NEW YORK STATE
INSURANCE DEPARTMENT

REGULATION NO. 155
(11 NYCRR 390)

SERVICE CONTRACTS

I, NEIL D. LEVIN, Superintendent of Insurance of the State of New York, pursuant to the authority granted by Sections 201, 301, 1101 and 7911 and Article 79 of the Insurance Law, do hereby promulgate a new Part 390 of Title 11 of the Official Compilation of Codes, Rules and Regulations of the State of New York (Regulation 155), entitled "Service Contracts", to take effect upon publication in the State Register. A new Chapter XVI, entitled "Service Contracts" is added. Part 390 shall read as follows:

Section 390.0 Purpose.

This Part implements, interprets, and clarifies Chapter 614 of the Laws of 1997, which amended several sections of the Insurance Law and added a new article 79 to the Insurance Law entitled "Service Contracts". New article 79 exempts the business of service contracts from all other provisions of the Insurance Law and establishes a framework by which service contract providers must be registered with, and subject to the jurisdiction of, the Superintendent. Chapter 614 also establishes a new kind of insurance, entitled "service contract reimbursement insurance", which may be used by the service contract provider to demonstrate financial responsibility.

390.1 Application.

Except as otherwise provided, this Part applies to service contracts (as defined in section 7902(k) of the Insurance Law) marketed, issued, sold or offered for sale, made or offered to be made, or administered in this state, on and after January 15, 1998. This Part and Article 79 do not apply to warranties.

390.2 Definitions.

(a) The definitions contained in article 79 of the Insurance Law ("article 79") shall apply to this Part.

(b) The definitions contained in section 107 of the Insurance Law shall also apply to article 79 and this Part.

(c) As used in article 79 and this Part, "qualified United States financial institution" shall mean a bank chartered in New York or a bank that is a member of the federal reserve system.

390.3 Documents and delivery of service contracts.

(a) The copy of the of the service contract required by section 7903(b)(1) of the Insurance Law shall be clearly identifiable as a service contract and shall be a separate document from any other document given to the service contract holder.

(b) The provider, or its authorized representative, shall give the service contract holder a receipt, or other written evidence of the purchase of a service contract, which clearly identifies the amount of the provider fee.

(c) If the service contract is not delivered to the service contract holder at the time of the contract's purchase, the contract shall be mailed or delivered to the service contract holder within a reasonable time.

390.4 Right of return of service contract.

(a) The statement of the right to return the service contract required by sections 7903(e) and 7905(n) of the Insurance Law shall be set forth in a conspicuous manner.

(b) The service contract shall clearly indicate the procedure for returning or terminating the contract. If the provider requires that the contract must be physically returned, the provider shall specify the address where the contract is to be returned.

(c) The service contract shall contain a statement that if no claim has been made under the contract, and the holder returns or terminates the contract within the time period specified in the service contract, the contract shall be void and that the provider shall refund to the contract holder the full purchase price of the contract.

390.5 Provisions of service contracts.

(a) Every service contract marketed, issued, sold or offered for sale, made or offered to be made, or administered in this state shall specify any limitations on the right to terminate the service contract by the provider or contract holder and to receive a refund of the provider fee.

(b) The notice required by subsection (f) of section 7905 of the Insurance Law, regarding prior approval of repair work and emergency assistance, if applicable, shall be set forth in a conspicuous manner.

390.6 Receipt of provider fee.

Payment of the provider fee to a person authorized to sell or market the service contract in this state, or an administrator or other person authorized to receive payment, shall be deemed to be payment to the service contract provider.

390.7 Service contract reimbursement insurance: Minimum provisions and requirements.

(a)(1) No insurer may issue or deliver in this state a policy of service contract reimbursement insurance on and after January 15, 1998, unless the insurer is licensed pursuant to Section 1113(a)(28) of the Insurance Law and the policy meets the definition contained therein.

(2) Service contract reimbursement insurance shall not provide coverage to a warrantor for its warranties.

(b) No policy of service contract reimbursement insurance may be issued or delivered in this state unless the policy, in substance, provides:

(1) For direct coverage to the covered contract holders if the provider fails to pay or provide service on a claim within 60 days after proof of loss has been filed with the provider;

(2) That the termination of the policy shall not affect or reduce the insurer’s obligations to, or responsibility for, direct coverage to contract holders whose service contracts were made during the term of the policy and were covered under the policy;

(3) That the revocation, or other termination of the provider’s registration, for any reason, shall be construed to be a default by the provider and that the insurer will provide for direct coverage to the covered contract holders without having to wait 60 days; and

(4) That the suspension of the provider’s registration for more than 60 days shall be construed to be a default by the provider and that the insurer will provide for direct coverage to the covered contract holders without having to wait 60 days, until such time as the provider is permitted to resume business.

(c) No policy of service contract reimbursement insurance shall permit the insurer to rescind the policy and no insurer shall rescind such a policy.

390.8 Filing of evidence of service contract reimbursement insurance policy.

A service contract provider that elects to meet the requirements of section 7903(c)(1) of the Insurance Law as the means to assure the faithful performance of its obligations under service contracts outstanding in this state shall provide the superintendent with evidence that appropriate coverage is in effect, in the form of a certificate from an insurer authorized to write service contract reimbursement insurance in New York. The certificate shall be provided at the time of initial application for registration as a service provider, at the time of renewal, and at the time of any changes to the policy of the items specified in this section, other than the dates of the policy. The certificate shall specify:

(a) The name of the insurer;

(b) The name of the insured;

(c) The service contracts that are covered by the policy;

(d) The effective dates of the policy;

(e) The applicable policy limits, if any;

(f) The applicable deductibles, if any;

(g) That the insurance policy provides for direct coverage to the covered contract holders if the provider fails to pay or provide service on a claim within 60 days after proof of loss has been filed with the provider;

(h) That the termination of the insurance policy shall not affect or reduce the insurer’s obligations to, or responsibility for, direct coverage to contract holders whose service contracts were made during the term of the policy and were covered under the policy;

(i) That the insurance policy provides that the revocation, or other termination of the provider’s registration, for any reason, shall be construed to be a default by the provider and that the insurer will provide for direct coverage to the covered contract holders without having to wait 60 days; and

(j) That the insurance policy provides that the suspension of the provider’s registration for more than 60 days shall be construed to be a default by the provider and that the insurer will provide for direct coverage to the covered contract holders without having to wait 60 days, until such time as the provider is permitted to resume business; and

(k) That the coverage provided under the policy conforms to all of the requirements of article 79 of the Insurance Law and this Part.

390.9 Termination of service contract reimbursement insurance policy; notice to the superintendent.

(a) The notice to the superintendent of termination of the service contract reimbursement insurance policy required by section 7909 of the Insurance Law shall be in writing and shall be mailed or delivered to the superintendent at the following address:

New York State Insurance Department
Licensing Bureau--Registration Unit
Agency Building One
Empire State Plaza
Albany, NY 12257

(b) With respect to a termination initiated by the insurer, the notice shall be mailed or delivered to the superintendent at least 15 days prior to the effective date of the termination. A copy of the notice issued to the insured pursuant to section 3426 of the Insurance Law shall accompany the notice to the superintendent.

(c) With respect to a termination initiated by the service contract provider, the notice shall be mailed or delivered by the insurer to the superintendent no later than five days after the notice of termination was received by the insurer.

390.10 Funded reserve account and financial security deposit.

(a) A service contract provider that elects to meet the requirements of section 7903(c)(2) of the Insurance Law as the means to assure the faithful performance of its obligations under service contracts outstanding in this state shall, in accordance with the provisions of this section:

(1) Establish and maintain a funded reserve account;

(2) Place in trust a financial security deposit with the superintendent; and

(3) File audited financial statements with the superintendent.

(b) Funded reserve account. The funded reserve account established in accordance with section 7903(c)(2)(A) of the Insurance Law shall comply with the following:

(1) The account shall be appropriately identified as a New York funded reserve account and shall be maintained in:

(i) A qualified United States financial institution; or

(ii) A broker or dealer registered under the Securities Exchange Act of 1934, or any act adopted in amendment thereof, with the Securities and Exchange Commission, provided the registration remains in good standing.

(2) The funds in the account shall at all times be not less than forty percent of the gross consideration received upon the sale of, less claims paid under, all its service contracts then in force, but not less than zero.

(3) The account shall be funded with cash or investments of the types, and subject to the limitations, applicable to property/casualty insurance companies, specified in section 1404(a) of the Insurance Law.

(4) Cash and securities in the account shall not be commingled with other property or cash.

(5) Withdrawals from the account are permitted for the payment of claims resulting from covered losses under service contracts and for the return of unearned provider fees on the contract. Other withdrawals are permitted if the balance remaining in the account after the withdrawal is sufficient to meet the reserve requirements of this Part and article 79.

(6) More than one account may be maintained if, in the aggregate, the accounts comply with the provisions of this section.

(c) Financial security deposit. The financial security deposit established in accordance with section 7903(c)(2)(B) of the Insurance Law shall at all times be at least equivalent to the amount required and comply with the following:

(1) The surety bond allowed for placement in trust with the superintendent in accordance with section 7903(c)(2)(B)(i) of the Insurance Law shall be issued by an insurer licensed in this State to write fidelity and surety insurance under section 1113(a)(16) of the Insurance Law.

(2)(i) The securities allowed for placement in trust with the superintendent in accordance with section 7903(c)(2)(B)(ii) of the Insurance Law shall consist of securities specified in section 1402(b)(1) and (2) of the Insurance Law, estimated at an amount not exceeding their current market value, but their total par value shall not be less than the amount required.

(ii) If the service contract provider is incorporated or principally headquartered in another state, the securities allowed for placement in the trust may consist of direct obligations of that state.

iii) If the aggregate market value of the securities in trust shall fall below the required amount, the superintendent may require the service contract provider to deposit additional securities of like character.

(3) The letter of credit allowed for placement in trust with the superintendent in accordance with section 7903(c)(2)(B)(iv) of the Insurance Law shall comply with the requirements of sections 79.1, 79.2, 79.3, 79.4, and 79.9 of Part 79 of this Title (Regulation 133). In applying such sections to this Part, the term "service contract provider" shall be substituted for the term "insurer" when referring to a beneficiary.

(d) Audited financial statements.

(1) On or before June 30th of each year, or 180 days after the end of the service contract provider's fiscal year, whichever is later, the provider shall file its audited financial statements for the prior calendar year with the superintendent. The statements shall include an opinion of an independent certified public accountant. The statements and opinion shall be mailed or delivered to the superintendent at the following address:

New York State Insurance Department
Property Bureau--Service Contract Providers
25 Beaver Street
New York, NY 10004-2319

(2) The notes to the audited financial statements shall show how the service contract provider meets the reserve and trust requirements set forth in section 7903(c)(2)(A) of the Insurance Law and in this Part and how the assets in the account and trust meet the requirements set forth in subdivisions (b) and (c) of this section.

(3) If, at any time, the certified public accountant or the service contract provider determines that the provider has materially misstated its financial condition as reported to the superintendent or that the provider’s funded reserve account does not meet the reserve requirements set forth in the Insurance Law and this Part, the provider shall submit the determination to the superintendent, in writing within 15 days following the determination.

(e) If the service contract provider’s registration is suspended for more than 60 days, revoked, or otherwise terminated for any reason, and it has service contracts that have been issued and are outstanding in this state, the provider shall immediately transfer to the superintendent the funded reserve account, in an amount equal to the minimum required by subdivision (b)(2) of this section, for safekeeping and for the use and protection of contract holders and administration of claims. The contract provider shall submit a written affirmation to the superintendent at the time of registration that it shall so transfer the funds.

390.11 Net worth option.

A service contract provider that elects to meet the requirements of Section 7903(c)(3) of the Insurance Law as the means to assure the faithful performance of its obligations under service contracts outstanding in this state shall comply with the provisions of this section.

(a) Audited financial statements.

(1) On or before June 30th of each year or 180 days after the end of the service contract provider’s fiscal year, whichever is later, the service contract provider shall file its audited financial statements for the prior calendar year with the superintendent. If the audited financial statements of the provider’s parent or indirect parent are used to meet the provider's financial responsibility requirement, then the parent or indirect parent shall file the statements and the 180 days shall be counted from the parent’s or indirect parent’s fiscal year. The statements shall include an opinion of an independent certified public accountant. The statement and opinion shall be mailed or delivered to the superintendent at the following address:

New York State Insurance Department
Property Bureau--Service Contract Providers
25 Beaver Street
New York, NY 10004-2359

(2) If, at any time, the certified public accountant or the service contract provider determines that the provider, or the provider’s parent or indirect parent, has materially misstated its financial condition as reported to the superintendent, the provider shall submit the determination to the superintendent, in writing within 15 days following the determination.

(b) If the statements of the service contract provider’s parent or indirect parent are used to meet the provider’s financial responsibility requirement, then the parent or indirect parent shall guarantee the provider’s obligations relating to the service contracts sold by the provider in this state. The provider shall mail or deliver the guarantee to the superintendent with the registration application at the following address:

New York State Insurance Department
Licensing Bureau--Registration Unit
Agency Building One
Empire State Plaza
Albany, NY 12257

(c) If the contract provider’s registration is suspended for more than 60 days, revoked, or otherwise terminated for any reason, and it has service contracts that have been issued and are outstanding in this state, the contract provider will immediately transfer to the superintendent an amount equal to the minimum required by Section 7903(c)(2) of the Insurance Law and Section 390.10 of this Part for the funded reserve account and trust fund, for safekeeping and for the use and protection of contract holders and administration of claims. The contract provider shall submit a written affirmation to the superintendent at the time of registration that it shall so transfer the funds.

390.12 Default contingency plan agreements.

Every application for approval of registration as a provider under section 7907 of the Insurance Law, wherein the provider has elected to assure its obligations to contract holders by a funded reserve account and financial security or by net worth qualification, shall include a form of default contingency plan agreement that provides:

(a) For the appointment of a claims trustee that is acceptable to the superintendent and who is registered as a provider, in the event of a provider’s default in performance as specified in sections 390.10(e) and 390.11(c) of this Part;

(b) That the appointment shall be made within 15 days of the provider’s default;

(c) That the superintendent may make the appointment in the event the provider fails to make an appointment within the time specified by subdivision (b) of this section or if the appointed trustee fails to serve or resigns;

(d) For the trustee to administer all claims outstanding and which may arise after the provider’s default;

(e) For the trustee to receive from the superintendent the funded reserve account, any securities deposited with the superintendent as financial security, and, in the case of a provider that met the net worth qualification, all funds that said provider shall have allocated upon its books of account to obligations to contract holders arising from service contracts marketed, issued, sold or offered for sale, made or offered to be made, or administered in this State on and after January 15, 1998;

(f) For the trustee to apply all funds received pursuant to subdivision (e) of this section exclusively to the payment of claims arising from service contracts issued by the provider;

(g) For the trustee to have the power to bring actions or proceedings against the provider to obtain the funds provided for by subdivision (e) of this section and any additional funds that may be necessary for the payment of claims and expenses arising from service contracts issued by the provider; and

(h) That all funds received by the trustee pursuant to the default contingency plan shall be treated as trust funds and shall not be used for any purpose except as specified in subdivision (f) of this section.

390.13 Mechanical breakdown insurance.

A motor vehicle or aircraft mechanical breakdown insurance policy, issued by an insurer licensed pursuant to Section 1113(a)(19) of the Insurance Law, shall not be considered to be a service contract and shall not be subject to article 79 of the Insurance Law.

I, NEIL D. LEVIN, Superintendent of Insurance of the State of New York, do hereby certify that the foregoing is Regulation 155 (11 NYCRR 390), promulgated on January 12, 2001, pursuant to the authority granted by Sections 201, 301, 1101 and 7911 and Article 79 of the Insurance Law, to be effective upon publication in the State Register. Pursuant to the provisions of the State Administrative Procedure Act, prior notice of the proposed amendment was published in the State Register on November 15, 2000. No other publication or prior notice is required by statute.

__________________________________________

Neil D. Levin

Superintendent of Insurance

January 12, 2001