On June 9, 2015, the Texas Attorney General’s Office released a response to State Senator Kevin P. Eltife’s request for clarification of state law governing refunds payable in the event of the cancellation of a service contract. State law, as amended during the 2011 legislative session, provides that a service contract provider shall refund to the contract holder either the full amount of the amount paid for the service contract if cancelled during the free look period or a pro rata amount if cancelled subsequent to that time frame “decreased by the amount of any claims paid under the contract.” The 2011 legislation went on to specify that a provider “may allow [cancellation] on other terms included in the contract, provided the terms do not conflict with this section.”
Subsequent to the passage of the 2011 legislation, Meenan PA reached out to TDLR on behalf of the Service Contract Industry Council to determine whether a service contract provider was permitted not to deduct claims paid from any refund amount due. In response, TDLR indicated to us that a provider was not required to deduct claims paid thereby concluding that claims deduction from refunds was permissible, not mandatory.
In response to an inquiry on the claims deduction issue from Senator Eltife, the Texas Attorney General’s Office concluded that “[a] court would likely conclude that [applicable law] does not authorize a service provider to issue a service contract refund that does not deduct the amount of any claims previously paid under the contract.” In reaching this conclusion the Attorney General’s Office rejected arguments set forth by TDLR in its brief to the AG in favor of allowing a provider to choose not to deduct claims paid. The AG instead relied on a strict statutory construction and concluded that the Texas Legislature wrote the statutory refund language in a restrictive manner and not permissive and, therefore, a provider is required to follow the law as written and deduct claims paid from refund amounts. However, given the language utilized within the AG’s opinion (“a court would likely conclude”) it would appear that there is some room for discussion regarding the practice of deducting claims paid from refund amounts due. Notwithstanding this slight hedge from the AG, as it stands now, the most recent word out of the State of Texas is that a provider is required to deduct claims paid from any refunds due as a result of contract cancellation.