SF 1782

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

A bill for an act
relating to commerce; regulating service contracts and
contract providers; providing exceptions; amending
Minnesota Statutes 2004, section 72A.20, by adding a
subdivision; proposing coding for new law as Minnesota
Statutes, chapter 59B.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA:

Section 1.

new text begin [59B.01] SCOPE AND PURPOSE.
new text end

new text begin (a) The purpose of this chapter is to create a legal
framework within which service contracts may be sold in this
state.
new text end

new text begin (b) The following are exempt from this chapter:
new text end

new text begin (1) warranties;
new text end

new text begin (2) maintenance agreements;
new text end

new text begin (3) warranties, service contracts, or maintenance
agreements offered by public utilities, as defined in section
216B.02, subdivision 4, or an entity or operating unit owned by
or under common control with a public utility;
new text end

new text begin (4) service contracts sold or offered for sale to persons
other than consumers;
new text end

new text begin (5) service contracts on tangible property where the
tangible property for which the service contract is sold has a
purchase price of $250 or less exclusive of sales tax;
new text end

new text begin (6) motor vehicle service contracts as defined in section
65B.29, subdivision 1, paragraph (1); and
new text end

new text begin (7) service contracts for home security equipment installed
by a licensed technology systems contractor.
new text end

new text begin (c) The types of agreements referred to in paragraph (b)
are not subject to chapters 60A to 79A, except as otherwise
specifically provided by law.
new text end

Sec. 2.

new text begin [59B.02] DEFINITIONS.
new text end

new text begin Subdivision 1. new text end

new text begin Terms. new text end

new text begin For the purposes of this chapter,
the terms defined in this section have the meanings given them.
new text end

new text begin Subd. 2. new text end

new text begin Administrator. new text end

new text begin "Administrator" means the person
who is responsible for the administration of the service
contracts or the service contracts plan or who is responsible
for any filings required by this chapter.
new text end

new text begin Subd. 3. new text end

new text begin Commissioner. new text end

new text begin "Commissioner" means the
commissioner of commerce.
new text end

new text begin Subd. 4. new text end

new text begin Consumer. new text end

new text begin "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.
new text end

new text begin Subd. 5. new text end

new text begin Maintenance agreement. new text end

new text begin "Maintenance agreement"
means a contract of limited duration that provides for scheduled
maintenance only.
new text end

new text begin Subd. 6. new text end

new text begin Person. new text end

new text begin "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.
new text end

new text begin Subd. 7. new text end

new text begin Premium. new text end

new text begin "Premium" means the consideration paid
to an insurer for a reimbursement insurance policy.
new text end

new text begin Subd. 8. new text end

new text begin Provider. new text end

new text begin "Provider" means a person who is
contractually obligated to the service contract holder under the
terms of the service contract.
new text end

new text begin Subd. 9. new text end

new text begin Provider fee. new text end

new text begin "Provider fee" means the
consideration paid for a service contract.
new text end

new text begin Subd. 10. new text end

new text begin Reimbursement insurance policy. new text end

new text begin "Reimbursement
insurance policy" means a policy of insurance issued to a
provider to either provide reimbursement to the provider under
the terms of the insured service contracts issued or sold by the
provider or, in the event of the provider's nonperformance, to
pay on behalf of the provider all covered contractual
obligations incurred by the provider under the terms of the
insured service contracts issued or sold by the provider.
new text end

new text begin Subd. 11. new text end

new text begin Service contract. new text end

new text begin "Service contract" means a
contract or agreement for a separately stated consideration for
a specific duration to perform the repair, replacement, or
maintenance of property or 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 provisions for
incidental payment of indemnity under limited circumstances.
Service contracts may provide for the repair, replacement, or
maintenance of property for damage resulting from power surges
and accidental damage from handling.
new text end

new text begin Subd. 12. new text end

new text begin Service contract holder or contract
holder. new text end

new text begin "Service contract holder" or "contract holder" means a
person who is the purchaser or holder of a service contract.
new text end

new text begin Subd. 13. new text end

new text begin Warranty. new text end

new text begin "Warranty" means a warranty made
solely by the manufacturer, importer, or seller of property or
services without consideration, that is not negotiated or
separated from the sale of the product, and is incidental to the
sale of the product, 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.
new text end

Sec. 3.

new text begin [59B.03] REQUIREMENTS FOR TRANSACTING BUSINESS.
new text end

new text begin Subdivision 1. new text end

new text begin Appointment of administrator. new text end

new text begin A provider
may, but is not required to, appoint an administrator or other
designee to be responsible for any or all of the administration
of service contracts and compliance with this chapter.
new text end

new text begin Subd. 2. new text end

new text begin Contract copies and receipts. new text end

new text begin Service contracts
must not be issued, sold, or offered for sale in this state
unless the provider has:
new text end

new text begin (1) provided a receipt for, or other written evidence of,
the purchase of the service contract to the contract holder;
new text end

new text begin (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
new text end

new text begin (3) complied with this chapter.
new text end

new text begin Subd. 3. new text end

new text begin Registration. new text end

new text begin Each provider of service
contracts sold in this state shall file a registration with the
commissioner on a form prescribed by the commissioner. Each
provider shall pay to the commissioner a fee in the amount of
$200 annually.
new text end

new text begin Subd. 4. new text end

new text begin Financial requirements. new text end

new text begin In order to ensure the
faithful performance of a provider's obligations to its contract
holders, each provider is responsible for complying with the
requirements of one of the following:
new text end

new text begin (1) insure all service contracts under a reimbursement
insurance policy issued by an insurer authorized to transact
insurance in this state, a risk retention group, as that term is
defined in United States Code, title 15, section 3901(A)(4), as
long as that risk retention group is registered pursuant to
section 60E.03 or 60E.04 as applicable, and is in full
compliance with the federal Liability Risk Retention Act of
1986, United States Code, title 15, section 3901, et al., or
issued pursuant to sections 60A.195 to 60A.209, and either:
new text end

new text begin (i) the insurer or risk retention group shall, at the time
the policy is filed with the commissioner, and continuously
thereafter, maintain surplus as to policyholders and paid-in
capital of at least $15,000,000, and annually file audited
financial statements with the commissioner; or
new text end

new text begin (ii) the commissioner may authorize an insurer or risk
retention group that has surplus as to policyholders and paid-in
capital of less than $15,000,000 but at least equal to
$10,000,000 to issue the insurance required by this section if
the insurer or risk retention group demonstrates to the
satisfaction of the commissioner that the company maintains a
ratio of direct written premiums, wherever written, to surplus
as to policyholders and paid-in capital of not greater than 3 to
1; or
new text end

new text begin (2)(i) maintain a funded reserve account for obligations
under contracts issued and outstanding in this state. The
reserves must not be less than 40 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 commissioner; and
new text end

new text begin (ii) place in trust with the commissioner 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 $25,000, consisting of one of
the following:
new text end

new text begin (A) a surety bond issued by an authorized surety;
new text end

new text begin (B) securities of the type eligible for deposit by
authorized insurers in this state;
new text end

new text begin (C) cash;
new text end

new text begin (D) a letter of credit issued by a qualified financial
institution containing an evergreen clause which prevents the
expiration of the letter without due notice from the issuer; or
new text end

new text begin (E) another form of security prescribed by rules of the
commissioner; or
new text end

new text begin (3)(i) maintain, or its parent company maintain, a net
worth or stockholders' equity of $100,000,000; and
new text end

new text begin (ii) upon request, provide the commissioner with a copy of
the provider's or the provider's parent company's most recent
Form 10-K or Form 20-F 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 shows a net worth of the
provider or its parent company of at least $100,000,000. If the
provider's parent company's Form 10-K, Form 20-F, or audited
financial statements are filed to meet the provider's financial
stability requirement, then the parent company shall agree to
guarantee the obligations of the provider relating to service
contracts sold by the provider in this state.
new text end

new text begin Subd. 5. new text end

new text begin Right of return. new text end

new text begin Service contracts must require
the provider to permit the service contract holder to return the
service contract within 20 days of the date the service contract
was mailed to the service contract holder or within ten days of
delivery if the service contract is delivered to the service
contract holder at the time of sale or within a longer time
period permitted under the service contract. Upon return of the
service contract to the provider within the applicable time
period, if no claim has been made under the service contract
before its return to the provider, the service contract is void
and the provider shall refund to the service contract holder, or
credit the account of the service contract holder, with the full
purchase price of the service contract. The right to void the
service contract provided in this paragraph is not transferable
and applies only to the original service contract purchaser, and
only if no claim has been made before its return to the
provider. A ten percent penalty per month must be added to a
refund that is not paid or credited within 45 days after return
of the service contract to the provider.
new text end

new text begin Subd. 6. new text end

new text begin Premium taxes. new text end

new text begin (a) Provider fees collected on
service contracts are not subject to premium taxes.
new text end

new text begin (b) Premiums for reimbursement insurance policies are
subject to applicable taxes.
new text end

new text begin Subd. 7. new text end

new text begin Licensing exemption. new text end

new text begin Except for the
registration requirements in subdivision 3, providers and
related service contract sellers, administrators, and other
persons marketing, selling, or offering to sell service
contracts are exempt from any licensing requirements of this
state.
new text end

new text begin Subd. 8. new text end

new text begin Insurance exemption. new text end

new text begin The marketing, sale,
offering for sale, issuance, making, proposing to make, and
administration of service contracts by providers and related
service contract sellers, administrators, and other persons are
exempt from all other provisions of the insurance laws of this
state, except as provided in section 72A.20, subdivision 38.
new text end

Sec. 4.

new text begin [59B.04] REQUIRED DISCLOSURES; REIMBURSEMENT
INSURANCE POLICY.
new text end

new text begin Subdivision 1. new text end

new text begin Right to payment or
reimbursement. new text end

new text begin Reimbursement insurance policies insuring
service contracts issued, sold, or offered for sale in this
state shall state that the insurer that issued the reimbursement
insurance policy shall either reimburse or pay on behalf of the
provider any covered sums the provider is legally obligated to
pay or, in the event of the provider's nonperformance, 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.
new text end

new text begin Subd. 2. new text end

new text begin Right to apply to company. new text end

new text begin In the event covered
service is not provided by the service contract provider within
60 days of proof of loss by the service contract holder, the
contract holder is entitled to apply directly to the
reimbursement insurance company.
new text end

Sec. 5.

new text begin [59B.05] REQUIRED DISCLOSURE; SERVICE CONTRACTS.
new text end

new text begin Subdivision 1. new text end

new text begin Readability and general
disclosure. new text end

new text begin Service contracts marketed, sold, offered for sale,
issued, made, proposed to be made, or administered in this state
must be written, printed, or typed in clear, understandable
language that is easy to read and must disclose the requirements
set forth in this section, as applicable.
new text end

new text begin Subd. 2. new text end

new text begin Identities of parties. new text end

new text begin Service contracts must
state the name and address of the provider, and must identify
any administrator if different from the provider, the service
contract seller, and the service contract holder to the extent
that the name of the service contract holder has been furnished
by the service contract holder. The identities of the parties
are not required to be preprinted on the service contract and
may be added to the service contract at the time of sale.
new text end

new text begin Subd. 3. new text end

new text begin Total purchase price and sales terms. new text end

new text begin Service
contracts must 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.
new text end

new text begin Subd. 4. new text end

new text begin Deductibles. new text end

new text begin Service contracts must state the
existence of any deductible amount, if applicable.
new text end

new text begin Subd. 5. new text end

new text begin Coverages, limitations, and exclusions. new text end

new text begin No
particular causes of loss or property are required to be
covered, but service contracts must specify the merchandise and
services to be provided and, with equal prominence, any
limitations, exceptions, or exclusions including, but not
limited to, any damage or breakdown not covered by the service
contract.
new text end

new text begin Subd. 6. new text end

new text begin Restrictions on transferability. new text end

new text begin Service
contracts must state any restrictions governing the
transferability of the service contract, if applicable.
new text end

new text begin Subd. 7. new text end

new text begin Cancellation terms. new text end

new text begin Service contracts must
state the terms, restrictions, or conditions governing
cancellation of the service contract prior to the termination or
expiration date of the service contract by either the provider
or the service contract holder. The provider of the service
contract shall mail a written notice to the contract holder at
the last known address of the service contract holder contained
in the records of the provider at least 15 days before
cancellation by the provider. Five days' notice is required if
the reason for cancellation is nonpayment of the provider fee, a
material misrepresentation by the service contract holder to the
provider, or a substantial breach of duties by the service
contract holder relating to the covered product or its use. The
notice must state the effective date of the cancellation and the
reason for the cancellation.
new text end

new text begin Subd. 8. new text end

new text begin Duties of contract holder. new text end

new text begin Service contracts
must set forth all of the obligations and duties of the service
contract holder, such as the duty to protect against any further
damage and any requirement to follow the owner's manual.
new text end

new text begin Subd. 9. new text end

new text begin Exclusions; consequential damages and
preexisting conditions. new text end

new text begin Service contracts may exclude coverage
for consequential damages or preexisting conditions. These
exclusions, if applicable, must be stated in the contract.
new text end

Sec. 6.

new text begin [59B.06] ADDITIONAL REQUIRED DISCLOSURE; SERVICE
CONTRACTS.
new text end

new text begin Subdivision 1. new text end

new text begin Insurance disclosure. new text end

new text begin Service contracts
insured under a reimbursement insurance policy pursuant to
section 59B.03, subdivision 4, clause (1), must contain a
statement in substantially the following form: "Obligations of
the provider under this service contract are insured under a
service contract reimbursement insurance policy." The service
contract must also state the name and address of the insurer.
new text end

new text begin Subd. 2. new text end

new text begin Disclosure of no insurance. new text end

new text begin Service contracts
not insured under a reimbursement insurance policy pursuant to
section 59B.03, subdivision 4, clause (1), must contain a
statement in substantially the following form: "Obligations of
the provider under this service contract are backed by the full
faith and credit of the provider."
new text end

Sec. 7.

new text begin [59B.07] PROHIBITED ACTS.
new text end

new text begin Subdivision 1. new text end

new text begin Deceptive names. new text end

new text begin A provider shall not use
in its name the words insurance, casualty, surety, mutual, or
any other words descriptive of the insurance, casualty, or
surety business; or a name deceptively similar to the name or
description of any insurance or surety corporation, or to the
name of any other provider. The word "guaranty" or similar word
may be used by a 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 shall include
in its service contracts a statement in substantially the
following form: "This agreement is not an insurance contract."
new text end

new text begin Subd. 2. new text end

new text begin False or misleading statements. new text end

new text begin A provider or
its representative shall not in its service contracts,
literature, or otherwise make, permit, or cause to be made any
false or misleading statement or omit any material statement
that would be considered misleading if omitted.
new text end

new text begin Subd. 3. new text end

new text begin Required purchase. new text end

new text begin A person, such as a bank,
savings association, lending institution, manufacturer, or
seller of any product shall not require the purchase of a
service contract as a condition of a loan or a condition for the
sale of any property.
new text end

Sec. 8.

new text begin [59B.08] RECORD-KEEPING REQUIREMENTS.
new text end

new text begin Subdivision 1. new text end

new text begin Generally. new text end

new text begin The provider shall keep
accurate accounts, books, and records concerning transactions
regulated under this chapter.
new text end

new text begin The provider's accounts, books, and records include the
following:
new text end

new text begin (1) copies of each type of service contracts sold;
new text end

new text begin (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;
new text end

new text begin (3) a list of the locations where service contracts are
marketed, sold, or offered for sale; and
new text end

new text begin (4) written claims files which shall contain information
regarding the services provided or claims payments for contracts
that provide for payments or reimbursement, including at least
the dates and description of claims related to the service
contracts.
new text end

new text begin Subd. 2. new text end

new text begin Retention. new text end

new text begin (a) Except as provided in paragraph
(b), the provider shall retain all records required to be
maintained by this section for at least three years after the
specified period of coverage has expired.
new text end

new text begin (b) A provider discontinuing business in this state shall
maintain its records until it furnishes the commissioner
satisfactory proof that it has discharged all obligations to
contract holders in this state.
new text end

new text begin Subd. 3. new text end

new text begin Medium. new text end

new text begin The records required by this chapter
may be, but are not required to be, maintained on a computer
disk or other record-keeping technology. If the records are
maintained in other than hard copy, the records must be capable
of duplication to legible hard copy at the request of the
commissioner.
new text end

Sec. 9.

new text begin [59B.09] TERMINATION OF REIMBURSEMENT INSURANCE
POLICY.
new text end

new text begin An insurer that issued a reimbursement insurance policy may
not terminate the policy unless the insurer mails or delivers
written notice of the termination to the commissioner at least
30 days before the effective date of termination. 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.
new text end

Sec. 10.

new text begin [59B.10] OBLIGATION OF REIMBURSEMENT INSURANCE
POLICY INSURERS.
new text end

new text begin Insurers issuing reimbursement insurance to providers are
deemed to have received the premiums for the insurance upon the
payment of provider fees by consumers for service contracts
issued by the insured providers.
new text end

new text begin Nothing in this chapter prevents or limits 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.
new text end

Sec. 11.

new text begin [59B.11] SEVERABILITY PROVISION.
new text end

new text begin If any provision of this chapter or the application of the
provision to any person or circumstances are held invalid, the
remainder of this chapter and the application of the provision
to person or circumstances other than those as to which it is
held invalid, must not be affected.
new text end

Sec. 12.

Minnesota Statutes 2004, section 72A.20, is
amended by adding a subdivision to read:

new text begin Subd. 38. new text end

new text begin Unfair claims service; service contracts. new text end

new text begin No
person shall, in connection with a service contract regulated
under chapter 59B:
new text end

new text begin (1) attempt to settle claims on the basis of an application
or any other material document which was altered without notice
to, or knowledge or consent of, the service contract holder;
new text end

new text begin (2) make a material misrepresentation to the service
contract holder for the purpose and with the intent of effecting
settlement of the claims, loss, or damage under the contract on
less favorable terms than those provided in, and contemplated
by, the contract; or
new text end

new text begin (3) commit or perform with such frequency as to indicate a
general business practice any of the following practices:
new text end

new text begin (i) failure to properly investigate claims;
new text end

new text begin (ii) misrepresentation of pertinent facts or contract
provisions relating to coverages at issue;
new text end

new text begin (iii) failure to acknowledge and act upon communications
within a reasonable time with respect to claims;
new text end

new text begin (iv) denial of claims without conducting reasonable
investigations based upon available information;
new text end

new text begin (v) failure to affirm or deny coverage of claims upon
written request of the service contract holder within a
reasonable time after proof-of-loss statements have been
completed; or
new text end

new text begin (vi) failure to timely provide a reasonable explanation to
the service contract holder of the basis in the contract in
relation to the facts or applicable law for denial of a claim or
for the offer of a compromise settlement.
new text end

Sec. 13. new text begin EFFECTIVE DATE.
new text end

new text begin Sections 1 to 12 are effective January 1, 2006, and apply
to service contracts issued on or after that date. A provider
transacting business in this state on or before the date of the
enactment of this chapter, which submits an application for
registration as a provider under Minnesota Statutes, section
59B.03, subdivision 3, within 30 days after the commissioner
makes the application available, may continue to transact
business in this state until final agency action is taken by the
commissioner regarding the registration application and all
rights to administrative and judicial review related to that
final agency action have been exhausted or have expired.
new text end