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NO. 109. AN ACT RELATING TO REGULATING SERVICE CONTRACT COMPANIES.

(H.452)

It is hereby enacted by the General Assembly of the State of Vermont:

Sec. 1. SCOPE AND PURPOSE

The purpose of this act is to create a framework within which service contracts, extended warranties and substantively similar agreements may be sold in this state. Such contracts customarily cover consideration paid in advance for the promise of a future benefit, service, repair or replacement of what are commonly referred to as "consumer" products.

Sec. 2. 8 V.S.A. chapter 113, subchapter 3 is added to read:

Subchapter 3. Service Contract Companies

§ 4247. DEFINITIONS

As used in this subchapter,

(1) "Commissioner" means the commissioner of the Vermont department of banking, insurance, securities, and health care administration.

(2) "Consumer" means 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 commercial purposes.

(3) "Service contract holder" means a person who is the purchaser or holder of a service contract.

(4) "Manufacturer" means a person that manufactures, produces or markets goods and sells the goods under its own name or label; or manufactures or produces goods and the goods are sold under the trade name or label of another person.

(5) "Maintenance agreement" means a contract of limited duration that provides for scheduled maintenance only.

(6) "Mechanical breakdown insurance" means any policy, contract or agreement issued by an authorized insurer that provides for the repair, replacement, or maintenance of property or indemnification for repair, replacement, or maintenance, for the operational or structural failure of the property due to a defect in materials or workmanship or due tonormal wear and tear.

(7) "Provider" means a person who issues, makes or provides a service contract, and who is contractually obligated to provide service under a service contract and is not the manufacturer.

(8) "Service contract" means any contract or agreement to perform or indemnify for a specific duration the repair, replacement or maintenance of property for operational or structural failure due to a defect in materials, workmanship or normal wear and tear, with or without additional provisions for incidental payment of indemnity under limited circumstances, including towing, rental and emergency road service.

(9) "Service contract reimbursement policy" means a policy of insurance providing full reimbursement coverage for all obligations and liabilities under the terms of a service contract issued by the provider.

(10) "Warranty" means a warranty made solely by the manufacturer, importer or seller of property or services, without charge, that is not negotiated or separated from the sale of the product and is incidental to the sale of the product, and that 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.

§ 4248. REGISTRATION REQUIRED

(a) All providers of service contracts issued, sold or covering property located in this state shall file a registration with the commissioner on a form prescribed by the commissioner. Such registrations shall be renewed every three years. Providers shall submit a $600.00 fee at the time of registration and at the time of each renewal.

(b) The following are exempt from the scope of this subchapter, inclusive of this subchapter:

(1) Warranties;

(2) Maintenance agreements; and

(3) Service contracts sold or offered for sale in commercial transactions.

(c) The types of agreements defined as service contracts in this subchapter or excluded from coverage by subsection (b) of this section are not insurance under Vermont law.

(d) A foreign or alien provider shall not transact business in this state until it has either registered with the secretary of state to do business in Vermont, or if it is not registered to do business in Vermont, filed with the commissioner the name and address of a person in this state upon whom service of process may be served. Failure to file such information with the commissioner within 60 days of entering into a Vermont service contract, shall constitute an appointment by such provider of the secretary of state as its agent for service of process.

§ 4249. PROOF OF FINANCIAL STABILITY

(a) In order to ensure the performance of a provider's obligations to its contract holders, each provider shall possess the following documents as proof of financial stability:

(1)(A) a surety bond, securities of the type eligible for deposit by an authorized insurer in this state, cash or letter of credit in a form acceptable to the commissioner, which shall have at all times a value of not less than five percent of the gross annual consideration from all service contracts issued and in force, but in no case to be less than $25,000.00. Such bond, securities, cash or letter of credit shall be maintained unimpaired as long as the provider continues to do business in this state. When the provider ceases to do business in this state and has furnished the commissioner proof that it has discharged all its obligations to its service contract holders in this state, the commissioner shall release said bond, cash or letter of credit; and

(B) a funded reserve account for its liability under its service contracts issued and outstanding in this state. Such reserve shall at all times be not less than 40 percent of all consideration received, less claims paid, on in force contracts. Such reserve accounts shall be subject to examination and review by the commissioner upon a request; or

(2) evidence that all of its service contracts are insured through the purchase of a service contract reimbursement policy issued by an insurer authorized to do business in this state, or by an approved surplus line insurer; or

(3) a copy of the provider's financial statement or, if the provider's financial statement is consolidated with those of a parent company or affiliate, the provider's parent company or affiliate's financial statement, for the most recent calendar year which shows anet worth of the provider or its parent company or affiliate of at least $50 million. The financial statement shall contain information relating to the general financial condition, ownership and management of the provider and its controlling parent organization, the identity of the controlling entity, if applicable, and any reinsurance agreements covering all or substantially all of the ceded service contracts. A Form 10-K filed with the Securities and Exchange Commission within the last calendar year may be filed to meet the financial stability filing requirement.

(b) If the provider's parent or affiliate company's financial statement is filed to meet the provider's financial stability requirement, then the parent or affiliate company shall agree, on a form prescribed by the commissioner, to guarantee the provider's obligations relating to service contracts sold by the provider in this state.

(c) The commissioner may, upon review of the business activities of a provider, determine that the amounts set forth in this section are inadequate for protection of the public, and may require additional assurances of financial stability.

§ 4250. EXAMINATIONS

For the purpose of determining the provider's financial stability and protecting consumer interests, the commissioner may conduct an examination of a provider concerning service contracts sold in this state to enable the commissioner to determine compliance or noncompliance with this act. The expenses of examinations shall be paid to the state by the company or companies examined and the commissioner of finance and management shall issue his or her warrants for the proper charges incurred in all examinations.

§ 4251. CONSUMER DISCLOSURE REQUIREMENTS

(a) Each service contract subject to this subchapter shall be written in clear, understandable language and easily read type and disclose the following:

(1) The identity of the provider and the service contract seller;

(2) The total purchase price of the contract, stated separately from the price of the goods purchased;

(3) The existence of any deductible amount;

(4) The procedures to file a claim, including but not limited to the procedures for obtaining prior approval for repair work, the toll-free telephone number if prior approval is necessary for claim service and if the service contracts provide services essential to public health, safety or welfare, the service contract provider shall either provide for 24-hour telephone assistance or state the procedure for obtaining reimbursement for emergency repairs performed outside normal business hours;

(5) The terms for transferability of the contract;

(6) The prerequisites for early cancellation;

(7) The terms, restrictions or conditions governing termination of the service contract by the service contract holder;

(8) The obligations and duties of the service contract holder;

(9) The authorization of the original service contract holder to return the contract within 20 days of receipt of the contract if no claim has been made under the contract and obtain a refund of the full purchase price of the contract.

(b) All service contract reimbursement insurance policies insuring service contracts issued, sold or offered for sale in this state shall conspicuously state that upon the failure of the provider to perform under the contract, the insurer which issued the policy shall pay on behalf of the provider any sums the provider is legally obligated to pay and 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.

§ 4252. OBLIGATIONS OF PROVIDERS AND INSURERS

(a) A provider is considered to be the agent of an insurer which issued a service contract reimbursement insurance policy and therefore is required to act as a fiduciary in regard to premiums, return of premiums or other sums of money received. However, nothing in this act shall be construed to make such provider subject to the insurance agent licensure requirements set forth in this title.

(b) Providers shall keep accurate accounts, books and records concerning transactions regulated under this subchapter for at least three years after the specified period ofcoverage has expired. Records required by this act may be maintained solely in an electronic, optical or other storage medium as long as they are capable of being accurately reproduced upon request. These accounts, books and records shall include:

(1) Copies of each type of service contract in use;

(2) The name and address of each service contract holder to the extent that the name and address have been furnished by the service contract holder;

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

(4) Claims files which shall contain at least the dates, amounts and description of all receipts, claims and expenditures related to the service contracts.

§ 4253. PROHIBITED ACTS

(a) A provider shall not use in its name, contracts or literature:

(1) The words "insurance", "casualty", "surety", "mutual"; or

(2) A name deceptively similar to the name or description of any insurance or surety corporation or any other provider licensed to do business in this state.

(b) No provider or its agent shall advertise, print, display, publish, distribute or broadcast, or cause to permit the foregoing to occur, in any manner whatsoever, any statement or representation with regard to the rates, terms, or conditions of a service contract which is false, misleading, or deceptive.

(c) No service contract sold or offered for sale to a consumer in this state shall fail to contain the authorization of the original service contract holder to return the contract within 20 days of receipt of the contract if no claim has been made under the contract and obtain a refund of the full purchase price of the contract. Each provider shall provide or mail a copy of the service contract to the customer within 14 days of the date of sale, unless the provider makes a copy of the service contract terms and conditions available to the consumer at the point of sale, in which event the provider must provide or mail the service contract to the customer within a reasonable period of time.

(d) Nothing in this subchapter shall be construed to impair or in any way affect any rule of law applicable or governing service contracts not otherwise subject hereto.

§ 4254. PROHIBITED TERMS

No service contract issued, sold, or covering property located in this state shall provide:

(1) that the consumer is not a party to the contract;

(2) that the provider has no liability to the consumer;

(3) that the consumer does not have the right to bring an action to enforce the terms of the contract or otherwise challenge the denial of a claim which the consumer believes is wrongful, subject to the provisions of any alternative dispute resolution procedure authorized by contract and by law; or

(4) that any civil action brought in connection with the service contract must be brought in the courts of a jurisdiction other than Vermont.

§ 4255. PENALTIES; ENFORCEMENT

(a) The commissioner, after proper notice and opportunity for hearing in accordance with this state's Administrative Procedure Act, may take action to enforce the provisions of this subchapter and may:

(1) Revoke or suspend the registration of the service contract provider;

(2) Order the provider to cease and desist from further service contract operations;

(3) Impose a penalty of not more than $1,000.00 for each violation or $10,000.00 for each violation the commissioner finds to be willful; and

(4) Order the provider to make restitution to contract holders.

(b) Failure to comply with the sections 4251 or 4253 of this title shall constitute an unfair or deceptive act in commerce enforceable under section 2461(b) of Title 9.

§ 4256. EXEMPTION FOR CERTAIN DELIVERY SERVICE MAINTENANCE AND

REPAIR CONTRACTS

The provisions of this subchapter shall not apply to service contracts with a duration of one year or less where the provider also has an existing agreement to supply liquid fuel used in the course of normal operation of the property subject to the service contract.

Sec. 3. 32 V.S.A. § 9771(6) is added to read:

(6) Service contracts as defined in subchapter 3 of chapter 113 of Title 8.

Sec. 4. 9 V.S.A. § 2355(f)(4) is amended to read:

(f) The retail installment contract shall contain the following items:

* * *

(4) The amount, if any, for insurance including the cost of credit life insurance at a rate authorized by rate schedules then in effect and on file with the commissioner of banking, insurance, securities, and health care administration *[and]*, the cost, if any, of physical damage insurance specifying the type or types and the term of coverage, and the cost, if any, for service contracts as defined in section 4247 of Title 8;

Sec. 5. 9 V.S.A. § 2405(g)(4) is amended to read:

(g) The retail installment contract shall contain the following items:

* * *

(4) The amount, if any, included for insurance, if a separate identified charge is made therefor, specifying the coverage and cost of each type of insurance at rates authorized by rate schedules then in effect and on file with the commissioner of banking, insurance, securities, and health care administration, and the cost, if any, for service contracts as defined in section 4247 of Title 8;

Sec. 6. EFFECTIVE DATE

This act shall take effect on September 1, 1998. Providers shall have until January 1, 1999 to come into compliance with this act.

Approved: April 27, 1998