Regulatory History of Home Service Contracts
by Arthur J. Chartrand, NHSCA Executive Director and Counsel. For more information, see www.chartlaw.com
I work exclusively in the insurance and regulatory arenas. I have visited every state and had the privilege of testifying before many state legislative bodies. I spent my early career as counsel to the National Association of Insurance Commissioners (NAIC). I authored many of the NAIC’s position papers and served as counsel to the committees in the 1980’s which examined the service contract industry.
I represent the National Home Service Contract Association (NHSCA). NHSCA is a non profit Kansas Corporation dedicated to industry and consumer information about the use and benefits of home service contracts. Household services, repair and replacement are its members business. Home service is what they provide. Pure and simple. They are not “in the business of insurance.” Home service contracts have no insurance style benefits.
“Service contracts,” as defined and recognized by the National Association of Insurance Commissioners (NAIC) since 1995, do not constitute the business of insurance. Regulation should be left to the general state consumer protection laws or a simple registration and bonding law administered by the insurance department. To regulate home service contract providers as insurers, or even imply the same by limited regulation under the insurance code, is contrary to consumer expectations and a misapplication of limited insurance regulatory resources. Insurance style regulation just does not fit the business.
The clear and modern legislative trend is to exempt home service from insurance codes and other, outmoded “home warranty” acts. This was done in Louisiana (2015), Tennessee (2011), Pennsylvania (2010) Georgia (2005), Kansas (2005), Ohio (2004), Mississippi (2003), Alaska (2003). Oregon (2003), North Dakota (2001), West Virginia (2000), Idaho (1999) and Montana (1999).
NAIC History on Service Contracts
From 1978 until 1995, the NAIC debated the concept and definition of service contracts. In the 1970’s, the NAIC contemplated that there were three emerging industries—one covering “automobile mechanical repair;” one covering “ non–automotive consumer products;” and one covering “home warranty” contracts. The NAIC next researched potential insurance regulation for “warranty and service contract administrators.” The NAIC decided not to impose insurance treatment. [See NAIC Proceedings 1980 Vol. I, p. 847.] Until 1995, the NAIC decided to leave the service contract industry alone and concede consumer protection to the attorneys general and the state consumer protection laws.
In 1995, after several years of renewed hearings and debates, the NAIC resolved that a distinct “service contract” industry had emerged. The NAIC observed that regulation of this totally non–homogeneous business did not lend itself to the definition of insurance nor regulation under the insurance codes. The industry was simply too large and diverse and had permeated virtually every aspect of both consumer and commercial goods. In public meetings, the NAIC concluded that “service contracts” as it now defined them, “are not insurance.” Mike Bownes, General Counsel for the State of Alabama and principal author of the NAIC model, directed the NAIC to state that conclusion for the record. [See NAIC Compilation, December 4, 1995, page 2 of the Service Contracts Model Act Subgroup of the Special Insurance Issues (E) Committee.]
The insurance commissioners testified repeatedly in open hearings that they did not wish to regulate the service contract industry as the business of insurance. A minority reached a consensus that if there ever was a need to act upon a consumer complaint or potential insolvency of a service contract provider, the commissioners might be empowered with some limited level of authority. The NAIC Service Contracts Model Act was adopted in 1995 to meet that limited and balanced goal.
Home Service Providers
Home service contract providers offer a contract to service, repair or replace certain listed household systems or appliances for a period of one year which may fail due to normal wear and tear. Retailers offer similar programs on a single product point of purchase basis, or telemarket contracts covering one or a group of products regardless of purchase. Retail sales most often are a hybrid only offering an “extended warranty” on new products after the expiration of the manufacturer’s warranty. Home service contracts provide immediate service and repair on existing or “used” home appliances and systems.
Home service contracts in some states provide limited service to repair leaky roofs due to normal wear and tear. However, only a few home service contract providers are in the business of providing an actual “home warranty” on housing structures. Contracts covering actual structures or “new home builder warranties,” may or may not warrant other regulatory consideration or retention under the insurance code. Most states that enacted pre-1990 “home warranty acts” clearly were intended to primarily address this unique industry but most inadvertently swept all home service providers under their scope. The clear trend in recent years has been to simply exempt home service contracts from the insurance code. Existing laws on automobile plans and retail product warranties have been left largely intact.
What is critical to recognize is that no matter the provider or product covered, home service contracts provide no insurance coverage. Home service contracts repair or replace items due to predictable normal wear and tear for a set budgeted fee. They are the exact inverse of insurance in that they only cover what no insurance policy ever does – normal wear and tear. They do not cover nor afford protection from sudden and fortuitous events from unpredictable perils which may never occur, such as fire, windstorm, hail or collision. Insurance contracts pay for all financial losses from covered perils except that which are specifically excluded. The latter functional characteristics are what truly define the business of insurance. Thus, a home service contract compliments an insurance program for your home, it does not compete with it.
Failure and wear rates of appliances are actually quite predictable. Consumers are simply paying a budgeted annual fee to maintain them by local plumbers and electricians which have been qualified to do the work. Service contracts help level certain household expenses. They do not eliminate them. With the growth of the senior population and two working parents, the public has demanded the growth in this industry to economically and conveniently meet their daily household needs. The cost of duplicitous and unnecessary regulation tends to defeat this consumer need.
All providers of home service contracts may offer their services at the time of a house resale or at any time a consumer wishes to add the convenience on one or a group of appliances/household systems. The failure of these services, or even of the provider, rarely presents even a limited practical or financial risk to most consumers. There is simply no remote comparison of service and repair on dishwashers and ovens to the importance of performance on life insurance, health insurance, automobile or homeowners coverage, disability insurance or any other true insurance products. The latter are highly distinguished by their substantial consumer expectation and need of performance as well as long term investment of income. Insurance Departments are compelled by consumer expectation to make these logical distinctions.
Home service companies provide service and repair only (not economic loss indemnification) on specifically listed products and failures. Comparing the incidental fact that a fee is paid in advance to a third party on both service contracts and insurance and then concluding that both are insurance, is not unlike comparing a butterfly to a gorilla and concluding they are both gorillas because both have eyes and feet. It is the essential function of the contract that should control its treatment and regulation, not such limited aspects of its mere form. [See Louisiana Attorney General Opinion 98-121].
The two most noted, if not notorious, insolvencies affecting the service contracts industries in recent history have not been home service companies—or service contract companies of any kind. Ironically, they have been authorized, actual insurance companies which were thought to provide financial assurance to consumer and the service contract industry. These were the Virginia based Home Owner Warranty Risk Retention Group (better known as simply “HOW”) and the Cayman Island based, National Warranty Insurance Risk Retention Group (which “reinsured” automobile service contracts).
The generic term “home warranty” is still heavily utilized by the real estate community to describe what are in reality, home service contracts. In the coming years, many companies will be redefining their product to more clearly distinguish themselves as home service contract providers.
We encourage all states to support a very limited registration and bonding of home service contract companies. In addition or in the alternative, a state may pass a clear statutory definition of home service contracts which defines them for what they are and clearly exempts them from potential insurance code treatment.
CLM, Inc. Copyright 2017