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ARIZONA STATE SENATE
Fifty-Fifth Legislature, First Regular Session
insurance; omnibus
Purpose
Makes various changes to home service warranty contracts, electronic communications and records of insurers, Federal Home Loan Banks (FHL Banks) and insurer licensing.
Background
Home Service Warranty Contracts
A service company must obtain a permit from the Director of the Department of Insurance and Financial Institutions (DIFI) in order to offer or issue service contracts in Arizona (A.R.S. § 20-1095.01). In addition to obtaining a permit, a service company must have a service contract filed with and approved by the Director of DIFI (Director) prior to selling the service contract. All service contracts must disclose specific criteria, including any material acts or omissions committed by a contract holder that cancel or void coverage. Additionally, a service contract may not exclude preexisting conditions if such conditions were known or should reasonably have been known by the service company or a person selling the service contract on the service company's behalf (A.R.S. § 20-1095.06).
Statute outlines certain exemptions from service company permit requirements, including corporations that: 1) are affiliates of a consumer product manufacturer that issues warranties or service contracts; and 2) submit to the Director an annual audited financial statement in which one officer of the corporation attests and a certified public accountant certifies that the corporation maintains a net worth over $100,000,000 (A.R.S. § 20-1095.02).
Electronic Communications and Records
Any notice to a party or other document that is required in an insurance transaction or that is to serve as evidence of insurance coverage may be delivered, stored and presented electronically if certain requirements are met. An insurer may deliver a notice or document by electronic means to a party only if the party consents. Additionally, an insurer must obtain distinct advanced electronic consent from the named insured for delivery of certain notices. Under current statute, electronic communications and records requirements apply only to property, casualty and life insurance policies (A.R.S. § 20-239).
Federal Home Loan Banks
The FHL Bank Act requires FHL Banks to maintain a security interest in eligible collateral, including: 1) residential mortgage loans; 2) residential mortgage-backed securities; and 3) U.S. treasuries or agency securities and real-estate-related collateral. Any security interest granted to an FHL Bank by any FHL Bank member, or any affiliate of an FHL Bank member, is entitled to a priority over the claims and rights of any party, with certain exceptions (12 U.S.C. § 1430).
During a delinquency proceeding to liquidate, rehabilitate, reorganize or conserve an insurer, a court may issue an injunction or order to prevent: 1) interference with the receiver or proceeding; 2) the obtaining of preferences, judgments, attachments or other liens; and 3) the making of any levy against the insurer or against its assets (A.R.S. § 20-614). A person may not be enjoined or prohibited from exercising any right under a pledge, security, collateral, reimbursement or guarantee agreement or arrangement or any other similar security agreement or arrangement or other credit enhancement relating to one or more netting agreements or qualified financial contracts (A.R.S. § 20-637).
Licensing
Statute prohibits a person from selling, soliciting or negotiating insurance in Arizona, unless the person obtains an insurance producer license. Certain persons are exempt from insurance producer licensing requirements (A.R.S. § § 20-281; 20-282; and 20-283).
There is no anticipated fiscal impact to the state General Fund associated with this legislation.
Provisions
Home Service Warranty Contracts
1. Decreases, from $100,000,000 to $25,000,000, the minimum net worth that certain corporations must maintain to qualify for exemption from DIFI service company permit requirements.
2. Requires a service contract to disclose whether the service contract covers or excludes preexisting conditions.
3. Allows a service contract to exclude preexisting conditions only if the conditions were known or would have been known by visually inspecting, operating or testing the covered property.
4. Removes the limitation on circumstances that a service contract may provide for indemnity payments and adds a roof leak to the list of circumstances that may result in an indemnity payment.
5. Removes the requirement that a corporation's annual financial statement be independently audited and certified by a certified public accountant to qualify for exemption from DIFI service company requirements.
6. Prohibits the Director from approving a service company's service contract if the service contract may be canceled by the service company or its representatives for failing to state the extent to which preexisting conditions will or will not be covered.
7. Removes the prohibition on the Director approving a service company's service contract if the service contract may be canceled or voided by the service company or its representatives for:
a) preexisting conditions that were known or that reasonably should have been known by the service company or a person selling the contract on the service company's behalf; or
b) prior use or unlawful acts relating to the product.
8. Removes the prohibition on the Director from approving a service company's service contract, if the service contract may be voided by the service company for misrepresentation by the service company or the person selling the service contract on the service company's behalf.
9. Allows a service contract's disclosure of material acts or omissions of a contract holder that cancel or void coverage to include:
a) fraudulent or unlawful acts by the contract holder arising out of or relating to the service contract; and
b) the contract holder's use of a covered consumer product in an unintended manner that is likely to increase the likelihood that the consumer product will be damaged or require repairs.
10. Prohibits administrative expenses associated with a service contract cancellation from exceeding the lesser of $75 or 10 percent of the service contract purchase price, rather than 10 percent of the gross amount paid by a service contract holder for the service contract.
11. Prohibits any administrative expense assessed for a cancellation of a service contract from exceeding the refund amount due to the service contract holder.
12. Modifies the definition of consumer product as any property, rather than only tangible personal property, that:
a) is normally used for personal, family or household purposes; and
b) becomes part of the intended usefulness of real property or is typically transferred with real property as an integral functioning utility appliance or system.
13. Specifies that the definition of service contract is a written contract or agreement that covers, in whole or in part, services performed for the operational or structural failure of a consumer product, with or without additional indemnity payments.
Electronic Communications and Records
14. Requires an insurer, if the insurer uploads a document or notice to a portal or secure website, to send a separate notice to the receiving party that:
a) specifies that the document or notice has been uploaded; and
b) includes a description of the document or notice.
15. Deems, as sufficient proof of consent to receive notices and documents electronically, a named insured that effectuates insurance transactions by electronic means, unless the named insured opts out of electronic delivery and chooses delivery by hard copy.
16. Removes the requirement that an insurer confirm consent electronically with a party in advance in order to deliver a notice or document by electronic means.
17. Removes the requirement that an insurer obtain distinct advanced electronic consent from a named insured for delivery of a notice of cancellation, nonrenewal or reduction of limits of motor vehicle insurance.
18. Applies electronic communications and records requirements to the following policies and annuities:
a) disability;
b) marine and transportation,
c) surety;
d) prepaid legal;
e) prepaid dental;
f) title;
g) identity theft;
h) workers' compensation; and
i) policies and contracts issued by health care services organizations and hospital, medical, dental and optometric service corporations.
Federal Home Loan Banks
19. Prohibits, in insurance receivership and insolvency proceedings, an FHL Bank from being stayed, enjoined or prohibited from exercising or enforcing any right or cause of action against collateral pledged by an insurer member under any:
a) FHL Bank security agreement; or
b) pledge, security, collateral or guarantee agreement, or other similar arrangement or credit enhancement relating to a security agreement to which an FHL Bank is a party.
20. Prohibits a receiver, rehabilitator, liquidator or conservator from voiding any transfer of money or other property in connection with any FHL Bank security agreement or similar arrangement with an insurer member, unless the transfer is made with actual intent to hinder, delay or defraud existing or future creditors.
Licensing
21. Exempts, from insurance producer licensing requirements, a person:
a) whose activities in Arizona are limited to providing a website or other electronic platform for insurers or insurance producers to sell insurance; and
b) who processes payments or charges for insurance premiums, if the person does not sell, solicit or negotiate insurance.
22. Waives examination and residency requirements for an adjuster license applicant who holds a current claims certificate issued by an association with a Director-approved certification program.
Miscellaneous
23. Excludes, from the definition of adjuster, an individual, rather than an employee of a third-party administrator or self-insured employer, who investigates or negotiates settlement of only workers' compensation claims.
24. Includes a lessee of real property in the definition of consumer in relation to home service warranty contracts.
25. Allows DIFI to send orders and notices by mail, personal delivery, fax or by electronic means, rather than only allowing personal delivery, notification or mail.
26. Specifies that a nonrenewal of commercial insurance is not effective unless the insurer sends a copy of the notice of nonrenewal to the named insured in addition to the insured's agent.
27. Requires the Workers' Compensation Appeals Board to mail, rather than send, a written notice of its decision in a requested review of the application of a rating system.
28. Defines terms.
29. Makes technical and conforming changes.
30. Becomes effective on the general effective date.
Prepared by Senate Research
January 11, 2021
MG/ML/gs