In 2011, the Maine Legislature enacted L.D. 1507, An Act Regarding Service Contracts, as P.L. 2011, c. 345. The Service Contract Act exempts service contracts from the definition of insurance at 24-A M.R.S. § 3(4) and establishes a framework in which these agreements may be sold. Here are answers to some basic questions about Service Contracts and the Service Contract Act.
What is a service contract?
Many retail purchases of personal property today involve two sales. The first is the item itself, such as a telephone, refrigerator, or automobile. The second, which is optional, is an agreement that protects the purchaser against the item’s failure after the manufacturer’s or seller’s warranty expires. That agreement may be referred to as a service contract, service agreement, or extended warranty, and the interchangeable use of these terms can be confusing. One significant difference between a service contract and the original warranty is that the original warranty is incidental to the purchase of the item. In other words, the consumer doesn’t buy a warranty but a product, such as a refrigerator or an automobile. There is no additional charge for the warranty; it is simply the dealer’s or manufacturer’s promise that the item works properly and will continue working properly throughout the warranty period. By contrast, a buyer purchases a service contract to have more protection against its failure than the warranty offers. This is a separate transaction, for an additional price, which might occur when the item is sold or might occur later, when the original warranty is expiring. A second difference between a service contract and a warranty is that someone other than the item’s manufacturer or seller often stands behind the service contract. This is frequently the case even when the service contract is sold along with the item.
The Service Contract Act defines a service contract in part as an agreement in which the service contract provider – known as the “obligor” – will:
- For a charge in addition to the cost of the item and for a defined period repair, replace or maintain property, or
- Indemnify for the repair, replacement or maintenance of property because of defective materials or workmanship or normal wear and tear.
A service contract might also include incidental benefits such as towing, rental, emergency road service, and road hazard protection.
In 2021, the Legislature amended the Service Contract Act to cover the replacement of motor vehicle keys or key fobs because of breakage, loss, or theft. The Legislature also amended the Act to cover the repair, replacement, or maintenance of a leased motor vehicle because of damage or excess wear and use that would result in a lease-end or other charge. This coverage is capped by the purchase price of the vehicle. These amendments are effective October 18, 2021.
Is buying a service contract required?
No. No one may condition the sale of any property on the purchase of a service contract for that item. This prohibition includes banks, savings and loans, other lending institutions, and manufacturers and sellers of any product.
Who’s involved in the sale of a service contract?
There can be several parties. The service contract holder is the consumer who owns the service contract. The consumer might buy the service contract from the dealer at the point of sale, sometime after that transaction from the service contract provider, or along with a used item from the original service contract holder. In some cases, such as used car sales, the dealer is also the provider. The provider is the entity that is contractually responsible to the service contract holder for fulfilling the obligations of the service contract. The provider might use a service contract administrator to handle tasks such as billing and handling claims.
What are the requirements for service contracts?
A service contract must:
- Allow the service contract holder to return the contract within at least 20 days if mailed to the holder or 10 days if delivered with the covered item, and refund the entire purchase price and sales tax if no claim was made under the contract.
- Allow the holder to cancel after the period above or after making a claim and receive a pro rata refund, less any claims paid, subject to an administrative fee up to 10 % of the provider fee.
- Be in clear and understandable language in an easily readable font size.
- State whether or not a reimbursement insurance policy covers the contract and, if there is a policy, state the insurer’s name and address.
- State the name and address of the provider, the seller, and the administrator.
- State the total purchase price of the service contract.
- Conspicuously state the prior approval procedure for repairs, including emergency repairs, and a toll-free telephone number for claims service.
- Conspicuously state the deductible if applicable.
- Specify the merchandise and service to be provided, including limitations, exceptions, or exclusions.
- State whether non original manufacturer’s parts are allowed, if the contract covers a motor vehicle.
- State any restrictions on the transferability of the contract.
- State the terms concerning cancellation of the contract before it would otherwise end. The contract must allow at least 15 days’ prior notice, which must state when the cancellation is effective and the reason for cancellation. The provider must refund all of the unearned pro rata provider fee, less any claims paid, subject to an administrative fee up to 10 % of the fee.
- Include all the holder’s obligations, such as following owner’s manual instructions and protecting the item against further damage.
- State whether the contract allows or prohibits coverage for consequential damages or preexisting conditions.
When did the Service Contract Act become effective?
The Act became effective January 1, 2012, and applies to service contracts entered into, renewed, or offered for sale from that date forward. A transitional section of the law allowed service contract providers to conform their existing contracts to the new law before January 1, 2012. This section was a safe harbor for companies that had sold service contracts in Maine without becoming licensed as insurers. Other service contracts that predate the Act, if they are still in effect, are subject to regulation as insurance.
Does the Service Contract Act apply to all service contracts?
No. The Act only regulates contracts on tangible personal property – i.e., goods – with a purchase price of more than $100, excepting sales tax, sold to consumers for non-commercial use. The Act also does not apply to:
- Warranties – discussed above
- Maintenance agreements – providing for scheduled upkeep of property rather than repair of defective or damaged property
- Warranties, service contracts, and maintenance agreements offered by public utilities that the PUC regulates
- Service contracts sold for business purposes
- Road or tourist service contracts – these typically cover emergency towing, mechanical disablement, flat tire, lock-out, jump start, and fuel delivery
- Home service contracts – similar to service contracts, but cover structural components, appliances, or systems of a home necessitated by wear and tear, deterioration, inherent defect, or failure of an inspection to detect the likelihood of any such loss
- Warranties, service contracts, and maintenance agreements associated with the sale or supply of heating fuel
How does the Bureau of Insurance regulate the sale of service contracts?
The Service Contract Act has several basic functions: First, the Act sets out the requirements that providers must meet in order to offer or sell service contracts in Maine. The Act also spells out what administrators must do to comply with the law. Second, the Act specifies minimum requirements for service contract provisions. Third, the Act gives the Superintendent of Insurance the authority to enforce the Act.
The Act has limited application to motor vehicle manufacturers and licensed motor vehicle dealers.
Motor vehicle dealers must comply with all provisions of the Act except for the financial security requirements.
Motor vehicle manufacturers are subject to the Act’s provisions for return of a service contract, clear contract language, specific contract terms, prohibitions against unfair trade practices, and enforcement.
What requirements apply to service contract administrators?
An administrator must:
- Register with the Bureau and fulfill the terms of the service contracts that it administers.
- Allow the Superintendent of Insurance to examine its service contract records.
- Maintain an agent for service of process in Maine.
How does a provider qualify to sell service contracts in Maine?
A provider must:
- Register with the Bureau and comply with the Act’s financial security requirements. Registration forms are on the Bureau’s website at this link. There is a $200 filing fee, and the registration must be renewed annually.
- Keep accurate records of service contract transactions. This includes sales, cancellations, refunds, and claims.
- Maintain an agent for service of process in Maine.
Who has to register as a provider in Maine?
Any person who will be the obligated party under a service contract that is not exempt from the Act must register as a provider.
What are the financial security requirements for a provider?
Except for a provider that is a motor vehicle manufacturer or licensed motor vehicle dealer, a provider must either buy a reimbursement insurance policy or meet the Act’s net worth requirements.
- A reimbursement insurance policy, sometimes called a CLIP (contractual liability insurance policy), covers a provider’s liability under a service contract. An example of this liability would be the provider’s promise to repair the covered item.
- Alternatively, a provider must have a tangible net worth of at least $100,000,000, either on its own or combined with its parent. Tangible net worth as defined in 24-A M.R.S. § 7102(14) means an entity’s equity less assets that have no physical existence and depend on expected future benefits for their ascribed value. The excluded assets would include intangibles, such as good will and copyrights, patents, and other intellectual property, If a provider relies on its parent’s net worth, the parent must sign a guaranty agreement concerning the subsidiary provider’s service contract obligations.