What is the Service Contract Model Act?

The National Association of Insurance Commissioners (NAIC) has published a Service Contract Model Act for its members to consider when looking at how to regulate Service Contracts. This model act has been in existence for almost 20 years and many states have adopted this Act or components of the act in their statutes and regulations.

The purposes of the Act are:

(1) Creating a legal framework within which service contracts may be sold in a state.

(2) Encourage innovation in the marketing and development of more economical and effective means of providing services under service contracts, while placing the risk of innovation on the providers rather than on consumers; and

(3) Permit and encourage fair and effective competition among different systems of providing and paying for these services.

Fundamentally, the Act defines a legal framework within a state to allow for the sale of a service contract as a non-insurance product. The Act also provides a clear definition of a service contract and lays out requirements for acting an entity to act as a service contract provider and/or administrator.

The Act also includes specifics related to how a provider can satisfy financial requirements to ensure the consumer is protected when a claim occurs. This includes the use of a Service Contract Reimbursement Insurance Policy, a funded reserve account based on the amount of business written or the ability to demonstrate a net stockholders' equity in excess of a defined amount (e.g. $100,000,000). In some states, a Service Contract Reimbursement Insurance Policy SCRIP is the only viable option available to a service contract provider to comply with the states requirements.

Additional items in the Act include provider registration, required language for terms and conditions, cancellation provisions, record keeping requirements, reporting requirements and other requirements.

Many states have adopted some variation of the Service Contract Model Act to protect their residents.

Here are a few state level examples (for example only) of various guides and regs for service contract providers. This is only a very small sample and these links and the content is subject to change at the state level.