy

insurers.

(a)  Payment of provider fees.--Insurers issuing

reimbursement insurance to providers are deemed to have received

the premiums for such insurance upon the payment of provider

fees by consumers for service contracts issued by such insured

providers.

(b)  Indemnification and subrogation.--This act shall not

prevent or limit the right of an insurer which issued a

reimbursement insurance policy to seek indemnification or

subrogation against a provider if the issuer pays or is

obligated to pay the contractholder sums that the provider was

obligated to pay pursuant to the provisions of the service

contract.

Section 13.  Enforcement.

(a)  Examination.--

(1)  The commissioner may conduct examinations of

providers, administrators, insurers or other persons to

enforce the provisions of this act and protect

contractholders in this Commonwealth.

(2)  Upon request of the commissioner, the provider shall

make all accounts, books and records concerning service

contracts sold by the provider available to the commissioner

which are necessary to enable the commissioner to reasonably

determine compliance or noncompliance with this act.

(b)  Other action.--The commissioner may take action

authorized by law which is necessary or appropriate to enforce

this act and the commissioner's regulations and orders and to

protect contractholders in this Commonwealth.

(c)  Orders.--The commissioner may issue any of the following

orders to a provider that violates this act or the

commissioner's regulations or orders:

(1)  An order to cease and desist from committing

violations of this act or the commissioner's regulations or

orders.

(2)  An order prohibiting the provider from selling or

offering for sale service contracts in violation of this act.

(3)  An order imposing a civil penalty on the provider.

(d)  Aggrieved persons.--A person aggrieved by an order

issued under this section may request a hearing before the

commissioner. The hearing request must be filed with the

commissioner within 20 days of the date the commissioner's order

is effective.

(e)  Order pending hearing outcome.--If a hearing is

requested under subsection (d), an order issued by the

commissioner under this section shall be suspended from the

original effective date of the order until completion of the

hearing and final decision of the commissioner.

(f)  Justification of order.--At the hearing, the burden

shall be on the commissioner to show why the order issued

pursuant to this section is justified. The procedural provisions

of the act of May 17, 1921 (P.L.682, No.284), known as The

Insurance Company Law of 1921, shall apply to a hearing

requested under this section.

(g)  Actions initiated by commissioner.--

(1)  The commissioner may bring an action in any court of

competent jurisdiction for an injunction or other appropriate

relief to enjoin threatened or existing violations of this

act or of the commissioner's orders or regulations.

(2)   An action filed under this subsection may also seek

restitution on behalf of persons aggrieved by a violation of

this act or orders or regulations of the commissioner.

(h)  Penalty.--

(1)  A person that is found to have violated this act or

orders or regulations of the commissioner may be assessed a

civil penalty in an amount determined by the commissioner of

not more than $1,000 per violation and no more than $25,000

in the aggregate for all violations of a similar nature.

(2)  For purposes of this section, violations shall be of

a similar nature if the violation consists of the same or

similar course of conduct, action or practice, irrespective

of the number of times the act, conduct or practice which is

determined to be a violation of this act occurred.

Section 14.  Applicability.

(a)  General rule.--This act shall apply to service contracts

issued on or after the effective date of this section.

(b)  Limited grandfather provision.--A person engaged in the

service contract business, as a provider or otherwise, in this

Commonwealth on or before the effective date of this section,

that submits an application for registration as a provider

pursuant to this act within 30 days after the commissioner makes

the application available, may continue to engage in business as

a provider in this Commonwealth until final agency action is

taken by the commissioner regarding the registration application

and all rights to administrative and judicial review related to

that final agency action have been exhausted or have expired.

Section 15.  Effective date.

This act shall take effect in 60 days.