SERVICE CONTRACT MODEL ACT
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 determining how to regulate Service Contracts. This model act has existed for over 15 years, and many states have adopted it or its components in their statutes and regulations.
The purposes of the Act are:
(1) Creating a legal framework for selling service contracts 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 clearly defines a service contract and lays out requirements for an entity to act as a service contract provider and/or administrator.
The Act also includes specifics on how a provider can satisfy financial requirements to protect the consumer 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 over 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 state's 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.
A sample of the Model Act is available at: http://www.naic.org/store/free/MDL-685.pdf.
Personal Safeguards Group assists service contract marketers and providers with solutions for licensed obligors, administrators, and Service Contract Reimbursement Insurance Policy / Contractual Liability Insurance Policy requirements to satisfy licensing, registration, and financial guarantees.