Senate Bill Report — SB 5108

Summary

A Senate Bill Report on SB 5108, an act relating to regulating service contracts and protection product guarantees, as of January 14, 2025, for the Senate Committee on Business, Financial Services & Trade. The bill is sponsored by Senators Kauffman and Dozier, with committee activity listed for 1/16/25. The background describes provider registration with the Office of the Insurance Commissioner and current financial responsibility requirements, including a $100 million net worth option and a $200,000 minimum for protection product guarantee providers. The bill summary states that providers may use one or more failure to perform reimbursement insurance policies and that holders may apply directly to the insurer if the provider does not perform within 30 days of proof of loss. The report lists no appropriation.

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                            SENATE BILL REPORT
                                  SB 5108

                                      As of January 14, 2025

Title: An act relating to regulating service contracts and protection product guarantees.

Brief Description: Regulating service contracts and protection product guarantees.

Sponsors: Senators Kauffman and Dozier.

Brief History:
     Committee Activity: Business, Financial Services & Trade: 1/16/25.


                                     Brief Summary of Bill
           • Revises the type and number of reimbursement insurance policies
             that service contract providers and protection product guarantee
             providers may use to demonstrate financial responsibility.
           • Adds other methods for service contract providers covering motor
             vehicles   and    protection     product guarantee providers  to
             demonstrate financial responsibility.
           • Specifies when a consumer may apply directly to                            a
             reimbursement insurance company for payment or performance due.


SENATE COMMITTEE ON BUSINESS, FINANCIAL SERVICES & TRADE

     Staff: John Kim (786-7453)

     Background: Service Contracts and Protection Product Guarantees. A service contract is a
     contract to perform or indemnify the repair, replacement, or maintenance of consumer
     products such as motor vehicles, appliances, computers, and electronic equipment. A
     service contract may be entered into at any time for consideration over and above the lease
     or purchase price of the property for any specific duration. Service contracts cover
     operational or structural failure due to a defect in materials or workmanship, or normal wear




     This analysis was prepared by non-partisan legislative staff for the use of legislative
     members in their deliberations. This analysis is not part of the legislation nor does it
     constitute a statement of legislative intent.

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     and tear, and may cover damage resulting from power surges and accidental damage from
     handling, with or without additional incidental payments for certain circumstances.

     A protection product is a protective chemical, device, or system formulated or designed to
     make a specified loss or damage from a specific cause less likely to occur, an example
     being a paint protection coating. It does not include fuel additives, oil additives, or other
     chemical products applied to the engine, transmission, or fuel system of a motor vehicle. A
     protection product guarantee is a written agreement to repair or replace another product, or
     pay incidental costs upon the failure of the protection product to perform pursuant to the
     terms of the guarantee.

     Registration of Service Contract Providers and Protection Product Guarantee Providers. A
     person who provides repair, replacement, maintenance, or indemnification coverage through
     a service contract must register with the Office of the Insurance Commissioner (OIC) as a
     service contract provider. Likewise, a person who provides coverage for repair,
     replacement, or payment of incidental costs through a protection product guarantee must
     register with OIC as a protection product guarantee provider.

     The registration requirements do not apply to providers of warranties, maintenance
     agreements, service contracts purchased on property not for consumer use, vehicle
     mechanical breakdown insurance, and specified service contracts.

     Financial Responsibility Requirements. A service contract provider or a protection product
     guarantee provider must demonstrate financial responsibility to OIC, or must assure the
     faithful performance of the provider's obligations to its service contract holders or
     protection product guarantee holders, respectively.

     Financial responsibility requirements vary for service contract providers covering motor
     vehicles, service contract providers covering property other than motor vehicles, and
     protection product guarantee providers.

     Service Contract Providers Covering Motor Vehicles. A service contract provider covering
     motor vehicles must insure all service contracts under a reimbursement insurance policy.
      The policy must be issued by an insurer meeting specified capital requirements. A single
     reimbursement insurance policy must reimburse or indemnify the service contract provider
     for all contractual obligations incurred by the provider under the terms of its insured
     contracts or guarantees. This type of coverage without a deductible is sometimes referred to
     as a full reimbursement or first dollar contractual liability insurance policy.

     Service Contract Providers Covering Property Other than Motor Vehicles. A service
     contract provider covering property other than motor vehicles must demonstrate one of the
     following:
         • it or its parent company maintains a net worth or stockholder's equity of at least $100
           million;


Senate Bill Report                             -2-                                        SB 5108
         • it maintains a funded reserve account for its service contract obligations of at least 40
           percent of the gross consideration received, less claims paid, on the sale of the service
           contract for all in-force contracts, and places in trust with OIC a financial security
           deposit of at least 5 percent of the same or $25,000, whichever is greater; or
         • it insures all service contracts under a full reimbursement insurance policy meeting
           the requirements.

     Protection Product Guarantee Providers. A protection product guarantee provider must
     insure all protection product guarantees under a full reimbursement insurance policy, and
     must prove it maintains a minimum net worth or stockholder's equity of $200,000 and can
     pay its debts when due.

     Summary of Bill: Types and Number of Reimbursement Insurance Policies. Rather than
     obtaining a full reimbursement insurance policy, a service contract provider or protection
     product guarantee provider may obtain one or more reimbursement insurance policies
     paying on behalf of the provider each contractual obligation incurred by the provider in the
     event of nonperformance by the provider or if the provider is unable to fulfill its contractual
     obligations to the consumer. This type of policy is sometimes referred to as a failure to
     perform contractual liability insurance policy.

     A service contract provider or protection product guarantee provider is authorized to have
     more than one reimbursement insurance policy concurrently in force.

     Financial Responsibility Requirements. Service contract providers covering motor vehicles
     and protection product guarantee providers may demonstrate financial responsibility
     through the same options as currently available for service contract providers covering
     property other than motor vehicles. Rather than insuring their obligations through
     reimbursement insurance policies, the providers may elect to demonstrate financial
     responsibility through either the funded reserve account and financial security deposit
     option or the $100 million minimum net worth or stockholder's equity option.

     For a protection product guarantee provider, the minimum net worth or stockholder's equity
     requirement of $200,000 remains regardless of whether the provider opts to insure its
     obligations through reimbursement insurance policies, or elects the funded reserve account
     and financial security deposit option.

     If a service contract provider covering motor vehicles elects to demonstrate financial
     responsibility through an option other than insuring its obligations, the service contract must
     contain a disclosure that obligations of the service contract provider under the contract are
     backed by the full faith and credit of the provider.

     Payment or Performance Due Under Failure to Perform Policies. A failure to perform
     reimbursement insurance policy must state that if the provider does not provide the covered
     service or product within 30 days of proof of loss by the holder of the service contract or


Senate Bill Report                              -3-                                         SB 5108
     protection product guarantee, the holder may apply directly to the reimbursement insurance
     company for payment or performance due. If the provider has ceased operation, the holder
     may apply directly without waiting 30 days.

     Appropriation: None.

     Fiscal Note: Available.

     Creates Committee/Commission/Task Force that includes Legislative members: No.

     Effective Date: Ninety days after adjournment of session in which bill is passed.




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