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AS PASSED BY THE SENATE
February 16, 2000
S. 1039
Introduced by Senators McConnell, Matthews, Courtney, Patterson, Reese, Hayes, Jackson and Passailaigue
S. Printed 2/16/00--S. [SEC 2/17/00 5:24 PM]
Read the first time January 18, 2000.
TO ENACT THE "SERVICE CONTRACTS MODEL ACT" INCLUDING PROVISIONS TO AMEND TITLE 38, CODE OF LAWS OF SOUTH CAROLINA, 1976, RELATING TO INSURANCE BY ADDING CHAPTER 78, SO AS TO REGULATE THE SALE OF SERVICE CONTRACTS FOR THE REPAIR, REPLACEMENT, OR MAINTENANCE OF PROPERTY NORMALLY USED FOR PERSONAL, FAMILY, OR HOUSEHOLD PURPOSES, EXCLUDING, AMONG OTHER THINGS, WARRANTIES AND MAINTENANCE AGREEMENTS; TO REQUIRE ADMINISTRATORS OF SERVICE CONTRACTS TO REGISTER WITH THE DEPARTMENT OF INSURANCE; TO REQUIRE THOSE PROVIDING SERVICE UNDER A CONTRACT TO DEMONSTRATE FINANCIAL RESPONSIBILITY; TO PROVIDE FOR THE REQUIREMENTS OF A REIMBURSEMENT POLICY WHEN SUCH A POLICY INSURES A SERVICE CONTRACT; TO SPECIFY THE FORM AND CONTENT OF SERVICE CONTRACTS; TO REQUIRE SERVICE CONTRACT ADMINISTRATORS TO MAINTAIN ACCURATE ACCOUNTS AND RECORDS; TO AUTHORIZE THE DIRECTOR OF THE DEPARTMENT OF INSURANCE TO CONDUCT INVESTIGATIONS AND HEARINGS IN ENFORCING THE PROVISIONS OF THIS CHAPTER; AND TO PROVIDE CIVIL PENALTIES.
Amend Title To Conform
Be it enacted by the General Assembly of the State of South Carolina:
SECTION 1. This act may be cited as the "Service Contracts Model Act".
SECTION 2. Title 38 of the 1976 Code is amended by adding:
Section 38-78-10. (A) The purposes of this chapter are to:
(1) create a legal framework within which service contracts may be sold in this State;
(2) encourage innovation in the marketing and development of more economical and effective means of providing services under service contracts, while placing the risk of innovation on the providers rather than on consumers; and
(3) permit and encourage fair and effective competition among different systems for providing and paying for these services.
(B) This chapter does not apply to:
(1) warranties;
(2) maintenance agreements;
(3) commercial transactions;
(4) warranties, service contracts, or maintenance agreements offered by public utilities on their transmission devices to the extent they are regulated by the Public Service Commission;
(5) service contracts sold or offered for sale to persons other than consumers;
(6) a person subject to the provisions of Chapter 13, Title 46 (Pesticide Control Act) or regulations promulgated pursuant to it.
(C) Manufacturer's service contracts on the manufacturer's products shall comply with Sections 38-78-50 (A), (D), and (N), 38-78-60, and 38-78-100, as applicable.
Section 38-78-20. As used in this chapter:
(1) 'Administrator' means the person who is responsible for the administration of the service contracts or the service contracts plan and who is responsible for any filings required by this chapter.
(2) 'Director' means the Director of the Department of Insurance.
(3) '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 business or research purposes.
(4) 'Maintenance agreement' means a contract of limited duration that provides for scheduled maintenance only.
(5) 'Manufacturer' means a person that:
(a) manufactures or produces the property and sells the property under its own name or label;
(b) is a wholly owned subsidiary of the person who manufactures or produces the property;
(c) is a corporation which owns one hundred percent of the person who manufactures or produces the property;
(d) does not manufacture or produce the property, but the property is sold under its trade name label;
(e) manufactures or produces the property and the property is sold under the trade name or label or another person; or
(f) does not manufacture or produce the property but, pursuant to a written contract, licenses the use of its trade name or label to another person that sells the property under the licensor's trade name or label.
(6) 'Mechanical breakdown insurance' means a 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 service, for the operational or structural failure of the property due to a defect in materials or workmanship or to normal wear and tear.
(7) 'Nonoriginal manufacturer's parts' means replacement parts not made for or by the original manufacturer of the property, commonly referred to as 'after market parts'.
(8) 'Person' means an individual, partnership, corporation, incorporated or unincorporated association, joint stock company, reciprocal, syndicate, or any similar entity or combination of entities acting in concert.
(9) 'Premium' means the consideration paid to an insurer for a reimbursement insurance policy.
(10) 'Provider' means a person who administers, issues, makes, provides, sells, or offers to sell a service contract, or who is contractually obligated to provide service under a service contract such as sellers, administrators, and other intermediaries.
(11) 'Provider fee' means the consideration paid for a service contract in excess of the premium.
(12) 'Reimbursement insurance policy' means a policy of insurance issued to a provider and pursuant to which the insurer agrees, for the benefit of the service contract holders, to discharge all of the obligations and liabilities of the provider under the terms of the service contracts in the event of nonperformance by the provider. 'All obligations and liabilities' include, but are not limited to, failure of the provider to perform under the service contract and the return of the unearned provider fee in the event of the provider's unwillingness or inability to reimburse the unearned provider fee in the event of termination of a service contract.
(13) 'Service contract' means a contract or agreement for a separately stated consideration, or for a specific duration, to perform the repair, replacement, or maintenance of property, or for indemnification for repair, replacement, or maintenance, for the operational or structural failure due to a defect in materials, workmanship, or normal wear and tear, with or without additional provision for incidental payment of indemnity under limited circumstances including, but not limited to, towing, rental, and emergency road service, but not including mechanical breakdown insurance or maintenance agreements.
(14) 'Service contract holder' or 'contract holder' means a person who is the purchaser or holder of a service contract.
(15) '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, that 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.
Section 38-78-30. (A) A service contract must not be issued, sold, or offered for sale in this State unless the administrator or its designee has:
(1) provided a receipt for the purchase of the service contract to the contract holder;
(2) provided a copy of the service contract to the service contract holder within a reasonable period of time from the date of purchase; and
(3) complied with this chapter.
(B) An administrator of a service contract sold in this State shall file a registration with the director on a form, at a fee, and at a frequency prescribed by the director.
(C) In order to assure the faithful performance of a provider's obligations to its contract holders, a provider who is contractually obligated to provide service under a service contract shall:
(1) insure all service contracts under a reimbursement insurance policy issued by an insurer authorized to transact insurance business in this State or issued pursuant to Section 38-45-110;
(2)(a) maintain a funded reserve account for its obligations under its contracts issued and outstanding in this State. The reserves may not be less than forty percent of gross consideration received, less claims paid, on the sale of the service contract for all in-force contracts. The reserve account is subject to examination and review by the director; and
(b) place in trust with the director a financial security deposit having a value of not less than five percent 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 twenty-five thousand dollars, consisting of one of the following:
(i) a surety bond issued by an authorized surety;
(ii) securities of the type eligible for deposit by authorized insurers in this State;
(iii) cash;
(iv) a letter of credit issued by a qualified financial institution; or
(v) another form of security prescribed by regulations promulgated by the director; or
(3)(a) maintain a net worth of one hundred million dollars; and
(b) upon request, provide the director with a copy of the provider's or, if the provider's financial statements are consolidated with those of its parent company, the provider's parent company's most recent Form 10-K 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 audited financial statements, which must show a net worth of the provider or its parent company of at least one hundred million dollars. If the provider's parent company's Form 10-K or audited financial statements are filed to meet the provider's financial stability requirement, the parent company shall agree to guarantee the obligations of the obligor relating to service contracts sold by the provider in this State.
(D) Provider fees collected on service contract are not subject to premium taxes. Premiums for reimbursement insurance policies are subject to applicable taxes.
(E) Except for the registration requirement in Section 38-78-30(B), persons marketing, selling, or offering to sell service contracts for providers that comply with this chapter are exempt from state licensing requirements.
(F) Providers complying with this chapter are not required to comply with Chapter 73, except as specifically provided.
Section 38-78-40. Reimbursement insurance policies insuring service contracts issued, sold, or offered for sale in this State shall conspicuously state that, upon failure of the provider to perform under the contract, such as failure to return the unearned provider fee, the insurer that issued the policy shall pay on behalf of the provider any sums the provider is legally obligated to pay or 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.
Section 38-78-50. (A) Service contracts issued, sold, or offered for sale in this State must be written in clear, understandable language and achieve a grade level score of no higher than seventh grade on the Flesch-Kincaid readability test. The entire contract must be printed or typed in easy to read ten-point type or larger and conspicuously disclose the requirements in this section, as applicable. The disclosures provided for in subsections (B) and (C) must be printed or typed in easy to read fourteen-point type or larger.
(B) Service contracts insured under a reimbursement insurance policy pursuant to Section 38-78-30(C)(1) shall contain a statement in substantially the following form: 'You have rights under this contract. If you have a valid claim, the service contract company must pay or provide service on your claim within sixty days. An insurance policy guarantees that you will be paid or have your product serviced. After sixty days, you can make a claim directly to the insurance company'. A claim against the provider shall also include a claim for return of the unearned provider fee. The service contract shall also conspicuously state the name and address of the insurer.
(C) Service contracts not insured under a reimbursement insurance policy pursuant to Section 38-78-30(C)(1) of this chapter shall contain a statement in substantially the following form: 'You have rights under this contract. If you have a valid claim, the service contract company must pay or provide service on your claim. No insurance policy guarantees this service contract, only the full faith and credit of the service contract company backs it up. This contract is only as good as the contract service company'. A claim against the provider shall also include a claim for return of the unearned provider fee. The service contract shall also conspicuously state the name and address of the provider.
(D) Service contracts shall identify any administrator, the provider obligated to perform the service under the contract, the service contract seller, and the service contract holder, to the extent that the name and address of the service contract holder has been furnished by the service contract holder.
(E) Service contracts shall conspicuously state the total purchase price and the terms under which the 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 service contract holder.
(F) If prior approval of repair work is required, the service contracts shall conspicuously 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 of normal business hours.
(G) Service contracts shall conspicuously state the existence of any deductible amount.
(H) Service contracts shall specify the merchandise and services to be provided and any limitations, exceptions, or exclusions.
(I) Service contracts shall state the conditions upon which the use of nonoriginal manufacturers' parts, or substitute service, may be allowed. Conditions stated shall comply with applicable state and federal laws.
(J) Service contracts shall state any terms, restrictions, or conditions governing the transferability of the service contract.
(K) Service contracts shall state the terms, restrictions, or conditions governing termination of the service contract by the service contract holder. The provider of the service contract shall mail a written notice to the contract holder within fifteen days of the date of termination.
(L) Service contracts shall require every provider to permit the service contract holder to return the contract within at least twenty days of the date of mailing of the service contract or within at least ten days if the service contract is delivered at the time of sale or within a longer time period permitted under the contract. If no claim has been made under the contract, the contract is void and the provider shall refund to the contract holder the full purchase price of the contract. A ten percent penalty per month must be added to a refund that is not paid within thirty days of return of the contract to the provider. The applicable free-look time periods on service contracts only shall apply to the original service contract purchaser.
(M) Service contracts shall set forth all of the obligations and duties of the service contract holder including, but not limited to, the duty to protect against any further damage and the requirement for certain service and maintenance.
(N) Service contracts shall clearly state whether or not the service contract provides for or excludes consequential damages or preexisting conditions.
Section 38-78-60. (A) A provider may not use in its name the words 'insurance', 'casualty', 'guaranty', 'surety', 'mutual', or any other words descriptive of the insurance, casualty, guaranty, or surety business or a name deceptively similar to the name or description of any insurance or surety corporation or any other provider. This section does not apply to a company that was using any of the prohibited language in its name before the effective date of this chapter. However, a company using the prohibited language in its name conspicuously shall disclose substantially this statement in its service contracts: 'This agreement is not an insurance contract'.
(B) A provider or its representative in its service contracts or literature may not 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, in connection with the sale, offer to sell, or advertisement of a service contract.
(C) A person may not require the purchase of a service contract as a condition of a loan or a condition for the sale of any property.
Section 38-78-70. (A) An administrator shall maintain accurate accounts, books, and records concerning transactions regulated under this chapter which shall include:
(1) copies of each type of service contract issued;
(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 provider locations where service contracts are marketed, sold or offered for sale; 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.
Except as provided in subsection (B), an administrator shall retain all records pertaining to each service contract holder for at least three years after the specified period of coverage has expired.
An administrator may keep all records required under this chapter on a computer disk or other similar technology. If an administrator maintains records in other than hard copy, records must be accessible from a computer terminal available to the director and be capable of duplication to legible hard copy.
(B) An administrator discontinuing business in this State shall maintain its records until it furnishes the director satisfactory proof that it has discharged all obligations to contract holders in this State.
(C) An administrator shall make all accounts, books, and records concerning transactions regulated under this chapter or other pertinent laws available to the director upon request.
Section 38-78-80. As applicable, an insurer that issued a reimbursement insurance policy may not terminate the policy until a notice of termination in accordance with Chapter 75 has been mailed or delivered to the director. The termination of a reimbursement insurance policy does not reduce the issuer's responsibility for service contracts issued by providers before the date of the termination.
Section 38-78-90. (A) A provider is considered to be the agent of the insurer which issued the reimbursement insurance policy. In cases where a provider is acting as an administrator and enlists other providers, the provider acting as the administrator shall notify the insurer of the existence and identities of the other providers.
(B) This chapter does 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 service contract holder sums that the provider was obligated to pay pursuant to the provisions of the service contract or under a contractual agreement.
Section 38-78-100. (A) The director may conduct investigations or examinations of providers, administrators, insurers, or other persons to enforce the provisions of this chapter and protect service contract holders in this State.
(B) The director may take action which is necessary or appropriate to enforce the provisions of this chapter and the director's regulations and orders and to protect service contract holders in this State.
If a service contract provider violates a provision of this chapter, a regulation promulgated under this chapter, or an order issued by the director, the director may:
(1) order the service contract provider to cease and desist from committing the violation;
(2) issue an order prohibiting a service contract provider from selling or offering for sale service contracts;
(3) issue an order imposing a civil penalty; or
(4) any combination of these.
(C) A person aggrieved by an order issued under this section may request a hearing before the director. The hearing request must be filed with the director within twenty days of the date the director's order is effective.
Pending the hearing and the decision by the director, the director shall suspend the effective date of the order.
At the hearing, the burden is on the director to show why the order issued pursuant to this section is justified. The hearing must be conducted by the Administrative Law Judge Division.
(D) The director may bring an action under the Administrative Law Judge Division or in circuit court for an injunction or other appropriate relief to enjoin threatened or existing violations of this chapter or of the director's orders or regulations. An action filed under this section may also seek restitution on behalf of persons aggrieved by a violation of this chapter or orders or regulations of the director.
(E) A person in violation of this chapter or an order or regulation of the director may be assessed a civil penalty not to exceed one thousand dollars per violation.
(F) The authority of the director under this section is in addition to other authority of the director.
Section 38-78-110. The director may promulgate regulations necessary to effectuate this chapter.
Section 38-78-120. If a provision of this chapter, or the application of the provision to any person or circumstances, is held invalid, the remainder of the chapter, and its application to a person or circumstances other than those as to which it is held invalid, is not affected."
SECTION 3. This act takes effect upon approval by the Governor.
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