Threat of service contract regulation looms

Do these points of discussion cause you concern? They should. Though no concrete legislative action has yet resulted from this meeting, there are red flags waving that we shouldn’t ignore.

As longtime industry professionals know, the issue of product classification was addressed in a seemingly satisfactory manner with the NAIC Model Act in 1997. However, it now appears ripe to be revisited as concerns such as the rise in robocalls and the proliferation of service contracts offered through big box stores and other retailers have thrust consumer protection back into the spotlight.

As recently noted by the Motor Vehicle Protection Products Association, it is “always a dangerous discussion to be discussing retail cost and claims costs in a legislative environment, as we have all seen over the years.”

Change happens slowly, of course, but here are the key points to consider:


  • Service contracts are distinct from insurance and have been carved out from insurance products, though they may be governed by the Department of the Interior or another regulatory agency.
  • Service contracts are also subject to consumer protection laws.
  • If classification is revisited, states that do not currently regulate service contracts as insurance, or at all, may do so.
  • In addition, states that already regulate them could do so more stringently.
  • There will likely be a high cost and increased red tape for all involved.


Let’s review the worst-case scenario: Should vehicle service contracts be recategorized as insurance, all F&I providers and sellers (dealers) would have no choice but to form licensed insurance companies. This would require a rigorous licensure process as well as licensing requirements in every state.

On the financial side, there would be a greater need for capital and surplus. And dealers may be unable to participate in their products in the same meaningful way without additional burden.

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