Amends the insurance law, in relation to service contracts; repealer

Section 2 of the bill would amend Insurance Law § 1101(b)(3-a) to clarify that heating fuel sellers or deliverers who issue a service contract, warranty or maintenance agreement are not doing an insurance business.

Section 3 of the bill would amend Insurance Law § 2302 to make service contract reimbursement insurance subject to Article 23 of the Insurance Law, which regulates insurance rates and forms, among other things.

Section 4 of the bill would amend Insurance Law § 7901 (a)( 4) to clarify that one of the purposes of Article 79 is to protect service contract holders. Section 4 would also amend Insurance Law § 7901(b)(1) to make express and implied warranties made for a separate or additional consideration subject to Article 79, making service contracts issued by manufacturers or sellers for a separate or additional consideration subject to the article.

Section 5 of the bill would amend Insurance Law § 7902 to repeal subsections (a) and (1), which define "appliances" and "systems," respectively, and reletters the remaining subsections. Section 5 would also amend Insurance Law § 7902 to clarify the definitions of the terms "administrator," "incidental damages," and "service contract." The amendments to the incidental damages definition creates a definition that is more suited to service contracts than the definition contained in the Uniform Commercial Code. The amendments to the service contract definition remove specific references to appliances and systems. These types of service contracts do not need specific reference in the service contract definition; they clearly constitute service contracts. Section 5 also amends the service contract definition to clarify that accidental damage from handling means accidental damage that results from the normal and customary use of the product.

Section 5-b of the bill would define the term "motor club."

Section 6 of the bill would amend Insurance Law § 7903(a) to clarify that service contract providers are subject to Articles 1, 2 and 3 of the Insurance Law.

Section 7 of the bill would amend Insurance Law § 7903(b)(1) to require that a provider that does not deliver a service contract to a purchaser at the time of sale do so within 10 days after the date of purchase rather than a reasonable time thereafter.

Section 8 of the bill would amend Insurance Law § 7903(c)(1) to repeal a provision requiring a provider whose service contract reimbursement insurance has been terminated to comply with another method of demonstrating financial responsibility within 45 days after the insurance coverage ends. Section 8 of the bill would further amend Insurance Law § 7903(c)(2) to establish a $100,000 minimum balance for the funded reserve account; raising the minimum balance of the financial security deposit from $50,000 to $100,000; and amending the formula for calculating the minimum balances of the funded reserve account and financial security deposit by deleting the offset for claims paid.

Section 9 of the bill would add a new Insurance Law § 7904(b) to require that an authorized service contract reimbursement insurer (SCRI) establish a contingency reserve fund for its service contracts exposure. The fund shall contain deposits in an amount determined in accordance with a formula based upon its SCRI writings. Insurers must obtain approval from the Superintendent prior to making any withdrawals from the fund.

Section 10 of the bill would add a new Insurance Law § 7903(e) to require that a provider with a funded reserve account hold the monies in that account in a fiduciary capacity for the benefit of service contract holders. New Insurance Law § 7903(e) would also make the funds in a funded reserve account or financial security deposit exempt from levy, execution or attachment, or any other recovery by a person other than a service contract holder or the Superintendent, and proscribes a provider from assigning, pledging as security, or otherwise encumbering its funded reserve account and financial security deposit.

Section 11 of the bill would amend Insurance Law § 7905(k) to require service contracts that afford the service contract holder a right to terminate the service contract to include the method for calculating the refund due to the service contract holder. Section 11 of the bill also amends Insurance Law § 7905(n) to clarify a service contract holder's right to return a contract as a right to rescind, and defines the amount of the refund due as the price the service contract holder paid for the contract less any claims paid to the holder. This section further makes clarifying changes to Insurance Law § 7905(b) and (d).

Section 12 of the bill would amend Insurance Law § 7906(b) to clarify that a provider may not make any false or misleading statement or omit any material statement, whether the provider does so orally or in writing.

Section 13 of the bill would amend Insurance Law § 7907(b) to increase the provider's registration fee from $500 for each biennial period to $1,000. Section 12 of the bill would also amend Insurance Law § 7907(e) to conform the subsection to changes the bill makes to Insurance Law § 7910.

Section 14 of the bill would amend Insurance Law § 7907(f) to clarify that the exemption from other licensing requirements relates only to service contract business.

Section 15 of the bill would amend Insurance Law § 7907(g) to increase the provider's biennial application renewal fee from $500 to $1,000.

Section 16 of the bill would amend Insurance Law § 7908 to give the Superintendent authority to require a provider to maintain additional information.

Section 17 of the bill would amend Insurance Law § 7910 to set forth more specific grounds upon which the Superintendent may take

enforcement action. Section 17 would also restructure Insurance Law § 7910 for clarification.

Section 18 of the bill would repeal and add a new Insurance Law § 7912 to replace transition rules which are no longer relevant with a provision that clarifies that a provider is responsible for all aspects of the service contract business that it conducts in New York, irrespective of whether the provider designates an administrator or allows another person to market or sell its service contracts.

Section 19 of the bill would add a new Insurance Law § 7913 to require that a provider that ceases to maintain its registration submit a plan to the Superintendent, subject to approval, that specifies how the provider will meet its service contract obligations and otherwise protect service contract providers in New York.

Section 20 of the bill provides that this bill would take effect 180 days after it becomes a law, except that the Superintendent may promulgate any rule or regulation necessary for the timely implementation of this bill on its effective date.

Existing law

A service contract is an agreement to perform or indemnify for the repair or replacement of property covered by the agreement due to a defect in materials or workmanship or wear and tear. A service contract provider is the party that is obligated under the service contract.

Prior to the Legislature's enactment of Article 79 of the Insurance Law (the "Service Contract Law") in 1997, a provider wishing to do a service contract business in New York had to become licensed as an insurer, and comply with the regulatory strictures required for an insurer, such as the requirement that it hold reserves. The Legislature enacted Article 79 to provide a means for the Department to regulate providers without subjecting them to the regulatory requirements that apply to insurers.

Article 79 governs the marketing, sale, offering for sale, issuance, making, proposing to make and administration of service contracts by service contract providers. Article 79 requires a service contract provider to register with the Department, and to renew the registration on a biennial basis. Article 79 further requires a service contract provider to demonstrate its financial responsibility by one of the following methods: 1) purchasing a service contract reimbursement insurance policy, 2) maintaining a funded reserve account (FRA) and placing in trust for the Superintendent a financial security deposit (FSD), or 3) maintaining net worth or stockholder's equity of at least $100 million, on its own or in combination with its consolidated affiliates, including the provider's parent who must also provide a parental guarantee. Article 79 also requires a provider to provide a right for purchasers to return a service contract purchased from the provider, maintain certain records, and refrain from certain misleading practices.

The Superintendent may suspend or revoke a provider's registration if the Superintendent finds the provider untrustworthy, or the provider violates any provision of Article 79 or regulations promulgated thereunder, or an order of the Superintendent. The Superintendent may also impose a penalty of not more than $500 per violation, or bring an action in any court of competent jurisdiction for an injunction and restitution.

Legislative history

This is a new bill. STATEMENT IN SUPPORT :

Since the Legislature enacted the Service Contract Law in 1997, significant consumer, industry and regulatory concerns have arisen that necessitate amendment to the law.

The FRA and FSD method for demonstrating financial responsibility needs amendment to better protect service contract holders in New York. For example, one provider entered into bankruptcy with an FRA and FSD that was subject to creditors' liens, significantly reducing the funds available to pay claims of New York service contract holders. And for other providers that hold the minimum FRA and FSD balance, the minimum is not enough to ensure that providers will have sufficient funds available to pay claims of service contract holders in New York should a provider become insolvent or bankrupt.

This bill would require that the provider's FRA be held in a fiduciary basis for the benefit of service contract holders, and makes the FRA and FSD (which is a trust account) exempt from the claims of creditors other than service contract holders or the Superintendent. This bill also increases the minimum amount that a service contract provider must hold in its FRA and FSD. The bill's new reserve requirements for service contract reimbursement insurance (SCRI) insurers ensure adequate reserving by SCRI insurers for the protection of service contract holders. Most of the SCRI business in New York is insured by a small number of insurers, meaning that the risk of provider default is not well diversified. Without adequate reserving, the default of one large provider could adversely affect the service contract holders of many other providers. The bill also makes SCRI policies issued by authorized insurers subject to Article 23 of the Insurance Law's form and rate filing requirements. The Department has found that many existing policy forms do not conform to the provisions of the law.

Moreover, the bill strengthens the Superintendent's tools to address enforcement problems that have arisen since the Legislature enacted the Service Contract Law in 1997. The bill adds additional grounds upon which the Superintendent may take enforcement action, including a provider, as a business practice, denying valid service contract claims. The bill also requires a service contract provider that ceases to maintain its registration to submit a plan to the Superintendent specifying how the provider will meet its service contract obligations under existing service contracts. Further, the bill specifies that the jurisdiction of the Superintendent over a registered provider continues until such time as the provider's obligations under its service contracts have terminated, regardless of whether the provider continues its registration.

Finally, because Chapter 614 of the Laws of 1997, which enacted the Service Contract Law, exempted all warranties, the Department opined that manufacturer or seller service contracts were warranties and thus exempt from Article 79. This creates an unlevel playing field between service contract providers on the one hand and manufacturers and sellers on the other hand, even though the contractual provisions may otherwise be the same. Indeed, in some cases manufacturers and sellers used affiliated entities, which are subject to the Service Contract Law. Many large manufacturers and sellers have recently had major financial difficulties and several large retail chains have filed for bankruptcy, leaving the public unprotected. This bill would clarify that manufacturers or sellers that issue service contracts on their own products are subject to Article 79, while maintaining the exemption for warranties that are sold without separate or additional consideration.

Budget implications

This bill would not have an impact on State finances. EFFECTIVE DATE : This bill would take effect 180 days after it becomes a law, except that the Superintendent may promulgate any rule or regulation necessary for the timely implementation of this bill on its effective date.