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Bureau of Electronic & Appliance Repair Regulations

Article 5.5 - Service Contractors

2755. Definition of Product
For the purpose of the rules and regulations contained in this chapter, the term 'home health care products' are products purchased by an individual consumer for the purpose of personal care or personal health care. These products are powered by an AC cord or battery and include but are not limited to, personal grooming equipment, body care and skin products, oral care products, blood pressure monitors, electric wheelchairs, portable humidifiers, nebulizers, or air purifiers, or other like equipment.

NOTE: Authority cited: Section 9814.5, Business and Professions Code. Reference: Sections 9830.5, 9855, and 9855.2, Business and Professions Code.

2756. Registration of Service Contractors
An application for registration as service contractor shall be filled with the Bureau on an application form (Form 61A-2, Rev. 8/95) prescribed and provided by the Bureau and accompanied by the prescribed fee. In addition, to the information required by Section 9830.5 of the Code, an application shall also include the following:

1. (a) The service contractor's telephone number, mailing address, and the service contractor's business name, business address and business telephone number if different than the information relating to the individual service contractor.
2. (b) A service contract seller shall disclose the name and address of all service contract administrators which it uses to administer its service contracts.
3. (c) A service contract administrator shall disclose the name and address of the service contract sellers who sell or offer contracts administered by the administrator.
4. (d) A copy of the service contractor's proposed service contract form.
5. (e) The current value, based upon the full purchase price of the service contract paid by the service contract holder, of all service contracts in force, unless the service contractor has purchased or has arranged to have purchased on its behalf a service contract reimbursement insurance policy covering its service contracts or the service contracts which it administers.
6. (f) Proof of financial responsibility which complies with one of the following requirements:
7. (1) The most recent annual report on Form 10-K required by the Securities and Exchange Commission which complies with the provisions of Section 9855.2(a)(1) of the Code. A foreign corporation may submit a comparable regulatory filing which complies with the provisions of Section 2757.3 and includes an audited statement.
8. (2) A copy of a service contract reimbursement insurance policy which complies with the provisions of Section 9855.4 of the Code.
9. (3) Copies of contracts which evidence that a service contract seller sells service contracts which are administered by a service contract administrator who has obtained a service contract reimbursement insurance policy covering the seller's service contracts.
10. (4) Evidence of a funded escrow account which complies with the provisions of Section 2757.5. Such evidence shall disclose the name and address of the financial institution which holds the funded escrow account, the escrow account number, the escrow account instructions, and the most recent financial statement for the escrow account from the financial institution holding the escrow account. The applicant shall also grant the Director or his or her designee the authority to verify with the financial institution holding the escrow account the fund condition of the account.
11. (5) The most recent audited financial statement reflecting a net worth of not less than one hundred million dollars ($100,000,000) which complies with Section 9855.2(a)(1)(B) of the Code. This audited financial statement and the registration renewal shall be filed annually with the Bureau.
12. (g) A service contractor who is a service contract administrator shall only be allowed to demonstrate financial responsibility by submitting a copy of the service contract reimbursement insurance policy covering the service contracts which it administers.
13. (h) Where the service contractor is a sole proprietor, the owner shall disclose his or her social security number. Where the service contractor is a partnership, it shall disclose its federal employer identification number.
    Individuals identified in the application shall disclose a form of official identification from a state or federal government, such as a driver's license number or state identification number or passport number.
14. (i) Criminal and adverse administrative licensing history information in any jurisdiction relating to the service contractor and the following individuals:
15. (1) Sole proprietorship - Individual owner.
16. (2) Partnership - All general partners.
17. (3) Company submitting a Form 10-K with its application - The individual in charge of the company's service contract program.
18. (4) Company not submitting a Form 10-K with its application - All officers and directors of the company and the individuals in charge of the company's service contract program.
19. (j) Signatures from the following individuals:
20. (1) Sole proprietorship - Individual owner.
21. (2) Partnership - All general partners.
22. (3) Corporation - The officer or individual in charge of its service contract program.

NOTE: Authority cited: Section 9814, Business and Professions Code. Reference: Sections 9830.5, 9855.2, and 9855.7, Business and Professions Code.

2757. Financial Responsibility; Sellers of Another's Service Contracts

1. (a) A service contract seller shall provide proof of financial responsibility as specified in Section 2756(f).
2. (b) A person who is not the obligor on a service contract, but sells such service contracts on behalf of another person who is the obligor on the service contract, shall be deemed to be a service contract seller. Such a seller shall be required to meet all the requirements of registration except that such seller shall be allowed to provide proof of financial responsibility for those service contracts by identifying by date, document title, and if applicable, account number of the evidence of financial responsibility submitted by the obligor on such service contracts.

NOTE: Authority cited: Section 9814, Business and Professions Code. Reference: Sections 9855 and 9855.2, Business and Professions Code.

2757.1. "Deferred Revenues from Service Contracts in Force;" Defined
For purposes of complying with the requirements of Sections 9855.2(a)(1), 9855.2(a)(4), and 9855.3(c)(4) of the Code, the term "deferred revenues from service contracts in force" shall mean the full purchase price of the service contract paid by the service contract holder.

NOTE: Authority cited: Section 9814, Business and Professions Code. Reference: Sections 9855 and 9855.2, Business and Professions Code.

2757.2 Net Worth Test on Form 10-K; Defined
For purposes of complying with the requirements of Sections 9855.2(a)(1) and 9855.3(c)(1) of the Code, the term "a net worth greater than the sum of the deferred revenues from service contracts in force" shall be calculated by comparing the sum of the "deferred revenue from all service contracts in force" as of the date of the audited financial statement included in the Form 10-K (or acceptable substitute) filing with the stockholders' equity reported on the financial statement. The amount of stockholders' equity shall exceed the sum of the deferred revenues from service contracts in force in order for the requirements of Section 9855.2(a)(1) and 9855.3(c)(1) of the Code to be met.

NOTE: Authority cited: Section 9814, Business and Professions Code. Reference: Sections 9855.2 and 9855.3, Business and Professions Code.

2757.3. Foreign Corporation; Form 10-K Substitute

1. (a) For a foreign corporation to comply with the requirements of Sections 9855.2(a)(1) and 9855.3(c)(1) of the Code, an acceptable substitute for the annual report on Form 10-K required by the Securities and Exchange Commission shall consist of a complete copy of the filing made by the foreign corporation with a governmental agency of its home government that has regulatory oversight of a public securities exchange on which stock of such foreign corporation is traded. Such a filing shall include a set of financial statements audited by an independent accounting firm in order to be deemed an acceptable substitute for a Form 10-K filing. The complete copy shall be translated into the English language.
2. (b) If a foreign corporation does not make a filing with a foreign governmental agency of its home government that has regulatory oversight of a public securities exchange on which stock of such foreign corporation is traded because the corporation is substantially owned by the government of the country in which the corporation is domiciled, the Director may accept as an acceptable substitute for a Form 10-K filing documentation which consists of all of the following:
3. (1) A complete set of audited financial statements prepared by a firm of independent public accountants that practice, either directly or through affiliated firms, in more than one country, including but not limited to the United States and is licensed or otherwise has comparable authority under the laws of the country in which it is performing the audit to engage in the practice of public accounting;
4. (2) A description of the company, its history, principal lines of business, and current operations; and
5. (3) A section entitled "management's discussion and analysis of financial conditions and results of operation" that provides the same information required by Item 303 of Regulation S-K (17 CFR §229.303) for the similar section contained in a Form 10-K filing. The substitute for a Form 10-K filing shall be translated into the English language.

NOTE: Authority cited: Section 9814, Business and Professions Code. Reference: Sections 9855.2 and 9855.3, Business and Professions Code.

2757.4. Subsidiary Corporation Filing a Form 10-K
A service contract seller which is a majority-owned subsidiary of another (parent) corporation may demonstrate its financial responsibility as required by Sections 9855.2(a)(1) and 9855.3(c)(1) of the Code by filing, with its application for registration or renewal, either a copy of the Form 10-K of its parent corporation or, where its parent corporation is a foreign corporation, a Form 10-K substitute as specified in section 2757.3, provided that such filing includes a statement signed by an authorized officer of the parent corporation evidencing a full guarantee by the parent corporation of the service contract obligations of the subsidiary corporation. Absent such a guarantee from the parent corporation, the service contract seller shall comply with the financial responsibility requirements of the law using one of the other means provided for in Section 9855.2(a) and 9855.3(c) of the Code.

NOTE: Authority cited: Section 9814, Business and Professions Code. Reference: Sections 9855.2 and 9855.3, Business and Professions Code.

2757.5. Funded Escrow Account; Defined

1. (a) For purposes of complying with the requirements of Section 9855.2(a)(4) and 9855.3(c)(4) of the Code, the term "a funded account held in escrow" shall mean an account held at a federal or state chartered bank or savings institution. Such account shall be held in trust for the benefit of the service contract holders and funds in such account may not be released by the trustee except as provided for in Sections 2757.5 and 2757.6.
2. (b) The escrow agreement between the service contract seller and the bank or savings institution shall at a minimum specify all of the following:
3. (1) All escrow fees of any kind shall be paid by the service contract seller and shall not be the responsibility of the Director of the Department of Consumer Affairs.
4. (2) The investment alternatives for deposited funds held in escrow shall be limited to the investment alternatives allowed for in Government Code Section 16430 for funds of California governmental entities that maintain deposits with banks or savings institutions.
5. (3) The escrow agreement shall explicitly provide the Director or his or her designee the right, at any time and at his or her sole discretion, to review or audit any or all activity related to the escrow account(s) held for the purpose of meeting service contract deposit requirements.
6. (4) The withdrawal of escrow funds, for any reason, shall require an approval signature from an escrow officer of the bank or savings institution with signature authority for the account.
7. (5) The escrow account trustee shall notify the Director, through the Bureau, immediately, by facsimile and by letter, of any intended disbursement to be made out of the escrow account for any reason. The notification shall indicate that the Director has five (5) working days to suspend the disbursement pending the Director's review or other action, and shall indicate the last date for the Director's action. If the Director does not order the suspension of disbursements from the account before the end of the fifth working day, the escrow account trustee is authorized to make the previously notified distribution as planned.
8. (c) The required minimum balance in such account shall be equal to a minimum of 25 percent of the deferred revenues from the service contracts in force. The minimum balance shall be calculated by multiplying the sum total of the deferred revenues from all service contracts in force as of the last business day of the calendar quarter in which the calculation is being made by the number 0.25.
9. (d) The service contract seller shall file a statement with the funded escrow account trustee no less than once each calendar quarter, such statement shall be due by the 15th working day following the close of the calendar quarter. The statement shall indicate the escrow account aggregate ending balance from the previous calendar quarter, the number of new or renewal service contracts sold during the quarter, the aggregate sales price of the contracts sold during the quarter, the number and aggregate sales price of all service contracts expiring during the quarter, and the service contract seller's calculation of the new aggregate required balance in the funded escrow account. The statement shall be signed by an authorized representative or officer of the service contract seller.
   The escrow account trustee shall utilize the information contained in the statement balance of the funded escrow account to calculate the deposit amount or the amount available to refund. Such calculation shall be made no less often than once each calendar quarter within 20 working days after the close of the immediately preceding calendar quarter. The escrow account trustee shall notify the service contract seller of its findings within five working days after the trustee has completed its calculations. The service contract seller shall then have 10 working days to deposit such additional funds as the trustee calculates are required to meet the required minimum balance required by law. Interest earned on the funded escrow account may be used to meet the minimum funding requirement. Should the service contract seller fail to deposit the required funds in the escrow account, the trustee shall immediately notify the director of the deficiency and the director shall take appropriate action, including, but not limited to, the filing of a petition for an interim order of suspension.
10. (e) If there is a surplus of funds in the funded escrow account, the trustee may return such surplus funds as requested by the service contract seller.
11. (f) Prior to releasing funds from the escrow account to the service contract seller, the escrow account trustee shall notify the Director, through the Bureau, by facsimile and mail, five (5) working days prior to the day funds will be released to the service contract seller. The notice shall include the calculation made by the escrow account trustee to determine the amount of funds to be released and the pertinent data supplied by the service contract seller for the calculation. The notification shall indicate that the Director has five (5) working days to suspend the disbursement pending the Director's review or other action, and shall indicate the last date for the Director's action. If the Director does not order the suspension of disbursements from the account before the end of the fifth working day, the escrow account trustee is authorized to make the previously notified distribution as planned.

NOTE: Authority cited: Section 9814, Business and Professions Code. Reference: Sections 494, 9855.2 and 9855.3, Business and Professions Code.

2757.6. Release of Escrow Account Funds to Assist Service Contract Holders

1. (a) The Director may direct the trustee to release funds held in the funded escrow account of a service contract seller under the following conditions:
2. (1) The service contract seller petitions the Director, through the Bureau, to release funds in the account in order to pay for repair services required to meet obligations to service contract holders. Such a petition shall contain evidence that the service contract seller is unable to meet his or her obligations except through the use of funds in the escrow account.
   Such a petition shall include financial statements and an accompanying written narrative by an officer of the service contractor, signed under penalty of perjury, detailing the financial conditions of the service contractor and why the service contractor is unable to meet its service contract obligations except by use of escrow funds. The petition shall present a plan for corrective action that details how the service contractor will correct the deficiency in its funded escrow account or will otherwise discharge its obligations to the service contract holders.
3. (2) A service contract holder or group of service contract holders petitions the Director, through the Bureau, to release funds in the account in order to pay for repair services required to meet obligations to service contract holders. Such petition shall set forth the efforts the service contract holders took to obtain repair service from the service contract seller (or obligor).
4. (b) Upon receipt of a petition requesting the release of funds held in the funded escrow account of a service contract seller, the Director shall investigate the claims made in such petition and shall, within thirty (30) days, issue his or her decision on the petition. If the Director grants the petition, he or she may order appropriate action to protect the interests of service contract holders which includes, but, is not limited to:
5. (1) The issuance of an interim order restricting the service contractor's ability to enter into new service contracts during the period when the Director has authorized the trustee to release funds from the escrow account to pay for repair services. (2) Requiring the service contractor to appoint a third party to process applications from service contract holders for escrow account funds to pay for covered repairs.

NOTE: Authority cited: Section 9814, Business and Professions Code. Reference: Sections 494, 9855.2, 9855.3 and 9863, Business and Professions Code.

2758. Service Contractors; Record Keeping

1. (a) Every service contractor shall maintain or arrange for the maintenance of a record of the following:
2. (1) The number of total service contracts which are in effect.
3. (2) The duration remaining on all service contracts.
4. (3) The retail purchase price of its service contracts.
5. (4) The names and addresses of its service contract holders where provided by the service contract holder.
6. (5) The methods or means which have been used by the service contractor to meet the requirements of section 9855.2 of the Code during the immediate past five years or since it has been registered with the Bureau as a service contractor, whichever is shorter.
   Where the service contractor has elected to use a funded escrow account as proof of financial responsibility, the Director or his or her designee shall have the authority to audit and/or verify with the financial institution holding the escrow account the status of the fund condition of the account.
7. (b) A service contract seller shall maintain a record of the name and address of all sellers who sell or offer contracts administered by the administrator.
8. (c) A service contract seller shall maintain a record of the name and address of all administrators which it uses to administer its service contracts.
9. (d) A service contractor shall provide to the director annually at the time for renewal of its registration proof of financial responsibility as specified in Section 2756(f). The service contractor shall also provide to the director at that time the current value, based upon the full purchase price of the service contract paid by the service contract holder, of all service contracts in force, unless the service contractor has purchased or has arranged to have purchased on its behalf a service contract reimbursement insurance policy covering its service contracts or the service contracts which it administers.

NOTE: Authority cited: Section 9814, Business and Professions Code. Reference: Sections 9847.5, 9855 and 9855.2, Business and Professions Code.

2758.5 Service Contract; Filing
The service contractor or its authorized representative shall file with the Bureau, prior to its use, a service contract form, including revisions or modifications to a service contract previously filed with the Bureau.

NOTE: Authority cited: Section 9814, Business and Professions Code. Reference: Sections 9855.3, Business and Professions Code.