Service Contract Providers

Service Contract Providers Rule Proposal

Chapter 77. Service Contract Providers and Administrators
Proposal Filed: July 13, 2009 – To be published in the Texas Register: July 24, 2009
Deadline for Public Comment: August 24, 2009

Underlined text is new language.

The Texas Department of Licensing and Regulation (“Department”) proposes to repeal existing rules at 16 Texas Administrative Code (“TAC”) Chapter 77, §§77.1, 77.10, 77.21, 77.22, 77.70, 77.72, 77.80, and 77.90 and to adopt new rules at 16 TAC Chapter 77, §§77.1, 77.10, 77.20, 77.21, 77.22, 77.23, 77.40, 77.41, 77.42, 77.43, 77.70, 77.80, and 77.90 regarding service contract providers and administrators.

The existing rules at 16 TAC Chapter 77 implement the statutory requirements under Texas Occupations Code, Chapter 1304, the Service Contract Regulatory Act. The Department is proposing the repeal of the existing rules and the adoption of new rules in order to clarify and reflect the current policies, practices and procedures for registering and regulating service contract providers and administrators. In addition, the new rules are necessary to clarify and detail the providers’ financial security obligations and the providers’ responsibilities to their service contract holders.

Proposed new Chapter 77 rules clarify and detail the registration requirements for service contract providers (“providers”) and service contract administrators (“administrators”). The proposed rules compile the existing registration requirements found throughout the statute, rules and registration forms into one comprehensive list of registration requirements. The proposed rules separate registration requirements for providers and administrators into separate rules, and separate the requirements for initial registrations and renewals into separate rules. In addition, the proposed new rules clarify and detail the financial security requirements for providers, which are set out in general terms in the statute and which are critical for ensuring the performance of the providers’ obligations to their service contract holders.

The proposed rules set out the responsibilities that providers and administrators have to their service contract holders and to the Department, including providing disclosures to consumers in advertisements and in service contracts and providing updated information to the Department. The proposed rules establish new procedures that providers must follow if they cease operations in Texas but still have active service contracts in effect. Finally, the proposed rules include a fees section; however, there are no proposed changes to the fee amounts found in the existing rules.

William H. Kuntz, Jr., Executive Director, has determined that for the first five-year period the proposed rules are in effect, there will be no direct cost or effect on revenue to state or local government as a result of enforcing or administering the proposed rules.

Mr. Kuntz also has determined that for each year of the first five-year period the proposed rules are in effect, the public will benefit because the proposed rules clarify the service contract providers’ financial obligations and contractual responsibilities to members of the public who purchase service contracts (“service contract holders”). The public also will benefit from enhanced disclosures that providers must give to potential and new service contract holders. Existing service contract holders will benefit from receiving at least 30-days advance notice if their service contract provider ceases operations in Texas. These service contract holders will have the opportunity to seek a refund or other resolution before the provider ceases operations. Currently, providers that are ceasing operations are not notifying service contract holders, and service contract holders are finding out weeks, months or even years later when they try to make claims on their service contracts that the provider is no longer in business.

The service contract industry will benefit because of the additional clarity and detail provided in the rules regarding registration and financial security requirements and because the rules reflect the current policies, practices and procedures of the Department.

There are approximately 203 service contract providers and 49 service contract administrators currently registered with the Department to do business in Texas. Many of these businesses are large national corporations. The Department assumes that at least some of the providers and administrators may be classified as “small businesses” or “micro-businesses” as defined under Texas Government Code, Chapter 2006. After evaluating the proposed rules, the Department believes that there will be no adverse economic effect on small and micro-businesses, but the agency anticipates that there may be minimal economic costs to persons who are required to comply with the rules as proposed. Because there may be economic costs, the agency has prepared an Economic Impact Statement and a Regulatory Flexibility Analysis, as detailed under Texas Government Code §2006.002.

Most of the proposed changes in the new rules provide additional detail and clarification to the existing rules, but not additional new requirements. There will be no costs to those persons who are required to comply with the rules as a result of these changes. There are two additions to the existing rules that may result in minimal costs to providers (not administrators), but the Department has narrowly tailored the new requirements and does not anticipate an adverse economic cost to small or micro-businesses as a result of these proposed changes.

The first proposed change requires the provider to identify itself on the advertising materials that are used by the provider, its administrator or its sellers. The public often receives letters and postcards in the mail advertising various service contracts, but some of these advertisements do not provide the name of the service contract provider, just a phone number. Since service contract sellers are not registered with the Department, it is important for the public and the Department to know the name of the provider who is financially and contractually responsible for a particular service contract being advertised and whether that provider is registered in Texas to do business.

The Department has narrowly tailored this new provision to require only the name of the provider on the solicitation. The less burdensome alternative is not requiring the provider’s name on the advertising, which is the current status and which leaves the public wondering whether the provider behind the anonymous advertisement is registered to do business in Texas. Other alternatives to the proposed rule would require the provider to provide additional information on the solicitations, which would probably be more burdensome and costly. The Department believes the proposed change is a reasonable solution. The Department believes that the legitimate service contract providers currently include their names on their marketing materials and that this requirement should not result in an additional cost to those providers.

The second proposed change requires a provider that is ceasing operations in the state to notify its service contract holders who have active contracts in effect and the Department regarding the fact that the provider is going out of business. The provider also must provide certain information to the Department. While there may be some minimal economic cost to these requirements, the Department finds this to be a necessary cost of properly conducting business.

The Department has experienced several instances over the last few years of providers ceasing operations and not telling their service contract holders or the Department that they were going out of business and that they would no longer be honoring the service contracts. The service contract holders only find out weeks, months or even years later when they try to make claims on the service contracts and they discover that the provider is no longer in business. The Department often finds out when it starts receiving complaints from consumers or when the provider does not renew its registration with the Department the following year. Service contract providers like any other business entity should wind down business operations in an organized and proper manner and provide notice to customers who have paid upfront and in full for service contracts (often multi-year contracts) that they will no longer be able to use the service contracts or receive the coverage for which they paid.

The Department has narrowly tailored this new requirement and has not prescribed the method or format for notifying consumers or the Department, just the timing. In addition, the Department has limited the information required to be provided to the Department to that which is necessary to identify and handle potential complaints in the future from affected service contract holders. The less burdensome alternative is not requiring the provider to notify service contract holders with active contracts or the Department when it ceases operations, which is the current status. Other alternatives to the proposed rule would require the provider to provide additional information and would prescribe the method and format for doing so, which would probably be more burdensome and costly. The Department believes the proposed rules are a reasonable solution. The Department has attempted to minimize the potential for any economic costs to persons who are required to comply with the rules as proposed, while ensuring that the necessary information is provided to the public and the Department.

Comments on the proposal may be submitted by mail to Caroline Jackson, Legal Assistant, General Counsel’s Office, Texas Department of Licensing and Regulation, P.O. Box 12157, Austin, Texas 78711, or by facsimile to 512/475-3032, or electronically to erule.comments@license.state.tx.us. The deadline for comments is 30 days after publication in the Texas Register.

The repeal is proposed under Texas Occupations Code, Chapter 51, which authorizes the Commission, the Department’s governing body, to adopt rules as necessary to implement this chapter and any other law establishing a program regulated by the Department. The repeal is also proposed under Texas Occupations Code, Chapter 1304, which establishes the service contract program and gives regulatory authority of this program to the Commission and the Department.

The statutory provisions affected by the repeal are those set forth in Texas Occupations Code, Chapters 51 and 1304. No other statutes, articles, or codes are affected by the proposal.

§77.1. Authority
§77.10. Definitions
§77.21. Registration and Renewal Requirements--Provider
§77.22. Registration and Renewal Requirements--Administrator
§77.70. Responsibilities of Registrant--Provider and Administrator
§77.72. Financial Security
§77.80. Fees
§77.90. Sanctions--Administrative Sanctions/Penalties

Filed with the Office of the Secretary of State, on July 13, 2009.

William H. Kuntz, Jr.
Executive Director
Texas Department of Licensing and Regulation

The new rules are proposed under Texas Occupations Code, Chapter 51, which authorizes the Commission, the Department’s governing body, to adopt rules as necessary to implement this chapter and any other law establishing a program regulated by the Department. The new rules also are proposed under Texas Occupations Code, Chapter 1304, which establishes the service contract program and gives regulatory authority of this program to the Commission and the Department.

The statutory provisions affected by the proposal are those set forth in Texas Occupations Code, Chapters 51 and 1304. No other statutes, articles, or codes are affected by the proposal.

§77.1. Authority.

This chapter is promulgated under the authority of Texas Occupations Code, Chapter 1304 and Texas Occupations Code, Chapter 51.

§77.10. Definitions.

The following words and terms, as used in this chapter and Texas Occupations Code, Chapter 1304, have the following meanings:

(1) “Service contract seller” or “seller” means a person, other than the provider of the service contract, who is responsible for marketing, offering, or selling service contracts, but is not contractually obligated to a service contract holder under the terms of a service contract.

(2) “Third-party administration of a service contract” includes any of the following activities performed on behalf of a service contract provider:

(A) performing or arranging the collection, maintenance, or disbursement of money to compensate any party for claims or repairs pursuant to a service contract;

(B) participating in the processing or adjustment of claims arising under a service contract;

(D) complying with provider requirements, other than financial security requirements, of Texas Occupations Code, Chapter 1304.

(3) The term “third party administration of a service contract” does not include the performance of repairs, or clerical functions ancillary to the performance of repairs, by a repair facility that performs no other activities with respect to a service contract.

§77.20. Registration Requirements--Provider.

(a) No person may operate as a provider of service contracts, or offer to be a provider of service contracts, in this state without first registering with the Department, unless the service contracts offered by such person are specifically exempt from the application of Texas Occupations Code, Chapter 1304.

(b) A registration is valid for one year from the date issued.

(c) Initial applications for registration must provide the Department with all of the following required information, on forms prescribed by the Executive Director:

(1) a completed registration form;

(2) a completed biographical affidavit from each controlling person as defined in Texas Occupations Code §1304.0035;

(3) a completed criminal history questionnaire from each controlling person as defined in Texas Occupations Code §1304.0035, if applicable;

(4) the required fee; and

(5) proof of financial security as prescribed under §77.40.

(d) Not later than the 30th day after the date of a provider’s initial registration, the provider must submit the following information to the Department:

(1) a list of internet website addresses through which a consumer may purchase the provider’s service contracts, if any;

(2) a list of administrator(s) appointed by the provider, if any, including each administrator’s name, assumed name, street address, telephone number, and Department registration number; and

(3) a list of sellers of the provider’s service contracts, except those excluded under Texas Occupations Code §1304.1025(c)(2), including each service contract seller’s name, assumed name, street address, and telephone number.

(e) Falsification of information on an application is cause for denial and/or revocation of the registration.

(f) The Department may refuse to issue a registration if the applicant or a controlling person of the applicant has violated Texas Occupation Code, Chapter 1304, this chapter, or a rule or an order issued by the Commission or Executive Director.

§77.21. Registration Renewal Requirements--Provider.

(a) In order for a provider to continue operating in this state, a registration must be renewed annually.

(b) Non-receipt of a registration renewal notice from the Department does not exempt a person from any requirements of this chapter.

(c) Renewal applications for registration must provide the Department with all of the following required information, on forms prescribed by the Executive Director:

(1) a completed registration form;

(2) the number of service contracts sold by the provider in the preceding 12-month period;

(3) the updated lists of information required under §77.20(d);

(4) a biographical affidavit from each controlling person as defined in Texas Occupations Code §1304.0035, or a form indicating there has been no change in the biographical affidavit since the previous registration or renewal from each controlling person;

(5) a completed criminal history questionnaire from each controlling person as defined in Texas Occupations Code §1304.0035, if applicable, or a form indicating there has been no change in criminal history since the previous registration or renewal from each controlling person, as applicable;

(6) the required fee; and

(7) proof of new or continuing financial security as prescribed under §77.40.

(d) Falsification of information on an application is cause for denial and/or revocation of the registration.

(e) The Department may refuse to renew a registration if the applicant or a controlling person of the applicant has violated Texas Occupation Code, Chapter 1304, this chapter, or a rule or an order issued by the Commission or Executive Director.

(f) A person shall not perform work requiring registration under Texas Occupations Code, Chapter 1304 or this chapter with an expired registration.

§77.22. Registration Requirements--Administrator.

(a) No person may operate as an administrator for a provider or offer to act as an administrator for a provider operating in this state without first registering with the Department.

(b) A registration is valid for one year from the date issued.

(c) Initial applications for registration must provide the Department with all of the following required information, on forms prescribed by the Executive Director:

(1) a completed registration form;

(2) the name and Department registration number for each service contract provider(s) for which the person will act as an administrator;

(3) a list of the administrator’s controlling persons as defined in Texas Occupations Code §1304.0035; and

(4) the required fee.

(d) Falsification of information on an application is cause for denial and/or revocation of the registration.

(e) The Department may refuse to issue a registration if the applicant or a controlling person of the applicant has violated Texas Occupation Code, Chapter 1304, this chapter, or a rule or an order issued by the Commission or Executive Director.

§77.23. Registration Renewal Requirements--Administrator.

(a) In order for an administrator to continue operating in this state, a registration must be renewed annually.

(b) Non-receipt of a registration renewal notice from the Department does not exempt a person from any requirements of this chapter.

(c) Renewal applications for registration must provide the Department with all of the following required information, on forms prescribed by the Executive Director:

(1) a completed registration form;

(2) the name and Department registration number for each service contract provider(s) for which the person will act as an administrator;

(3) a list of the administrator’s controlling persons as defined in Texas Occupations Code §1304.0035; and

(4) the required fee.

(d) Falsification of information on an application is cause for denial and/or revocation of the registration.

(f) A person shall not perform work requiring registration under Texas Occupations Code, Chapter 1304 or this chapter with an expired registration.

§77.40. Financial Security--General Requirements.

(a) A provider must maintain financial security to ensure the faithful performance of a provider’s obligations to its service contract holders and for the benefit of those service contract holders who suffer actual financial loss due to the provider’s failure to perform those obligations.

(b) A provider must submit proof of one of the following three forms of financial security that meets the requirements of Texas Occupations Code §1304.151 and/or §1304.152:

(1) a reimbursement insurance policy;

(2) a funded reserve account and a security deposit; or

(3) net worth of at least $100 million.

(c) All forms of financial security must be maintained by the provider for the entire time the provider continues to do business in this state or is registered to do business in this state.

(d) All forms of financial security must be kept in effect until the later of:

(1) two years after the provider ceases to do business in this state;

(2) two years after the provider’s registration expires; or

(3) the Executive Director receives satisfactory proof from the provider and determines that the provider has discharged or otherwise adequately met all obligations to its service contract holders in this state.

(e) If any form of financial security is canceled or lapses during the term of the provider’s registration, the provider may not issue a new service contract after the effective date of the cancellation or lapse, unless and until the provider files with the Executive Director a copy of a new form of financial security that meets the financial security requirements provided by Texas Occupations Code, Chapter 1304 and this chapter and that provides coverage after that date.

(f) Cancellation or lapse of the financial security does not affect the provider’s liability for a service contract issued by the provider before or after the effective date of the cancellation or lapse.

§77.41. Financial Security--Reimbursement Insurance Policy.

(a) A provider that uses a reimbursement insurance policy to comply with the financial security requirements of Texas Occupations Code §1304.151 and §1304.152, will not be allowed to obtain or renew a registration unless the insurer issuing the policy has provided all of the information and met all of the requirements set forth in Texas Occupations Code §1304.152(a-1).

(b) A reimbursement insurance policy that is used to comply with the financial security requirements of Texas Occupations Code §1304.151 and §1304.152 must include:

(1) the “Service Contract Provider Texas Endorsement” prescribed by the Executive Director, or equivalent language; and

(2) copy of the approval letter from the Texas Department of Insurance for using the endorsement.

(c) If a reimbursement insurance policy, which is used to comply with the financial security requirements of Texas Occupations Code §1304.151 and §1304.152, is issued by a risk retention group, the provider must disclose to the Department:

(1) the identity of all of the policyholders/investors in the risk retention group; and

(2) the percentage of ownership of each policyholder/investor.

§77.42. Financial Security--Funded Reserve Account and Security Deposit.

(a) A provider that uses a funded reserve account and security deposit to comply with the financial security requirements of Texas Occupations Code §1304.151, will not be allowed to obtain or renew a registration unless the provider:

(1) maintains the funded reserve account and the security deposit at or above the financial levels required under §1304.151(b); and

(2) meets the requirements under this section.

(b) The funded reserve account maintained by the provider must:

(1) be kept separate from the provider’s operating accounts; and

(2) not be used for any purpose other than to cover the provider’s obligations under its service contracts that are issued and outstanding in this state.

(c) In addition to maintaining the funded reserve account, the provider must submit one of the following forms of security deposit:

(1) A surety bond that:

(A) is issued by a surety company authorized to do business in the State of Texas;

(B) conforms to the Texas Insurance Code;

(D) is payable to the Executive Director for the satisfaction of eligible service contract holder claims; and

(E) states that the surety company will provide the Department 60 days prior written notice of its intent to cancel the bond;

(2) A certificate of deposit that is assigned to the Executive Director;

(3) Securities of the type eligible for deposit by an authorized insurer in Texas;

(4) A deposit of cash or cash equivalents; or

(5) An original letter of credit that:

(A) is irrevocable;

(B) is issued by a qualified financial institution which is financially responsible in the amount of the letter of credit;

(C) does not require examination of the performance of the underlying transaction between the Department and the provider;

(D) is payable to the Department on demand or within a reasonably brief period of time after presentation of all required documents; and

(E) does not include any condition that makes payment to the Department contingent upon the consent of or other action by the provider or other party.

§77.43. Financial Security--Minimum Net Worth.

A provider that maintains, or has a parent company maintain, a net worth or stockholder’s equity of at least $100 million to comply with the financial security requirements of Texas Occupations Code §1304.151, will not be allowed to obtain or renew a registration unless the provider gives the Department audited financial statements as described under §1304.151(c) and (d) or information for accessing and viewing the proof of net worth online.

§77.70. Responsibilities of Registrant--Provider and Administrator.

(a) The provider must clearly and conspicuously identify itself on all written service contracts and advertising materials that are used by the provider, its administrator(s), or its seller(s).

(b) The provider and/or any administrator appointed by the provider must provide service contract holders with a notification that meets all of the following requirements.

(1) The notification must provide the name, mailing address, and telephone number of the Department.

(2) The notification must contain a statement that unresolved complaints concerning a registrant or questions concerning the regulation of service contract providers and administrators may be addressed to the Department.

(3) The notification must be included on all written service contacts. The notification may be stamped on the contract or printed on a separate sheet and stapled to the contract.

(c) The provider and/or any administrator appointed by the provider must provide service contract holders with the provider’s complaint resolution procedures.

(d) The provider and/or any administrator appointed by the provider must disclose the following information to service contract holders:

(1) the procedures and timeframes for returning a service contract in accordance with Texas Occupations Code §1304.157;

(2) the procedures and timeframes for voiding a service contract in accordance with Texas Occupations Code §1304.158;

(3) the procedures and timeframes for refunding the purchase price of the service contract to the service contract holder in accordance with Texas Occupations Code § 1304.158; and

(4) the conditions in which the provider and/or administrator may cancel a service contract in accordance with Texas Occupations Code §1304.159.

(e) The provider and/or any administrator appointed by the provider must provide a copy of the service contract to the service contract holder within 45 days from the date of purchase.

(f) The provider and/or any administrator appointed by the provider must provide a receipt for or other written evidence of the purchase of a service contract to the service contract holder within 45 days from the date of purchase.

(g) The provider is responsible for the activities of the service contract sellers used to sell the provider’s service contracts.

(h) A provider shall report to the Department within 30 days any change in information required by §77.20 and §77.21.

(i) An administrator shall report to the Department within 30 days any change in information required by §77.22 and §77.23.

(j) Upon notification by the Department, the provider and/or any administrator appointed by the provider shall allow the Department to audit records required to be maintained by Texas Occupations Code, Chapter 1304. These records include copies of the service contracts marketed, sold, administered or issued in this state.

(k) A provider must notify the Department no later than 60 days prior to the provider ceasing operations in this state or not renewing its registration in this state. A provider must notify the Department as soon as possible after the provider files for bankruptcy or is placed into receivership and must provide the contact information for the bankruptcy trustee or receiver and the court handling these proceedings.

(l) Within 10 days after notifying the Department in accordance with subsection (k), a provider must submit to the Department:

(1) the name(s) and the number of the active service contracts affected;

(2) the names and addresses of the service contract holders with active service contracts in this state and the remaining amount of time left on these active service contracts; and

(3) any other information determined necessary by the Department relating to the provider ceasing operations and/or terminating registration in this state.

(m) A provider must notify service contract holders with active service contracts in this state no later than 30 days prior to the provider ceasing operations in this state or not renewing its registration in this state. The provider remains financially responsible to service contract holders with active service contracts in this state.

§77.80. Fees.

(a) All registration fees are non-refundable.

(b) The initial registration fee for a service contract provider is $250.

(1) $250 for registrants providing 0 to 250 service contracts;

(2) $500 for registrants providing 251 to 499 service contracts; and

(3) $1,000 for registrants providing 500 or more service contracts.

(d) The initial registration fee for an administrator is $250.

(e) The annual renewal registration fee for an administrator is $250.

(f) The fee for a duplicate or amended registration certificate is $25.

(g) Late renewal fees for registrations issued under this chapter are provided under §60.83 of this title (relating to Late Renewal Fees).

§77.90. Administrative Penalties and Sanctions.

If a person violates any provision of Texas Occupations Code, Chapter 1304, this chapter, or any rule or order of the Executive Director or Commission, proceedings may be instituted to impose administrative penalties, administrative sanctions, or both in accordance with the provisions of Texas Occupations Code, Chapter 1304; Texas Occupations Code, Chapter 51; and any associated rules.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be a valid exercise of the agency’s legal authority.

Filed with the Office of the Secretary of State, on July 13, 2009.

William H. Kuntz, Jr.
Executive Director
Texas Department of Licensing and Regulation

A Service Contract Provider provides extended warranties to consumers for a specified period of time and for an additional cost beyond the price of the product. For more information about the Service Contract Providers program, e-mail TDLR at service.contract.providers@license.state.tx.us.

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