AB571: Bill Text

CORRECTED COPY

LRB-2677/4

MDK&PJK:kjf&wlj:jf

2011 - 2012 LEGISLATURE

2011 Assembly BILL 571

February 16, 2012 - Introduced by Representatives Nygren, LeMahieu, Bies and A. Ott, cosponsored by Senator Olsen. Referred to Committee on Insurance.

AB571,1,4 An Act to renumber subchapter II (title) of chapter 616 [precedes 616.71]; and to create 600.01 (1) (b) 12., 601.31 (1) (kr), subchapter III of chapter 616 [precedes 616.50] and 628.02 (1) (b) 9. of the statutes; relating to: regulating certain service contracts and granting rule-making authority.

Analysis by the Legislative Reference Bureau

This bill imposes requirements on service contracts that are enforced by the Office of the Commissioner of Insurance (OCI). As discussed below, the bill defines the service contracts that are subject to the bill, creates exemptions from the bill's requirements, imposes requirements on providers of service contracts that are not exempt from the bill, and imposes other requirements.

Service contracts. The bill defines "service contract" as a contract or agreement for a separately stated consideration to perform, or provide indemnification for, the repair, replacement, or maintenance of property for the operational or structural failure of property that is due to a defect in materials or workmanship, accidental damage from handling, or normal wear and tear. The definition includes contracts or agreements with or without additional provisions for incidental payment of indemnity under limited circumstances, including towing, rental, and emergency road service and road hazard protection.

The bill specifies that a contract or agreement for the following is a service contract: 1) repair, replacement, maintenance, or indemnification for damage resulting from a power surge or interruption; 2) repair, replacement, or indemnification for the operational or structural failure of motor vehicle parts or systems that is brought about by the failure of an additive product to perform as represented; 3) repair or replacement of motor vehicle tires or wheels that are damaged by road hazards; and 4) removal of motor vehicle dents, dings, or creases that can be repaired by specified processes. In addition, the bill specifies that a contract or agreement for repairing motor vehicle windshield chips or cracks is a service contract, but a contract or agreement for replacing an entire windshield is not a service contract. Also, the bill specifies that a contract or agreement for repairing damage to the interior components of a motor vehicle caused by wear and tear is a service contract, but a contract or agreement for replacing any part or component of a motor vehicle's interior is not a service contract.

Exemptions. The bill exempts certain service contracts from the bill's requirements. A service contract is exempt if any of the following are satisfied: 1) the service contract is sold or offered for sale to a person who is not a consumer; 2) the service contract is for an inside wire protection plan associated with the offering of telecommunications, video, cable programming, or Internet access service; or 3) the service contract is offered by a public utility on its devices for transmitting service to customers. However, the third exemption applies only to the extent that the service contract is regulated by the Public Service Commission.

The bill also exempts maintenance agreements and certain warranties from the bill's requirements. The bill defines "maintenance agreement" as a contract for a specified duration that provides for scheduled maintenance without including repair or replacement. The exemption for warranties covers warranties for certain products for preventing loss or damage to motor vehicles, as well as warranties for motor vehicle rustproofing, both of which are subject to regulation by OCI under current law. In addition, any other type of warranty is exempt if it satisfies all of the following: 1) the warranty is made solely by the manufacturer, importer, or seller of property or services without consideration; 2) the warranty is not negotiated or separated from the sale of the product or services; 3) the warranty is incidental to the sale of the product or services; and 4) the warranty guarantees indemnity for defective parts, mechanical or electrical breakdown, labor, or other remedial measures.

The bill also allows a person who holds a valid certificate of authority under OCI's rules regarding warranty plans to elect to either: 1) comply with the bill; or 2) exempt itself from the bill's requirements and continue to comply with those rules.

Regulation of providers. The bill regulates a "provider," which the bill defines as a person who is contractually obligated to the holder or purchaser of a service contract under the terms of the contract. Unless an exemption applies, the bill prohibits a person from acting as a provider without a license issued by OCI. An applicant for a license must pay an initial license fee of $400 and an annual $100 fee, unless OCI specifies different amounts by rule. An applicant must also submit copies of service contracts that it proposes to sell in the state. In addition, an applicant must provide documentation that the applicant does one of the following in order to assure performance of its obligations under the service contracts that it sells in the state: 1) obtains a reimbursement insurance policy that satisfies certain specified requirements; or 2) provides OCI with a deposit of securities, an irrevocable letter of credit, or a combination of the foregoing, in specified amounts. The bill generally defines "reimbursement insurance policy" as an insurance policy issued to a provider that, in the event of the provider's nonperformance under its service contracts, will pay or perform on behalf of the provider all covered contractual obligations or services. To satisfy the requirements necessary to assure performance of the provider's obligations under its service contracts a reimbursement insurance policy must state that a service contract holder may file a claim with the insurer if the provider does not perform its obligations within 60 days after the service contract holder provides proof of loss; that the insurer will administer and pay claims if the provider or the provider's designated administrator fails to do so; and that the insurer may not terminate or refuse to renew the policy unless the insurer has provided at least 60 days' written notice to OCI before terminating or not renewing the policy.

The bill requires providers to do the following: 1) obtain OCI approval of service contracts and comply with requirements regarding contract language; 2) make specified disclosures in service contracts; 3) comply with requirements regarding cancellation of service contracts and refunds; 4) provide sample service contracts prior to purchase upon request; 5) provide receipts and copies of service contracts to purchasers; 6) subject to OCI's approval, include independent appraisal and compulsory arbitration provisions in service contracts; 7) comply with payment of claims requirements that apply to insurers under current law; and 8) comply with record-keeping requirements. The bill prohibits providers from using certain terms regarding insurance in the provider's name, unless the provider used an otherwise prohibited term in its name prior to the bill's effective date, in which case the bill requires the provider to disclose that its service contracts are not insurance contracts. In addition, the bill prohibits a provider from making communications about service contracts that are false or misleading. For motor vehicle service contracts, the bill prohibits false or misleading statements regarding original equipment warranties or affiliation with motor vehicle manufacturers.

Other requirements. The bill also does the following:

1. Allows, but does not require, a provider to appoint a person, whom the bill refers to as an "administrator," to be responsible for administering service contracts and complying with the bill's requirements. A provider is generally liable for acts of an administrator regarding administration of the provider's service contracts, except that the bill allows a provider to avoid liability for certain false or misleading communications made by an administrator in cards, documents, or advertisements. The bill also requires an applicant for licensure as a provider to identify any administrators that the applicant has appointed, and requires administrators to register with OCI.

2. Exempts motor vehicle manufacturers, as defined in the bill, who offer service contracts from the following: 1) licensing by OCI: 2) registering administrators; 3) providing sample service contracts prior to purchase upon request; 4) providing receipts and copies of service contracts to purchasers; 5) assuring performance of obligations by obtaining a reimbursement insurance policy or providing OCI with a deposit of securities or an irrevocable letter of credit; and 6) complying with record-keeping requirements.

3. Exempts service contract sellers from licensure or registration. The bill generally defines a "service contract seller" as a person, including a real estate agent, who is engaged only in the selling or soliciting of a service contract.

4. Subjects administrators, service contract sellers, and representatives of providers to the prohibition on false or misleading communications that applies to providers.

5. Prohibits any person from requiring the purchase of a service contract as a condition of a loan or sale of property, except for a person buying or selling a home, who may condition the purchase or sale on the procurement of a service contract covering the home.

6. Allows OCI to enforce the bill's requirements in the same manner that OCI enforces other insurance requirements under current law, including allowing OCI to conduct examinations of providers, administrators, service contract sellers, and other persons, and allowing OCI to commence actions for injunctions and temporary restraining orders.

7. Subjects persons who violate the bill to the same penalties that apply under current law to other violations of insurance requirements. The penalties include forfeitures of not more than $1,000 and restitutionary forfeitures, as well as fines of not more than $10,000, imprisonment for not more than three years and six months, or both.

For further information see the state fiscal estimate, which will be printed as an appendix to this bill.

The people of the state of Wisconsin, represented in senate and assembly, do enact as follows:

AB571, s. 1 Section 1. 600.01 (1) (b) 12. of the statutes is created to read:

AB571,4,4 600.01 (1) (b) 12. Service contracts, as defined in s. 616.50 (11), or providers, service contract sellers, or administrators of service contracts under subch. III of ch. 616.

AB571, s. 2 Section 2. 601.31 (1) (kr) of the statutes is created to read:

AB571,4,8 601.31 (1) (kr) For processing and maintaining license records under s. 616.54 (4), $400 upon initial licensure and $100 annually thereafter, unless the commission specifies a different amount by rule.

AB571, s. 3 Section 3. Subchapter III of chapter 616 [precedes 616.50] of the statutes is created to read:

AB571,5,4 SUBchapter III property service contracts

AB571,5,5 616.50 Definitions. In this subchapter:

AB571,5,7 (1) "Administration" includes any of the following activities performed on behalf of a provider:

AB571,5,9 (a) Approving or disapproving claims, paying claims, or controlling the claims adjustment process.

AB571,5,11 (b) Arranging for or controlling the purchase of insurance associated with the offering of service contracts.

AB571,5,13 (c) Maintaining records or submitting filings required under this subchapter on behalf of a provider.

AB571,5,15 (d) Collecting provider fees from service contract sellers and remitting the provider fees to the provider.

AB571,5,18 (2) "Administrator" means a person appointed by a provider under s. 616.54 (1) to be responsible for any or all of the administration of service contracts and compliance with this subchapter.

AB571,5,19 (3) "Commissioner" means the commissioner of insurance.

AB571,5,23 (4) "Consumer" means an individual 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.

AB571,5,25 (5) "Maintenance agreement" means a contract of a specified duration that provides for scheduled maintenance only and does not include repair or replacement.

AB571,6,2 (6) "Motor vehicle manufacturer" means a person that does or satisfies any of the following:

AB571,6,4 (a) Manufactures or produces motor vehicles and sells motor vehicles under its own name or label.

AB571,6,5 (b) Is a subsidiary of the person that manufactures or produces motor vehicles.

AB571,6,7 (c) Is a corporation that owns 100 percent of the person that manufactures or produces motor vehicles.

AB571,6,9 (d) Manufactures or produces motor vehicles and sells motor vehicles under the trade name or label of another person that manufactures or produces motor vehicles.