Thirty-three states have now enacted statutes regulating service contract providers (i.e., those persons or entities obligated pay claims under a service contracts or extended warranties). Sixteen of these 33 states have specifically provided civil penalties for a failure to comply with their respective service contract acts. A service contract provider can be fined even if the violation of the service contract act is not willful; a violation can be as innocent as failing to include proper disclosures and notices in the service contract or extended warranty.
For example, Oregon’s service contract act assesses a civil penalty of $2,000 for first-time violators, $5,000 for second-time violators, and $10,000 for all subsequent violations. New Mexico’s Service Contract Regulation Act provides for a fee of $5,000 per violation of the Act (with a $100,000 aggregate limit). Florida may assess a fine of $1,000 per violation; the fine can be up to $10,000 per violation if the violation is knowing and willful. On the other hand, New York provides for the most lenient fees, capping penalties for those in violation of its service contract act at $500 per violation.
In addition to monetary civil penalties, most service contract acts empower the state insurance department to revoke a service contract provider license or registration (see New Hampshire), some statutes provide for a separate civil cause of action (see Texas), and Idaho even provides for imprisonment up to six months for willful violations.
To avoid such fees, service contract providers must diligently review the language in their contracts, their policies for selling such contracts, and their registration documents on file with their state insurance commissioner. Many service contract acts require states to keep records in accordance with the act. Illinois, for example, requires providers to maintain records at least three years after coverage has expired. This strict and ever-expanding regulatory climate mandates that those who sell service contracts or extended warranties remain on top of their contract formalities.