Letter to the Editor - Warranty Solutions for Manufacturers

August 31, 2007

To the editor:

I read with interest your recent article regarding ServiceBench's extended warranty solution for manufacturers [Warranty Week, July 25, 2007]. As an attorney who has handled warranty regulatory compliance matters for a variety of providers, including manufacturers, I was particularly interested in the discussion of the challenges manufacturers face with respect to compliance with the various state service contract regulatory schemes. I wanted to take this opportunity to more fully discuss these issues, including the opportunities for manufacturers to take advantage of lessened regulatory burdens that exist by virtue of the manufacturers' relationship to the products covered under their service contracts.

Several states limit, or eliminate entirely, regulatory oversight of manufacturers who issue service contracts. This is particularly true in Florida and Oklahoma, which are discussed in detail in your article. The full regulatory schemes of those states may not be applicable to manufacturer service contract providers, under certain circumstances. However, Florida and Oklahoma are not alone in their differing treatment of manufacturers.

Manufacturers may be entirely exempt from regulation under Oklahoma's Service Warranty Insurance Act based upon the Act's definition of "service warranty." See 36 Okla. St. § 6602(14). Contracts sold by manufacturers or their affiliates and subsidiaries which are backed by a contractual liability insurance policy are not included in the Act's definition of "service warranty;" likewise, the term does not include any such contracts issued by a company which has net assets in excess of $100 million. A manufacturer demonstrating that it meets either of these exemptions is not required to be licensed in Oklahoma to issue service warranties, and in fact, is exempt entirely from Oklahoma's regulatory scheme.

Florida offers a separate and distinct service warranty association license for manufacturers of consumer products which allows a company that qualifies as a "manufacturer" to obtain a license through a streamlined application process. See §§ 634.401(17) & 634.404(6), Fla. Stat. For instance, Florida does not require fingerprinting of officers and directors of manufacturer service warranty associations and, upon licensure, only requires a simplified annual financial report in lieu of the more burdensome quarterly reports required of non-manufacturers. See § 634.415(4), Fla. Stat. In addition, a manufacturer with a net worth of $100 million and net assets of $750,000 may qualify for a further exemption under Florida law which eliminates the need to comply with (1) the unearned premium reserve/contractual liability insurance requirement; and (2) the premiums-to-net-assets ratio, both of which are otherwise required of service warranty associations. See § 634.406(8). Fla. Stat.

Outside of these two states, there are further opportunities for manufacturers to limit or completely eliminate the regulatory burdens placed on service contract providers, by virtue of their status as manufacturers. Existing regulatory schemes in states such as Alabama, Arizona, Kentucky, New Mexico, New York, Vermont, and Wisconsin contain manufacturer exemptions from licensure and/or regulation, depending on the specific circumstances of the manufacturer. New regulatory schemes enacted this year in Arkansas and Missouri contain similar exemptions for manufacturers. Identifying these opportunities and constructing a compliant service contract program which limits regulatory burdens, and their associated costs, is vitally important for manufacturers who want to maintain control over their extended warranty programs.

The Frost Brown Todd Insurance Industry Practice Group has advised numerous clients regarding the implementation and maintenance of comprehensive national service contract programs, including state licensure, solvency, and disclosure requirements. We look forward to further discussion of these and other warranty-related topics in Warranty Week and welcome the opportunity to contribute to these discussions in order to enhance the understanding of this complex area of the law.

Christopher J. Karo

The editor responds:

Thank you for that information. I'm sure many of the manufacturers contemplating their own launches of extended warranty offers will be happy to hear they can take advantage of these and other exemptions in state laws.

But this only reinforces my point, which is that state insurance law compliance is an enormous task which will require legal advice and assistance. I have heard numerous times about manufacturers who tried to do it themselves and who found their service contract operations in one state or another temporarily shut down for noncompliance. Hopefully, everyone who reads your letter will know better than to try to go it alone without the benefit of expert advice.