Locke Lord QuickStudy: New Washington Statutory Financial Requirements for Providers of Service Contracts and Protection Product Guarantees Effective July 28, 2019

Washington H.B. 1001 was enacted on April 8, 2019, and will take effect on July 28, 2019.¹ H.B. 1001 makes changes to Wash Rev. Code Chapter 48.110 governing service contracts and protection product guarantees which permit new items to be covered under service contracts and establishes new minimum net worth and financial responsibility requirements for service contract providers.

New Items Permitted To Be Covered by Service Contract Providers

H.B. 1001 adds new language to Chapter 48.110 to permit service contract providers to cover “plumbing, electrical, heating and cooling systems…including items intended to be attached to or installed in any real property.”²

Minimum Net Worth

Currently, Chapter 48.110 only provides a minimum net worth requirement for service contract providers who meet financial responsibility requirements by maintaining a minimum net worth.  In this case, the service contract provider must maintain a net worth of $100 million.³ Service contract providers, who meet financial responsibility requirements by either obtaining a reimbursement insurance policy or by maintaining a funded reserve account, currently must provide audited financial statements that prove the service contract provider is “solvent.”⁴ The current statutes do not define the term “solvent.”   

H.B. 1001 now provides greater clarity by establishing a minimum net worth requirement.  Going forward, service contract providers who meet financial responsibility requirements either by obtaining a reimbursement policy or by maintaining a funded reserve account must provide audited financial statements that “prove the applicant has and maintains a minimum net worth or stockholder’s equity of two hundred thousand dollars [$200,000] or more calculated in accordance with section 6 of this act and the ability to pay debts when debts become due.”⁵ H.B. 1001 does not change the existing requirement that service contract providers meeting financial responsibility requirements exclusively by maintaining a minimum net worth must still maintain a net worth of $100 million.

Similar changes were made to provisions relating to motor vehicle service contract providers and protection product guarantee provider requirements.⁶

Calculation of Minimum Net Worth

H.B. 1001 inserts a new section into Chapter 48.110 which sets forth requirements relating to how net worth is to be calculated in various scenarios.⁷  Service contract providers and motor vehicle service contract providers who satisfy financial responsibility requirements by maintaining a reimbursement insurance policy must follow generally accept accounting principles as set forth by the financial accounting standards board, including standards relating to unearned service contract fees and expected service contract claims, to determine net worth.  Alternatively, the service provider can elect to use statutory accounting principles in lieu of generally accepted accounting principles.  Similar requirements were included for protection product guarantee providers.⁸

Service contract providers who satisfy financial responsibility requirements by either maintaining a funded reserve account or a minimum net worth of $100 million also must follow generally accepted accounting principles.  However, these service contract providers may not include in their assets “intangible assets including, but not limited to, goodwill, franchises, customer lists, patents, trademarks, and receivables from or advances to officers, directors, employees, salesmen, and affiliate companies when calculating net worth.”  Receivables of an affiliate may be included if the affiliate provides a written irrevocable guarantee plus a statement from a certified public accountant that the net worth or stockholder’s equity of the affiliate is sufficient.⁹

Financial Responsibility

Currently, the commissioner may refuse to issue a registration if the service contract provider is “not competent, trustworthy, financially responsible, or….”¹⁰  H.B. 1001 deletes the term “financially responsible” and replaces it with “cannot demonstrate a minimum net worth or stockholder’s equity and the ability pay its debts when debts become due in accordance with applicable requirements….”¹¹  For service contract providers meeting financial responsibility requirements by maintaining a reimbursement policy or a funded reserve account, the minimum net worth is now $200,000.  For service contract providers satisfying financial responsibility requirements exclusively by net worth, the amount remains unchanged at $100 million.  Similar changes were made to provisions relating to protection product guarantee provider requirements.¹²

H.B. 1001 also clarifies that the Washington Insurance Commissioner may immediately suspend the registration of a service contract provider if “the provider either does not maintain the minimum net worth required by this chapter or cannot pay its debts when debts become due or both:….”¹³  Therefore, service contract providers must maintain the minimum net worth and be able to pay debts when they become due to maintain their service contract provider registration.

Applicability To Wholly Owned Subsidiaries of Motor Vehicle Manufacturers or Import Distributors

Certain provisions of Chapter 48.110 relating to motor vehicle service contracts do not apply to “wholly owned subsidiaries.”  H.B. 1001 does not affect which provisions apply, but does insert a definition of wholly owned subsidiary into the existing provisions.  The new language provides “a company is considered a wholly owned subsidiary as long as it is ultimately owned, directly or indirectly, one hundred percent by single or multiple motor vehicle manufacturers or import distributors.”¹⁴

Best Practices

Impacted registrants in Washington should review the new requirements and ensure compliance by July 28, 2019 in the event that the Washington Insurance Commissioner begins reviewing the financial condition of Washington registrants. 

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