Forming a Service Contract Company

Personal Safeguards Group, LLC (“PSG”) receives many inquiries related to forming a new Service Contract (Extended Warranty) company.

The following offers a very high level definition and overview of the various elements to consider when researching how to form a new Service Contract Company. This is by no means a comprehensive view and is only intended to frame out some of the components to consider.

Depending on product type(s) and the location where an entity plans to operate, properly forming a Service Contract company may be fairly easy to accomplish with proper guidance. In some cases, a company may simply wish to use an existing Obligor (Service Contract company) and not form their own company.

This represents the entity actually making the solicitation and sale of a Service Contract. This includes Retailers, Dealers and Marketers.

The Obligor (or Provider) is the legal entity that is issuing the Service Contract.

Many states require some form or registration (licensing), form filing for terms and conditions, financial guarantees, officer and/or director biographical reviews and various other requirements. This is not a one time event and ongoing reporting and license renewals exist in many states.

This is on a state by state basis and varies on a product level. Examples include: vehicle service contracts, ancillary auto products, home warranties, consumer appliance and electronics products.

Click here for a more detailed document containing an example of a single state's requirements (statutes) for acting as a Service Contract Obligor (Provider).

Financial Guarantee
Most states have requirements for how an Obligor (Provider) must provide for the financial guarantee of a Service Contract.

Financial guarantees are intended to protect the Contract Holder from the financial failure of the Obligor (Provider).

Financial guarantees may include cash reserves, bonds, a parental guarantee from an entity with substantial and defined net worth or a service contract reimbursement insurance policy (contractual liability insurance policy).

Click here for a more detailed page on financial guarantees and an example of a state regulatory requirement.

The Administrator is the entity providing customer entitlement, claim adjudication and payment of claims.

Some states require registration of the administrator and some form of financial guarantee.

Service Entity
The Service Entity is a company the Administrator utilizes to perform repair or replacement services in fulfilling the obligations of the Obligor in the Service Contract.

Some states require registration of the administrator and some form of financial guarantee.

Contract Holder (Customer)
The actual Contract Holder (or Consumer) that the Service Contract is issued to and who is the owner of the covered product.

This page does not drill into various participation models such as the use of Reinsurance or Profit Sharing which are common in some areas.

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