FINANCIAL SECURITY REQUIREMENTS; DISTRIBUTION OF FUNDS HELD IN TRUST.

(a) To ensure the faithful performance of a provider's obligations to its service contract holders, each provider must:

(1) insure the provider's service contracts under a reimbursement insurance policy issued by an insurer authorized to transact insurance in this state or by a surplus lines insurer eligible to place coverage in this state under Chapter 981, Insurance Code;

(2) maintain a funded reserve account covering the provider's obligations under its service contracts that are issued and outstanding in this state and place in trust with the executive director a financial security deposit consisting of:

(A) a statutory deposit of cash;

(B) a letter of credit issued by a qualified financial institution; or

(C) a certificate of deposit issued by a qualified financial institution; or

(3) maintain, or have a parent company that maintains, a net worth or stockholders' equity of at least $100 million.

(b) If the provider ensures its obligations under Subsection (a)(2), the amount maintained in the reserve account may not be less than an amount computed by subtracting the amount of any claims paid from the product of 40 percent and the gross consideration the provider received from consumers from the sale of all service contracts issued and outstanding in this state. The department shall prescribe a calculation form to be used by a provider to calculate the minimum amount required to be maintained in the provider's reserve account under this subsection. The executive director may review and examine the reserve account. Except as provided by Subsections (b-1) and (b-4), the amount of the security deposit may not be less than $250,000. The provider must submit to the executive director on request a copy of the provider's financial statements that must be prepared in accordance with generally accepted accounting principles, be without qualification as to the going concern status of the provider, and be audited by an independent certified public accountant. The commission by rule may require the provider to submit additional financial reports.

(b-1) Subject to Subsection (b-2), the amount of the security deposit required under Subsection (b) may not be less than $25,000 if the provider:

(1) is a motor vehicle dealer licensed under Chapter 2301; and

(2) offers to sell service contracts only on motor vehicles sold by the provider.

(b-2) The amount of the security deposit required under Subsection (b-1) is:

(1) $25,000 for a motor vehicle dealer that generated $1,125,000 or less in annual gross revenue in this state from the sale of service contracts in the preceding year;

(2) $50,000 for a motor vehicle dealer that generated more than $1,125,000 and not more than $2,500,000 in annual gross revenue in this state from the sale of service contracts in the preceding year; and

(3) $75,000 for a motor vehicle dealer that generated more than $2,500,000 in annual gross revenue in this state from the sale of service contracts in the preceding year.

(b-3) If a motor vehicle dealer described by Subsection (b-1) has no gross revenue in this state from the sale of service contracts in the preceding year, the security deposit shall be $25,000.

(b-4) The amount of the security deposit required under Subsection (b) may not be less than $25,000 for a provider of a residential service contract.

(c) If the provider ensures its obligations under Subsection (a)(3), the provider must give to the executive director on request:

(1) a copy of the provider's or the provider's parent company's most recent Form 10-K or Form 20-F filed with the Securities and Exchange Commission within the preceding calendar year; or

(2) if the provider or the provider's parent company does not file with the Securities and Exchange Commission, a copy of the provider's or the provider's parent company's audited financial statements showing a net worth of the provider or its parent company of at least $100 million.

(d) If the provider's parent company's Form 10-K, Form 20-F, or audited financial statements are filed to show that the provider meets the financial security requirement, the parent company shall agree to guarantee the obligations of the provider relating to service contracts sold by the provider in this state.

(e) The executive director may not require a provider to meet any additional financial security requirement.

(f) In the event of a provider's bankruptcy or a similar event affecting the ability of the provider to faithfully perform its obligations to its service contract holders, the executive director may distribute any funds held in trust as financial security for the provider under this section to eligible service contract holders as payment for claims. The executive director must distribute the funds in an equitable and cost-effective manner as determined by the executive director.