Permits certain contracts of warranty or guaranty to include
coverage for towing and substitute transportation. (SD1)

THE SENATE                              S.B. NO.           S.D. 1
TWENTIETH LEGISLATURE, 1999                                
STATE OF HAWAII                                            

                   A  BILL  FOR  AN  ACT



 1      SECTION 1.  Chapter 431:10C, Hawaii Revised Statutes, is
 2 amended by adding a new part to be appropriately designated and
 3 to read as follows:
 4                    "PART  .  SERVICE CONTRACTS
 5          -1  Scope and purposes.(a)  The purposes of this part
 6 are to:
 7      (1)  Create a legal framework within which service contracts
 8           may be sold in this State;
 9      (2)  Encourage innovation in the marketing and development
10           of more economical and effective means of providing
11           services under service contracts, while placing the
12           risk of innovation on the providers rather than on
13           consumers; and
14      (3)  Permit and encourage fair and effective competition
15           among different systems of providing and paying for
16           these services.
17      (b)  This part shall not apply to:
18      (1)  Warranties;
19      (2)  Maintenance agreements; and

Page 2                                                     984
                                     S.B. NO.           S.D. 1

 1      (3)  Commercial transactions.
 2      (c)  Manufacturer's service contracts on the manufacturer's
 3 products need only comply with sections    -5(a) and (d), and
 4 sections    -6 and    -10.
 5          -2  Definitions.  As used in this part:
 6      "Administrator" means the person who is responsible for the
 7 administration of the service contracts or the service contracts
 8 plan and who is responsible for any filings required by this
 9 part.
10      "Commissioner" means the state insurance commissioner.
11      "Consumer" means a natural person who buys other than for
12 purposes of resale any motor vehicle that is distributed in
13 commerce and that is normally used for personal, family, or
14 household purposes and not for business or research purposes.
15      "Maintenance agreement" means a contract of limited duration
16 that provides for scheduled maintenance only.
17      "Manufacturer" means a person that:
18      (1)  Manufactures or produces the motor vehicle and sells
19           the motor vehicle under its own name or label;
20      (2)  Is a wholly owned subsidiary of the person who
21           manufactures or produces the motor vehicle;
22      (3)  Is a corporation which owns one hundred per cent of the
23           person who manufactures or produces the motor vehicle;

Page 3                                                     984
                                     S.B. NO.           S.D. 1

 1      (4)  Does not manufacture or produce the motor vehicle, but
 2           the motor vehicle is sold under its trade name label;
 3      (5)  Manufactures or produces the motor vehicle and the
 4           motor vehicle is sold under the trade name or label of
 5           another person; or
 6      (6)  Does not manufacture or produce the motor vehicle but,
 7           pursuant to a written contract, licenses the use of its
 8           trade name or label to another person that sells the
 9           motor vehicle under the licensor's trade name or label.
10      "Mechanical breakdown insurance" means a policy, contract,
11 or agreement issued by an authorized insurer that provides for
12 the repair, replacement, or maintenance of motor vehicle or
13 indemnification for repair, replacement, or service, for the
14 operational or structural failure of the motor vehicle due to a
15 defect in materials, or workmanship, or to normal wear and tear.
16      "Non-original manufacturer's parts" means replacement parts
17 not made for or by the original manufacturer of the motor
18 vehicle, commonly referred to as "after market parts".
19      "Person" means an individual, partnership, corporation,
20 incorporated or unincorporated association, joint stock company,
21 reciprocal, syndicate, or any similar entity or combination of
22 entities acting in concert.
23      "Premium" means the consideration paid to an insurer for a

Page 4                                                     984
                                     S.B. NO.           S.D. 1

 1 reimbursement insurance policy.
 2      "Provider" means a person who administers, issues, makes,
 3 provides, sells, or offers to sell a service contract, or who is
 4 contractually obligated to provide service under a service
 5 contract such as sellers, administrators, and other
 6 intermediaries.
 7      "Provider fee" means the consideration paid for a service
 8 contract in excess of the premium.
 9      "Reimbursement insurance policy" means a policy of insurance
10 issued to a provider and pursuant to which the insurer agrees,
11 for the benefit of the service contract holders, to discharge all
12 of the obligations and liabilities of the provider under the
13 terms of the service contracts in the event of non-performance by
14 the provider.  "All of the obligations and liabilities" include,
15 but are not limited to, failure of the provider to perform under
16 the service contract and the return of the unearned provider fee
17 in the event of the provider's unwillingness or inability to
18 reimburse the unearned provider fee in the event of termination
19 of a service contract.
20      "Service contract" means a contract or agreement for a
21 separately stated consideration or for a specific duration to
22 perform the repair, replacement, or maintenance of motor vehicle
23 or indemnification for repair, replacement, or maintenance, for

Page 5                                                     984
                                     S.B. NO.           S.D. 1

 1 the operational or structural failure due to a defect in
 2 materials, workmanship, or normal wear and tear, with or without
 3 additional provision for incidental payment of indemnity under
 4 limited circumstances, including, but not limited to, towing,
 5 rental, and emergency road service, but does not include
 6 mechanical breakdown insurance or maintenance agreements.
 7      "Service contract holder" or "contract holder" means a
 8 person who is the purchaser or holder of a service contract.
 9      "Warranty" means a warranty made solely by the manufacturer,
10 importer, or seller of motor vehicle or services without charge,
11 that is not negotiated or separated from the sale of the motor
12 vehicle and is incidental to the sale of the motor vehicle, that
13 guarantees indemnity for defective parts, mechanical or
14 electrical breakdown, labor, or other remedial measures, such as
15 repair or replacement of the motor vehicle or repetition of
16 services.
17          -3  Requirements for doing business.(a)  Service
18 contracts shall not be issued, sold, or offered for sale in this
19 State unless the administrator or its designee has:
20      (1)  Provided a receipt for the purchase of the service
21           contract to the contract holder;
22      (2)  Provided a copy of the service contract to the service
23           contract holder within a reasonable period of time from

Page 6                                                     984
                                     S.B. NO.           S.D. 1

 1           the date of purchase; and,
 2      (3)  Complied with this part.
 3      (b)  All administrators of service contracts sold in this
 4 State shall file a registration with the commissioner on a form,
 5 at a fee, and at a frequency prescribed by the commissioner.
 6      (c)  In order to assure the faithful performance of a
 7 provider's obligations to its contract holders, each provider who
 8 is contractually obligated to provide service under a service
 9 contract shall:
10      (1)  Insure all service contracts under a reimbursement
11           insurance policy issued by an insurer authorized to
12           transact insurance in this State or issued pursuant to
13           chapter 431, article 8; or
14      (2)  (A)  Maintain a funded reserve account for its
15                obligations under its contracts issued and
16                outstanding in this State.  The reserves shall not
17                be less than forty per cent of gross consideration
18                received, less claims paid, on the sale of the
19                service contract for all in-force contracts.  The
20                reserve account shall be subject to examination
21                and review by the commissioner; and
22           (B)  Place in trust with the commissioner a financial
23                security deposit, having a value of not less than

Page 7                                                     984
                                     S.B. NO.           S.D. 1

 1                five per cent of the gross consideration received,
 2                less claims paid, on the sale of the service
 3                contract for all service contracts issued and in
 4                force, but not less than $25,000, consisting of
 5                one of the following:
 6                (i)  A surety bond issued by an authorized surety;
 7               (ii)  Securities of the type eligible for deposit
 8                     by authorized insurers in this State;
 9              (iii)  Cash;
10               (iv)  A letter of credit issued by a qualified
11                     financial institution as defined in section
12                     431:4A-103; or
13                (v)  Another form of security prescribed by rules
14                     issued by the commissioner; or
15      (3)  (A)  Maintain a net worth of $100,000,000; and
16           (B)  Upon request, provide the commissioner with a copy
17                of the provider's or, if the provider's financial
18                statements are consolidated with those of its
19                parent company, the provider's parent company's
20                most recent Form 10-K filed with the Securities
21                and Exchange Commission (SEC) within the last
22                calendar year, or if the company does not file
23                with the SEC, a copy of the company's audited

Page 8                                                     984
                                     S.B. NO.           S.D. 1

 1                financial statements, which shows a net worth of
 2                the provider or its parent company of at least
 3                $100,000,000.  If the provider's parent company's
 4                Form 10-K or audited financial statements are
 5                filed to meet the provider's financial stability
 6                requirement, then the parent company shall agree
 7                to guarantee the obligations of the obligor
 8                relating to service contracts sold by the provider
 9                in this State.
10      (d)  Premium Taxes:
11      (1)  Provider fees collected on service contracts shall not
12           be subject to premium taxes; and
13      (2)  Premiums for reimbursement insurance policies shall be
14           subject to applicable taxes.
15      (e)  Except for the registration requirement in section
16 3(b), persons marketing, selling, or offering to sell service
17 contracts for providers that comply with this part are exempt
18 from this State's licensing requirements. 
19      (f)  Providers complying with this part are not required to
20 comply with other provisions of chapter 431, article 14, except
21 as specifically provided.
22          -4  Required disclosures; reimbursement insurance
23 policy.  Reimbursement insurance policies insuring service

Page 9                                                     984
                                     S.B. NO.           S.D. 1

 1 contracts issued, sold, or offered for sale in this State shall
 2 conspicuously state that, upon failure of the provider to perform
 3 under the contract, such as failure to return the unearned
 4 provider fee, the insurer that issued the policy shall pay on
 5 behalf of the provider any sums the provider is legally obligated
 6 to pay or shall provide the service which the provider is legally
 7 obligated to perform according to the provider's contractual
 8 obligations under the service contracts issued or sold by the
 9 provider.
10          -5  Required disclosures; service contracts.(a)
11 Service contracts issued, sold or offered for sale in this State
12 shall be written in clear, understandable language and the entire
13 contract shall be printed or typed in easy to read ten point type
14 or larger and conspicuously disclose the requirements in this
15 section, as applicable.
16      (b)  Service contracts insured under a reimbursement
17 insurance policy pursuant to section   -3(c)(1) shall contain a
18 statement in substantially the following form:
19      "Obligations of the provider under this service
20      contract are guaranteed under a service contract
21      reimbursement insurance policy.  If the provider fails
22      to pay or provide service on a claim within sixty days
23      after proof of loss has been filed, the contract holder

Page 10                                                    984
                                     S.B. NO.           S.D. 1

 1      is entitled to make a claim directly against the
 2      insurance company."  
 3 A claim against the provider shall also include a claim for
 4 return of the unearned provider fee.  The service contract shall
 5 also conspicuously state the name and address of the insurer.
 6      (c)  Service contracts not insured under a reimbursement
 7 insurance policy pursuant to section -3(c)(1) shall contain a
 8 statement in substantially the following form:
 9      "Obligations of the provider under this service
10      contract are backed only by the full faith and credit
11      of the provider and are not guaranteed under a service
12      contract reimbursement insurance policy."  
13 A claim against the provider shall also include a claim for
14 return of the unearned provider fee.  The service contract shall
15 also conspicuously state the name and address of the provider.
16      (d)  Service contracts shall:
17      (1)  Identify any administrator, the provider obligated to
18           perform the service under the contract, the service
19           contract seller, and the service contract holder to the
20           extent that the name and address of the service
21           contract holder has been furnished by the service
22           contract holder;
23      (2)  Conspicuously state the total purchase price and the

Page 11                                                    984
                                     S.B. NO.           S.D. 1

 1           terms under which the service contract is sold.  The
 2           purchase price is not required to be pre-printed on the
 3           service contract and may be negotiated at the time of
 4           sale with the service contract holder;
 5      (3)  If prior approval of repair work is required,
 6           conspicuously state the procedure for obtaining prior
 7           approval and for making a claim, including a toll-free
 8           telephone number for claim service and a procedure for
 9           obtaining emergency repairs performed outside of normal
10           business hours;
11      (4)  Conspicuously state the existence of any deductible
12           amount;
13      (5)  Specify the parts and services to be provided and any
14           limitations, exceptions, or exclusions;
15      (6)  State the conditions upon which the use of non-original
16           manufacturers' parts, or substitute service, may be
17           allowed.  Conditions stated shall comply with
18           applicable state and federal laws;
19      (7)  State any terms, restrictions, or conditions governing
20           the transferability of the service contract;
21      (8)  State the terms, restrictions, or conditions governing
22           termination of the service contract by the service
23           contract holder.  The provider of the service contract

Page 12                                                    984
                                     S.B. NO.           S.D. 1

 1           shall mail a written notice to the contract holder
 2           within fifteen days of the date of termination;
 3      (9)  Require every provider to permit the service contract
 4           holder to return the contract within at least twenty
 5           days of the date of mailing of the service contract, or
 6           within at least ten days if the service contract is
 7           delivered at the time of sale, or within a longer time
 8           period permitted under the contract.  If no claim has
 9           been made under the contract, the contract is void and
10           the provider shall refund to the contract holder the
11           full purchase price of the contract.  A ten per cent
12           penalty per month shall be added to a refund that is
13           not paid within thirty days of return of the contract
14           to the provider.  The applicable free-look time periods
15           on service contracts shall only apply to the original
16           service contract purchaser;
17     (10)  Set forth all of the obligations and duties of the
18           service contract holder, such as the duty to protect
19           against any further damage and the requirement for
20           certain service and maintenance; and
21     (11)  Clearly state whether or not the service contract
22           provides for or excludes consequential damages or
23           preexisting conditions.

Page 13                                                    984
                                     S.B. NO.           S.D. 1

 1          -6  Prohibited acts.(a)  A provider shall not use in
 2 its name the words insurance, casualty, guaranty, surety, mutual,
 3 or any other words descriptive of the insurance, casualty,
 4 guaranty, or surety business, or a name deceptively similar to
 5 the name or description of any insurance or surety corporation,
 6 or any other provider.  This section shall not apply to a company
 7 that was using any of the prohibited language in its name prior
 8 to the effective date of this part.  However, a company using the
 9 prohibited language in its name shall conspicuously disclose in
10 its service contracts a statement in substantially the following:
11 "This agreement is not an insurance contract."
12      (b)  A provider or its representative shall not in its
13 service contracts or literature make, permit, or cause to be made
14 any false or misleading statement, or deliberately omit any
15 material statement that would be considered misleading if
16 omitted, in connection with the sale, offer to sell, or
17 advertisement of a service contract.
18      (c)  A person, such as a bank, savings and loan association,
19 lending institution, manufacturer, or seller of any motor
20 vehicle, shall not require the purchase of a service contract as
21 a condition of a loan or a condition for the sale of any motor
22 vehicle.
23          -7  Recordkeeping requirements.(a)  Books and

Page 14                                                    984
                                     S.B. NO.           S.D. 1

 1 records:
 2      (1)  An administrator shall keep accurate accounts, books,
 3           and records concerning transactions regulated under
 4           this part;
 5      (2)  An administrator's accounts, books, and records shall
 6           include:
 7           (A)  Copies of each type of service contract issued;
 8           (B)  The name and address of each service contract
 9                holder to the extent that the name and address
10                have been furnished by the service contract
11                holder;
12           (C)  A list of the provider locations where service
13                contracts are marketed, sold, or offered for sale;
14                and
15           (D)  Claims files which shall contain at least the
16                dates, amounts, and description of all receipts,
17                claims and expenditures related to the service
18                contracts;
19      (3)  Except as provided in section -7(b), an administrator
20           shall retain all records pertaining to each service
21           contract holder for at least three years after the
22           specified period of coverage has expired;
23      (4)  An administrator may keep all records required under

Page 15                                                    984
                                     S.B. NO.           S.D. 1

 1           this part on a computer disk or other similar
 2           technology.  If an administrator maintains records in
 3           other than hard copy, records shall be accessible from
 4           a computer terminal available to the commissioner and
 5           be capable of duplication to legible hard copy.
 6      (b)  An administrator discontinuing business in this State
 7 shall maintain its records until it furnishes the commissioner
 8 satisfactory proof that it has discharged all obligations to
 9 contract holders in this State.
10      (c)  An administrator shall make all accounts, books, and
11 records concerning transactions regulated under this part or
12 other pertinent laws available to the commissioner upon request.
13          -8  Termination of reimbursement insurance policy.  As
14 applicable, an insurer that issued a reimbursement insurance
15 policy shall not terminate the policy until a notice of
16 termination has been mailed or delivered to the commissioner.
17 The termination of a reimbursement insurance policy shall not
18 reduce the issuer's responsibility for service contracts issued
19 by providers prior to the date of the termination.
20          -9  Obligation of reimbursement insurance policy
21 insurers.(a)  Providers are considered to be the agent of the
22 insurer which issued the reimbursement insurance policy for
23 purposes of section 431:9-218.  In cases where a provider is

Page 16                                                    984
                                     S.B. NO.           S.D. 1

 1 acting as an administrator and enlists other providers, the
 2 provider acting as the administrator shall notify the insurer of
 3 the existence and identities of the other providers.
 4      (b)  This part shall not prevent or limit the right of an
 5 insurer which issued a reimbursement insurance policy to seek
 6 indemnification or subrogation against a provider if the issuer
 7 pays or is obligated to pay the service contract holder sums that
 8 the provider was obligated to pay pursuant to the provisions of
 9 the service contract or under a contractual agreement.
10          -10  Enforcement provisions.(a)  The commissioner may
11 conduct investigations or examinations of providers,
12 administrators, insurers, or other persons to enforce this part
13 and protect service contract holders in this State.
14      (b)  The commissioner may take action which is necessary or
15 appropriate to enforce this part and the commissioner's
16 regulations and orders, and to protect service contract holders
17 in this State.
18      (c)  The commissioner may:
19      (1)  Order a service contract provider to cease and desist
20           from committing violations of this part or the
21           commissioner's rules or orders;
22      (2)  Issue an order prohibiting a service contract provider
23           from selling or offering for sale service contracts; or

Page 17                                                    984
                                     S.B. NO.           S.D. 1

 1      (3)  Issue an order imposing a civil penalty, or any
 2           combination of these, if the provider has violated this
 3           part or the commissioner's rules or orders.
 4      (d)  A person aggrieved by an order issued under this
 5 section may request a hearing before the commissioner.  The
 6 hearing request shall be filed with the commissioner within
 7 twenty days of the date the commissioner's order is effective.
 8 Pending the hearing and the decision by the commissioner, the
 9 commissioner shall suspend the effective date of the order.  At
10 the hearing, the burden shall be on the commissioner to show why
11 the order issued pursuant to this paragraph is justified.
12 Section 431:2-308 shall apply to a hearing requested under this
13 subsection.
14      (e)  The commissioner may bring an action in circuit court
15 for an injunction or other appropriate relief to enjoin
16 threatened or existing violations of this part or of the
17 commissioner's orders or rules.  An action filed under this
18 subsection may also seek restitution on behalf of persons
19 aggrieved by a violation of this part or orders or rules of the
20 commissioner.
21      (f)  A person in violation of this part or orders or rules
22 of the commissioner may be assessed a civil penalty not to exceed
23 $1,000 per violation; provided that each contract issued, sold,

Page 18                                                    984
                                     S.B. NO.           S.D. 1

 1 or offered shall be considered a separate violation.
 2      (g)  The authority of the commissioner under this section is
 3 in addition to other authority of the commissioner.
 4          -11  Authority to develop rules.  The commissioner may
 5 adopt rules under part 91 to effectuate this part."
 6      SECTION 2.  Section 431:1-209, Hawaii Revised Statutes, is
 7 amended to read as follows:
 8      "431:1-209  General casualty insurance defined.  General
 9 casualty insurance includes vehicle insurance as defined in
10 section 431:1-208, disability insurance defined in section
11 431:1-205 and in addition is insurance:
12      (1)  Against legal liability for the death, injury or
13           disability of any human being, or from damage to
14           property.
15      (2)  Of medical, hospital, surgical, and funeral benefits to
16           persons injured, irrespective of legal liability of the
17           insured, when issued with or supplemental to insurance
18           against legal liability for the death, injury or
19           disability of human beings.
20      (3)  Of the obligation accepted by, imposed upon, or assumed
21           by employers under law for death, disablement or injury
22           to employees.
23      (4)  Against loss or damage by burglary, theft, larceny,

Page 19                                                    984
                                     S.B. NO.           S.D. 1

 1           robbery, forgery, fraud, vandalism, malicious mischief,
 2           confiscation, or wrongful conversion, disposal or
 3           concealment, or from any attempt of any of the
 4           foregoing; also insurance against loss or damage to
 5           moneys, coins, bullion, securities, notes, drafts,
 6           acceptances, or any other valuable papers or documents,
 7           resulting from any cause, except while in the mail.
 8      (5)  Upon personal effects of individuals, by an all-risk
 9           type of policy commonly known as the personal property
10           floater.
11      (6)  Against loss or damage to glass and its appurtenances
12           resulting from any cause.
13      (7)  Against any liability and loss or damage to property
14           resulting from accidents to or explosions of boilers,
15           pipes, pressure containers, machinery, or apparatus.
16      (8)  Against loss of or damage to any property of the
17           insured resulting from the ownership, maintenance or
18           use of elevators, except loss or damage by fire.
19      (9)  Against loss or damage to any property caused by the
20           breakage or leakage of sprinklers, water pipes or
21           containers, or by water entering through leaks or
22           openings in buildings.
23     (10)  Against loss or damage resulting from failure of

Page 20                                                    984
                                     S.B. NO.           S.D. 1

 1           debtors to pay their obligations to the insured (credit
 2           insurance).
 3     (11)  Against loss of or damage to any domesticated or wild
 4           animal resulting from any cause (livestock insurance).
 5     (12)  Against loss of or damage to any property of the
 6           insured resulting from collision of any other object
 7           with such property, but not including collision to or
 8           by vessels, craft, piers, or other instrumentalities of
 9           ocean or inland navigation (collision insurance).
10     (13)  Against legal liability of the insured, and against
11           loss, damage or expense incident to a claim of such
12           liability, and including any obligation of the insured
13           to pay medical, hospital, surgical, and funeral
14           benefits to injured persons, irrespective of legal
15           liability of the insured, arising out of the death or
16           injury of any person, or arising out of injury to the
17           economic interest of any person as the result of
18           negligence in rendering expert, fiduciary or
19           professional service (malpractice insurance).
20    [(14)  Against any contract of warranty or guaranty which
21           promises service maintenance, parts replacement,
22           repair, money, or any other indemnity in the event of
23           loss of or damage to a motor vehicle or any part

Page 21                                                    984
                                     S.B. NO.           S.D. 1

 1           thereof from any cause, including loss of or damage to
 2           or loss of use of the motor vehicle by reason of
 3           depreciation, deterioration, wear and tear, use,
 4           obsolescence, or breakage if made by a warrantor or
 5           guarantor who or which as such is doing an insurance
 6           business.
 7                The making of a contract covering only defects in
 8           material and work in exchange for a separately stated
 9           charge where it is incidental to the business of
10           selling or leasing motor vehicles, shall not be deemed
11           insurance; provided the maker of the contract has an
12           insurance policy, with an insurer as defined in section
13           431:1-202, providing coverage for the making of those
14           contracts.  The policy shall assume the legal liability
15           created by each contract or, alternatively, the
16           ultimate legal liability of all contracts made by the
17           issuer.  If the maker of the contract is unable to
18           perform the duties imposed by the contract, the
19           purchaser of the contract then shall be considered a
20           policyholder of the insurer.  The policy shall include
21           a loss payee endorsement that provides coverage to any
22           lending institution as its interest may appear.  In
23           addition, the contract conspicuously shall state the

Page 22                                                    984
                                     S.B. NO.           S.D. 1

 1           name and address of the licensed underwriting insurer
 2           and contain a statement that the policyholder shall be
 3           entitled to make a direct claim against the insurer
 4           upon the failure of the issuer to pay any claim within
 5           sixty days after proof of loss has been filed with the
 6           issuer.  The requirement that the maker of the contract
 7           have an insurance policy with an insurer shall not
 8           apply if the maker is a manufacturer, distributor or
 9           importer of automobiles.
10                The doing or proposing to do any business in
11           substance equivalent to the business described in this
12           section in a manner designed to evade the provisions of
13           this section is the doing of an insurance business.
14     (15)] (14)  Against any other kind of loss, damage or
15           liability properly the subject of insurance and not
16           within any other class or classes of insurance as
17           defined in section 431:1-204 to section 431:1-211, if
18           such insurance is not contrary to law or public
19           policy."
20      SECTION 3.  If any provision of this Act, or the application
21 thereof to any person or circumstance is held invalid, the
22 invalidity does not affect other provisions or applications of
23 the Act which can be given effect without the invalid provision

Page 23                                                    984
                                     S.B. NO.           S.D. 1

 1 or application, and to this end the provisions of this Act are
 2 severable.
 3      SECTION 4.  Statutory material to be repealed is bracketed.
 4      SECTION 5.  This Act shall take effect upon its approval.