HF 1003

1st Engrossment - 84th Legislature (2005 - 2006) Posted on 12/15/2009 12:00am

  1.1                          A bill for an act 
  1.2             relating to commerce; regulating service contracts and 
  1.3             contract providers; providing exceptions; amending 
  1.4             Minnesota Statutes 2004, section 72A.20, by adding a 
  1.5             subdivision; proposing coding for new law as Minnesota 
  1.6             Statutes, chapter 59B. 
  1.7   BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA: 
  1.8      Section 1.  [59B.01] [SCOPE AND PURPOSE.] 
  1.9      (a) The purpose of this chapter is to create a legal 
  1.10  framework within which service contracts may be sold in this 
  1.11  state. 
  1.12     (b) The following are exempt from this chapter: 
  1.13     (1) warranties; 
  1.14     (2) maintenance agreements; 
  1.15     (3) warranties, service contracts, or maintenance 
  1.16  agreements offered by public utilities or their affiliates; 
  1.17     (4) service contracts sold or offered for sale to persons 
  1.18  other than consumers; 
  1.19     (5) service contracts on tangible property where the 
  1.20  tangible property for which the service contract is sold has a 
  1.21  purchase price of $250 or less exclusive of sales tax; and 
  1.22     (6) motor vehicle service contracts as defined in section 
  1.23  65B.29, subdivision 1, paragraph (1). 
  1.24     (c) The types of agreements referred to in paragraph (b) 
  1.25  are not subject to chapters 60A to 79A, except as otherwise 
  1.26  specifically provided by law. 
  2.1      Sec. 2.  [59B.02] [DEFINITIONS.] 
  2.2      Subdivision 1.  [TERMS.] For the purposes of this chapter, 
  2.3   the terms defined in this section have the meanings given them. 
  2.4      Subd. 2.  [ADMINISTRATOR.] "Administrator" means the person 
  2.5   who is responsible for the administration of the service 
  2.6   contracts or the service contracts plan or who is responsible 
  2.7   for any filings required by this chapter.  
  2.8      Subd. 3.  [COMMISSIONER.] "Commissioner" means the 
  2.9   commissioner of commerce. 
  2.10     Subd. 4.  [CONSUMER.] "Consumer" means a natural person who 
  2.11  buys, other than for purposes of resale, any tangible personal 
  2.12  property that is distributed in commerce and that is normally 
  2.13  used for personal, family, or household purposes and not for 
  2.14  business or research purposes. 
  2.15     Subd. 5.  [MAINTENANCE AGREEMENT.] "Maintenance agreement" 
  2.16  means a contract of limited duration that provides for scheduled 
  2.17  maintenance only. 
  2.18     Subd. 6.  [PERSON.] "Person" means an individual, 
  2.19  partnership, corporation, incorporated or unincorporated 
  2.20  association, joint stock company, reciprocal, syndicate, or any 
  2.21  similar entity or combination of entities acting in concert. 
  2.22     Subd. 7.  [PREMIUM.] "Premium" means the consideration paid 
  2.23  to an insurer for a reimbursement insurance policy. 
  2.24     Subd. 8.  [PROVIDER.] "Provider" means a person who is 
  2.25  contractually obligated to the service contract holder under the 
  2.26  terms of the service contract. 
  2.27     Subd. 9.  [PROVIDER FEE.] "Provider fee" means the 
  2.28  consideration paid for a service contract. 
  2.29     Subd. 10.  [REIMBURSEMENT INSURANCE POLICY.] "Reimbursement 
  2.30  insurance policy" means a policy of insurance issued to a 
  2.31  provider to either provide reimbursement to the provider under 
  2.32  the terms of the insured service contracts issued or sold by the 
  2.33  provider or, in the event of the provider's nonperformance, to 
  2.34  pay on behalf of the provider all covered contractual 
  2.35  obligations incurred by the provider under the terms of the 
  2.36  insured service contracts issued or sold by the provider. 
  3.1      Subd. 11.  [SERVICE CONTRACT.] "Service contract" means a 
  3.2   contract or agreement for a separately stated consideration for 
  3.3   a specific duration to perform the repair, replacement, or 
  3.4   maintenance of property or indemnification for repair, 
  3.5   replacement, or maintenance, for the operational or structural 
  3.6   failure due to a defect in materials, workmanship, or normal 
  3.7   wear and tear, with or without additional provisions for 
  3.8   incidental payment of indemnity under limited circumstances. 
  3.9   Service contracts may provide for the repair, replacement, or 
  3.10  maintenance of property for damage resulting from power surges 
  3.11  and accidental damage from handling. 
  3.12     Subd. 12.  [SERVICE CONTRACT HOLDER OR CONTRACT 
  3.13  HOLDER.] "Service contract holder" or "contract holder" means a 
  3.14  person who is the purchaser or holder of a service contract. 
  3.15     Subd. 13.  [WARRANTY.] "Warranty" means a warranty made 
  3.16  solely by the manufacturer, importer, or seller of property or 
  3.17  services without consideration, that is not negotiated or 
  3.18  separated from the sale of the product, and is incidental to the 
  3.19  sale of the product, that guarantees indemnity for defective 
  3.20  parts, mechanical or electrical breakdown, labor, or other 
  3.21  remedial measures, such as repair or replacement of the property 
  3.22  or repetition of services. 
  3.23     Sec. 3.  [59B.03] [REQUIREMENTS FOR TRANSACTING BUSINESS.] 
  3.24     Subdivision 1.  [APPOINTMENT OF ADMINISTRATOR.] A provider 
  3.25  may, but is not required to, appoint an administrator or other 
  3.26  designee to be responsible for any or all of the administration 
  3.27  of service contracts and compliance with this chapter. 
  3.28     Subd. 2.  [CONTRACT COPIES AND RECEIPTS.] Service contracts 
  3.29  must not be issued, sold, or offered for sale in this state 
  3.30  unless the provider has: 
  3.31     (1) provided a receipt for, or other written evidence of, 
  3.32  the purchase of the service contract to the contract holder; 
  3.33     (2) provided a copy of the service contract to the service 
  3.34  contract holder within a reasonable period of time from the date 
  3.35  of purchase; and 
  3.36     (3) complied with this chapter. 
  4.1      Subd. 3.  [REGISTRATION.] Each provider of service 
  4.2   contracts sold in this state shall file a registration with the 
  4.3   commissioner on a form prescribed by the commissioner.  Each 
  4.4   provider shall pay to the commissioner a fee in the amount of 
  4.5   $200 annually. 
  4.6      Subd. 4.  [FINANCIAL REQUIREMENTS.] In order to ensure the 
  4.7   faithful performance of a provider's obligations to its contract 
  4.8   holders, each provider is responsible for complying with the 
  4.9   requirements of one of the following: 
  4.10     (1) insure all service contracts under a reimbursement 
  4.11  insurance policy issued by an insurer authorized to transact 
  4.12  insurance in this state, a risk retention group, as that term is 
  4.13  defined in United States Code, title 15, section 3901(A)(4), as 
  4.14  long as that risk retention group is in full compliance with the 
  4.15  federal Liability Risk Retention Act of 1986, United States 
  4.16  Code, title 15, section 3901, et al., or issued pursuant to 
  4.17  sections 60A.195 to 60A.209, and either: 
  4.18     (i) the insurer or risk retention group shall, at the time 
  4.19  the policy is filed with the commissioner, and continuously 
  4.20  thereafter, maintain surplus as to policyholders and paid-in 
  4.21  capital of at least $15,000,000, and annually file audited 
  4.22  financial statements with the commissioner; or 
  4.23     (ii) the commissioner may authorize an insurer or risk 
  4.24  retention group that has surplus as to policyholders and paid-in 
  4.25  capital of less than $15,000,000 but at least equal to 
  4.26  $10,000,000 to issue the insurance required by this section if 
  4.27  the insurer or risk retention group demonstrates to the 
  4.28  satisfaction of the commissioner that the company maintains a 
  4.29  ratio of direct written premiums, wherever written, to surplus 
  4.30  as to policyholders and paid-in capital of not greater than 3 to 
  4.31  1; or 
  4.32     (2)(i) maintain a funded reserve account for obligations 
  4.33  under contracts issued and outstanding in this state.  The 
  4.34  reserves must not be less than 40 percent of gross consideration 
  4.35  received, less claims paid, on the sale of the service contract 
  4.36  for all in-force contracts.  The reserve account is subject to 
  5.1   examination and review by the commissioner; and 
  5.2      (ii) place in trust with the commissioner a financial 
  5.3   security deposit, having a value of not less than five percent 
  5.4   of the gross consideration received, less claims paid, on the 
  5.5   sale of the service contract for all service contracts issued 
  5.6   and in force, but not less than $25,000, consisting of one of 
  5.7   the following: 
  5.8      (A) a surety bond issued by an authorized surety; 
  5.9      (B) securities of the type eligible for deposit by 
  5.10  authorized insurers in this state; 
  5.11     (C) cash; 
  5.12     (D) a letter of credit issued by a qualified financial 
  5.13  institution containing an evergreen clause which prevents the 
  5.14  expiration of the letter without due notice from the issuer; or 
  5.15     (E) another form of security prescribed by rules of the 
  5.16  commissioner; or 
  5.17     (3)(i) maintain, or its parent company maintain, a net 
  5.18  worth or stockholders' equity of $100,000,000; and 
  5.19     (ii) upon request, provide the commissioner with a copy of 
  5.20  the provider's or the provider's parent company's most recent 
  5.21  Form 10-K or Form 20-F filed with the Securities and Exchange 
  5.22  Commission (SEC) within the last calendar year, or if the 
  5.23  company does not file with the SEC, a copy of the company's 
  5.24  audited financial statements, which shows a net worth of the 
  5.25  provider or its parent company of at least $100,000,000.  If the 
  5.26  provider's parent company's Form 10-K, Form 20-F, or audited 
  5.27  financial statements are filed to meet the provider's financial 
  5.28  stability requirement, then the parent company shall agree to 
  5.29  guarantee the obligations of the provider relating to service 
  5.30  contracts sold by the provider in this state. 
  5.31     Subd. 5.  [RIGHT OF RETURN.] Service contracts must require 
  5.32  the provider to permit the service contract holder to return the 
  5.33  service contract within 20 days of the date the service contract 
  5.34  was mailed to the service contract holder or within ten days of 
  5.35  delivery if the service contract is delivered to the service 
  5.36  contract holder at the time of sale or within a longer time 
  6.1   period permitted under the service contract.  Upon return of the 
  6.2   service contract to the provider within the applicable time 
  6.3   period, if no claim has been made under the service contract 
  6.4   before its return to the provider, the service contract is void 
  6.5   and the provider shall refund to the service contract holder, or 
  6.6   credit the account of the service contract holder, with the full 
  6.7   purchase price of the service contract.  The right to void the 
  6.8   service contract provided in this paragraph is not transferable 
  6.9   and applies only to the original service contract purchaser, and 
  6.10  only if no claim has been made before its return to the 
  6.11  provider.  A ten percent penalty per month must be added to a 
  6.12  refund that is not paid or credited within 45 days after return 
  6.13  of the service contract to the provider. 
  6.14     Subd. 6.  [PREMIUM TAXES.] (a) Provider fees collected on 
  6.15  service contracts are not subject to premium taxes. 
  6.16     (b) Premiums for reimbursement insurance policies are 
  6.17  subject to applicable taxes. 
  6.18     Subd. 7.  [LICENSING EXEMPTION.] Except for the 
  6.19  registration requirements in subdivision 3, providers and 
  6.20  related service contract sellers, administrators, and other 
  6.21  persons marketing, selling, or offering to sell service 
  6.22  contracts are exempt from any licensing requirements of this 
  6.23  state. 
  6.24     Subd. 8.  [INSURANCE EXEMPTION.] The marketing, sale, 
  6.25  offering for sale, issuance, making, proposing to make, and 
  6.26  administration of service contracts by providers and related 
  6.27  service contract sellers, administrators, and other persons are 
  6.28  exempt from all other provisions of the insurance laws of this 
  6.29  state, except as provided in section 72A.20, subdivision 38. 
  6.30     Sec. 4.  [59B.04] [REQUIRED DISCLOSURES; REIMBURSEMENT 
  6.31  INSURANCE POLICY.] 
  6.32     Subdivision 1.  [RIGHT TO PAYMENT OR 
  6.33  REIMBURSEMENT.] Reimbursement insurance policies insuring 
  6.34  service contracts issued, sold, or offered for sale in this 
  6.35  state shall state that the insurer that issued the reimbursement 
  6.36  insurance policy shall either reimburse or pay on behalf of the 
  7.1   provider any covered sums the provider is legally obligated to 
  7.2   pay or, in the event of the provider's nonperformance, shall 
  7.3   provide the service which the provider is legally obligated to 
  7.4   perform according to the provider's contractual obligations 
  7.5   under the service contracts issued or sold by the provider. 
  7.6      Subd. 2.  [RIGHT TO APPLY TO COMPANY.] In the event covered 
  7.7   service is not provided by the service contract provider within 
  7.8   60 days of proof of loss by the service contract holder, the 
  7.9   contract holder is entitled to apply directly to the 
  7.10  reimbursement insurance company. 
  7.11     Sec. 5.  [59B.05] [REQUIRED DISCLOSURE; SERVICE CONTRACTS.] 
  7.12     Subdivision 1.  [READABILITY AND GENERAL 
  7.13  DISCLOSURE.] Service contracts marketed, sold, offered for sale, 
  7.14  issued, made, proposed to be made, or administered in this state 
  7.15  must be written, printed, or typed in clear, understandable 
  7.16  language that is easy to read and must disclose the requirements 
  7.17  set forth in this section, as applicable. 
  7.18     Subd. 2.  [IDENTITIES OF PARTIES.] Service contracts must 
  7.19  state the name and address of the provider, and must identify 
  7.20  any administrator if different from the provider, the service 
  7.21  contract seller, and the service contract holder to the extent 
  7.22  that the name of the service contract holder has been furnished 
  7.23  by the service contract holder.  The identities of the parties 
  7.24  are not required to be preprinted on the service contract and 
  7.25  may be added to the service contract at the time of sale. 
  7.26     Subd. 3.  [TOTAL PURCHASE PRICE AND SALES TERMS.] Service 
  7.27  contracts must state the total purchase price and the terms 
  7.28  under which the service contract is sold.  The purchase price is 
  7.29  not required to be preprinted on the service contract and may be 
  7.30  negotiated at the time of sale with the service contract holder. 
  7.31     Subd. 4.  [DEDUCTIBLES.] Service contracts must state the 
  7.32  existence of any deductible amount, if applicable. 
  7.33     Subd. 5.  [COVERAGES, LIMITATIONS, AND EXCLUSIONS.] No 
  7.34  particular causes of loss or property are required to be 
  7.35  covered, but service contracts must specify the merchandise and 
  7.36  services to be provided and, with equal prominence, any 
  8.1   limitations, exceptions, or exclusions including, but not 
  8.2   limited to, any damage or breakdown not covered by the service 
  8.3   contract.  
  8.4      Subd. 6.  [RESTRICTIONS ON TRANSFERABILITY.] Service 
  8.5   contracts must state any restrictions governing the 
  8.6   transferability of the service contract, if applicable. 
  8.7      Subd. 7.  [CANCELLATION TERMS.] Service contracts must 
  8.8   state the terms, restrictions, or conditions governing 
  8.9   cancellation of the service contract prior to the termination or 
  8.10  expiration date of the service contract by either the provider 
  8.11  or the service contract holder.  The provider of the service 
  8.12  contract shall mail a written notice to the contract holder at 
  8.13  the last known address of the service contract holder contained 
  8.14  in the records of the provider at least 15 days before 
  8.15  cancellation by the provider.  Five days' notice is required if 
  8.16  the reason for cancellation is nonpayment of the provider fee, a 
  8.17  material misrepresentation by the service contract holder to the 
  8.18  provider, or a substantial breach of duties by the service 
  8.19  contract holder relating to the covered product or its use.  The 
  8.20  notice must state the effective date of the cancellation and the 
  8.21  reason for the cancellation. 
  8.22     Subd. 8.  [DUTIES OF CONTRACT HOLDER.] Service contracts 
  8.23  must set forth all of the obligations and duties of the service 
  8.24  contract holder, such as the duty to protect against any further 
  8.25  damage and any requirement to follow the owner's manual. 
  8.26     Subd. 9.  [EXCLUSIONS; CONSEQUENTIAL DAMAGES AND 
  8.27  PREEXISTING CONDITIONS.] Service contracts may exclude coverage 
  8.28  for consequential damages or preexisting conditions.  These 
  8.29  exclusions, if applicable, must be stated in the contract. 
  8.30     Sec. 6.  [59B.06] [ADDITIONAL REQUIRED DISCLOSURE; SERVICE 
  8.31  CONTRACTS.] 
  8.32     Subdivision 1.  [INSURANCE DISCLOSURE.] Service contracts 
  8.33  insured under a reimbursement insurance policy pursuant to 
  8.34  section 59B.03, subdivision 4, clause (1), must contain a 
  8.35  statement in substantially the following form:  "Obligations of 
  8.36  the provider under this service contract are insured under a 
  9.1   service contract reimbursement insurance policy."  The service 
  9.2   contract must also state the name and address of the insurer. 
  9.3      Subd. 2.  [DISCLOSURE OF NO INSURANCE.] Service contracts 
  9.4   not insured under a reimbursement insurance policy pursuant to 
  9.5   section 59B.03, subdivision 4, clause (1), must contain a 
  9.6   statement in substantially the following form:  "Obligations of 
  9.7   the provider under this service contract are backed by the full 
  9.8   faith and credit of the provider." 
  9.9      Sec. 7.  [59B.07] [PROHIBITED ACTS.] 
  9.10     Subdivision 1.  [DECEPTIVE NAMES.] A provider shall not use 
  9.11  in its name the words insurance, casualty, surety, mutual, or 
  9.12  any other words descriptive of the insurance, casualty, or 
  9.13  surety business; or a name deceptively similar to the name or 
  9.14  description of any insurance or surety corporation, or to the 
  9.15  name of any other provider.  The word "guaranty" or similar word 
  9.16  may be used by a provider.  This section does not apply to a 
  9.17  company that was using any of the prohibited language in its 
  9.18  name before the effective date of this chapter.  However, a 
  9.19  company using the prohibited language in its name shall include 
  9.20  in its service contracts a statement in substantially the 
  9.21  following form:  "This agreement is not an insurance contract." 
  9.22     Subd. 2.  [FALSE OR MISLEADING STATEMENTS.] A provider or 
  9.23  its representative shall not in its service contracts, 
  9.24  literature, or otherwise make, permit, or cause to be made any 
  9.25  false or misleading statement or omit any material statement 
  9.26  that would be considered misleading if omitted. 
  9.27     Subd. 3.  [REQUIRED PURCHASE.] A person, such as a bank, 
  9.28  savings association, lending institution, manufacturer, or 
  9.29  seller of any product shall not require the purchase of a 
  9.30  service contract as a condition of a loan or a condition for the 
  9.31  sale of any property. 
  9.32     Sec. 8.  [59B.08] [RECORD-KEEPING REQUIREMENTS.] 
  9.33     Subdivision 1.  [GENERALLY.] The provider shall keep 
  9.34  accurate accounts, books, and records concerning transactions 
  9.35  regulated under this chapter. 
  9.36     The provider's accounts, books, and records include the 
 10.1   following: 
 10.2      (1) copies of each type of service contracts sold; 
 10.3      (2) the name and address of each service contract holder to 
 10.4   the extent that the name and address have been furnished by the 
 10.5   service contract holder; 
 10.6      (3) a list of the locations where service contracts are 
 10.7   marketed, sold, or offered for sale; and 
 10.8      (4) written claims files which shall contain sufficient 
 10.9   information for the commissioner to ascertain whether a claim 
 10.10  has been adjusted in conformity with the terms of the service 
 10.11  contract, including at least the dates and description of claims 
 10.12  related to the service contracts. 
 10.13     Subd. 2.  [RETENTION.] (a) Except as provided in paragraph 
 10.14  (b), the provider shall retain all records required to be 
 10.15  maintained by this section for at least three years after the 
 10.16  specified period of coverage has expired. 
 10.17     (b) A provider discontinuing business in this state shall 
 10.18  maintain its records until it furnishes the commissioner 
 10.19  satisfactory proof that it has discharged all obligations to 
 10.20  contract holders in this state. 
 10.21     Subd. 3.  [MEDIUM.] The records required by this chapter 
 10.22  may be, but are not required to be, maintained on a computer 
 10.23  disk or other record-keeping technology.  If the records are 
 10.24  maintained in other than hard copy, the records must be capable 
 10.25  of duplication to legible hard copy at the request of the 
 10.26  commissioner. 
 10.27     Sec. 9.  [59B.09] [TERMINATION OF REIMBURSEMENT INSURANCE 
 10.28  POLICY.] 
 10.29     An insurer that issued a reimbursement insurance policy may 
 10.30  not terminate the policy unless the insurer mails or delivers 
 10.31  written notice of the termination to the commissioner at least 
 10.32  30 days before the effective date of termination.  The 
 10.33  termination of a reimbursement insurance policy does not reduce 
 10.34  the issuer's responsibility for service contracts issued by 
 10.35  providers before the date of the termination. 
 10.36     Sec. 10.  [59B.10] [OBLIGATION OF REIMBURSEMENT INSURANCE 
 11.1   POLICY INSURERS.] 
 11.2      Insurers issuing reimbursement insurance to providers are 
 11.3   deemed to have received the premiums for the insurance upon the 
 11.4   payment of provider fees by consumers for service contracts 
 11.5   issued by the insured providers. 
 11.6      Nothing in this chapter prevents or limits the right of an 
 11.7   insurer which issued a reimbursement insurance policy to seek 
 11.8   indemnification or subrogation against a provider if the issuer 
 11.9   pays or is obligated to pay the service contract holder sums 
 11.10  that the provider was obligated to pay pursuant to the 
 11.11  provisions of the service contract. 
 11.12     Sec. 11.  [59B.11] [SEVERABILITY PROVISION.] 
 11.13     If any provision of this chapter or the application of the 
 11.14  provision to any person or circumstances are held invalid, the 
 11.15  remainder of this chapter and the application of the provision 
 11.16  to person or circumstances other than those as to which it is 
 11.17  held invalid, must not be affected. 
 11.18     Sec. 12.  Minnesota Statutes 2004, section 72A.20, is 
 11.19  amended by adding a subdivision to read: 
 11.20     Subd. 38.  [UNFAIR CLAIMS SERVICE; SERVICE CONTRACTS.] No 
 11.21  person shall, in connection with a service contract regulated 
 11.22  under chapter 59B: 
 11.23     (1) attempt to settle claims on the basis of an application 
 11.24  or any other material document which was altered without notice 
 11.25  to, or knowledge or consent of, the service contract holder; 
 11.26     (2) make a material misrepresentation to the warranty 
 11.27  holder for the purpose and with the intent of effecting 
 11.28  settlement of the claims, loss, or damage under the contract on 
 11.29  less favorable terms than those provided in, and contemplated 
 11.30  by, the contract; or 
 11.31     (3) commit or perform with such frequency as to indicate a 
 11.32  general business practice any of the following practices: 
 11.33     (i) failure to properly investigate claims; 
 11.34     (ii) misrepresentation of pertinent facts or contract 
 11.35  provisions relating to coverages at issue; 
 11.36     (iii) failure to acknowledge and act upon communications 
 12.1   within a reasonable time with respect to claims; 
 12.2      (iv) denial of claims without conducting reasonable 
 12.3   investigations based upon available information; 
 12.4      (v) failure to affirm or deny coverage of claims upon 
 12.5   written request of the warranty holder within a reasonable time 
 12.6   after proof-of-loss statements have been completed; or 
 12.7      (vi) failure to timely provide a reasonable explanation to 
 12.8   the warranty holder of the basis in the contract in relation to 
 12.9   the facts or applicable law for denial of a claim or for the 
 12.10  offer of a compromise settlement. 
 12.11     Sec. 13.  [EFFECTIVE DATE.] 
 12.12     Sections 1 to 12 are effective January 1, 2006, and apply 
 12.13  to service contracts issued on or after that date.  A provider 
 12.14  transacting business in this state on or before the date of the 
 12.15  enactment of this chapter, which submits an application for 
 12.16  registration as a provider under Minnesota Statutes, section 
 12.17  59B.03, subdivision 3, within 30 days after the commissioner 
 12.18  makes the application available, may continue to transact 
 12.19  business in this state until final agency action is taken by the 
 12.20  commissioner regarding the registration application and all 
 12.21  rights to administrative and judicial review related to that 
 12.22  final agency action have been exhausted or have expired.