BILL ANALYSIS
SENATE COMMITTEE ON INSURANCE
Senator Jackie Speier, Chair
SB 1323 (Ortiz) Hearing Date: May 5,
2004
As Introduced: February 17, 2004
Fiscal: No
Urgency: No
SUMMARY
Would prohibit insurers from refusing to issue or renew
homeowners' insurance unless the insured has more than two
claims in two years, would prohibit credit scoring for
underwriting or rating homeowners' insurance, and would
prohibit insurers from reporting inquiries about coverage
to industry databases, as specified.
DIGEST
Existing law
1.Provides, under Insurance Code Section 1861.05(a), that
"no rate shall be approved or remain in effect which is
excessive, inadequate, unfairly discriminatory or
otherwise in violation of this chapter."
2.Provides, under Insurance Code Section 791.10 and the
Fair Credit Reporting Act -15 U.S.C. 1681 et seq., that
when an insurer makes an adverse underwriting decision,
the insurer is required to provide notice and advise the
consumer of his or her rights.
3. Requires an insurer to offer renewal or to give notice
of nonrenewal at least 45 days prior to expiration of
coverage, and grants a homeowner a 45 day extension of
coverage should no notice be made; [Insurance Code
Section 678];
4. Requires a notice of renewal or notice of nonrenewal
to contain specified information, including:
a. Any reduction or elimination of
coverage (notice of renewal)
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b. Reasons for nonrenewal
c. A brief statement that if the
insured has contacted the insurer and
remains dissatisfied with the nonrenewal,
the insured can contact the Department of
Insurance (DOI)
d. A telephone number for the insurer
or its representative (both types of
notices)
5. Prohibits an insurer from basing an adverse
underwriting decision on the fact that a homeowner made
an inquiry about coverage, if the information about the
inquiry comes from an industry database [Insurance Code
Section 791.12].
This bill
1. Would prohibit an insurer from reporting an inquiry
about coverage under a policy to an industry database,
if no claim was filed;
2.
Would prohibit the use of credit scoring and similar
credit-related evaluation tools when underwriting a
policy;
3. Would prohibit an insurer from refusing to issue or
renew a policy provided the homeowner has not had more
than two claims in a two year period and provided that
none of the following have occurred:
a. Nonpayment of premium,
including nonpayment of any additional
premium calculated in accordance with
the approved rates of the insurer;
b. Discovery of fraud or
material misrepresentation by either
the named insured or a representative
of the named insured;
c. Discovery of grossly
negligent acts or omissions by the
named insured or representative;
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d. Physical changes to the
property that result in the property
being uninsurable.
COMMENTS
1. Purpose of the bill . To ensure that homeowners are
fairly evaluated by homeowners' insurance companies so
that they can be eligible for offers of coverage from
multiple companies, and to ensure that policyholders
can make a claim without fear of being non-renewed.
2. Background .
Committee hearing & report. On December 4, 2002, the
Senate Insurance Committee heard testimony on the topic
of homeowners' insurance. The hearing and report are
entitled, "Haunted Houses: Does Making a Claim Make a
Home Uninsurable?"
Consumers and their advocates cited numerous examples
of homeowners who could not obtain coverage except
through extraordinary effort or at a very high price,
once they made a claim or were suspected of having made
a claim-and at times even if they hadn't contacted
their insurer.
A retired police officer at the hearing noted that he'd
lost his wedding ring.
Even though he didn't make a claim to his insurer, the
insurer treated his policy coverage inquiry as if it
were a claim, declined to cover it, and then sent the
centralized database known as CLUE a message indicating
that a claim had been filed. Numerous carriers refused
to offer him insurance thereafter, and he was only able
to obtain coverage at a significantly higher cost and
after an extensive search. Consumer advocates stated
that market losses and over-reserving for future losses
were driving premiums up, not claims by consumers.
Commissioner Low indicated that the DOI did not permit
the use of credit scoring in underwriting or rating
either automobile or homeowners' insurance. The DOI, he
added, had recently alleged that Allstate was using
credit-scoring techniques in the offer of auto
insurance. [In March of 2004, the DOI and Allstate
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entered into a settlement agreement. Without admitting
wrongdoing, Allstate agreed to discontinue the use of
the disputed credit technique and also agreed to pay
the DOI a fine of $3 million to settle this and other
issues raised in the December 2001 action against
Allstate.]
At the December 2002 hearing of this committee,
insurers and brokers cautioned against adding
additional requirements to California's market that
might make it more difficult to underwrite risks. They
generally cited mold and water damage claims as the
drivers behind escalating premiums.
The hearing report made nine recommendations:
a) The DOI should enforce its ban on credit
scoring and the Legislature should consider
formally outlawing the practice;
b) The DOI should adhere to the spirit of public
notice in current law and hold public hearings
when the cumulative rate increase requested by
insurers exceed the statutory threshold of 7% per
annum;
c) DOI should audit insurer reserves to catch
over (and under) reserving and to head off
inappropriate pricing in the market (reserves
drive prices);
d) The DOI should eliminate the requirement of
three written declinations from carriers before
homeowners can access the FAIR plan;
e) The DOI should examine the underwriting
practices of companies that disproportionately
declined FAIR plan applicants;
f) The DOI should take action to ensure that
policy coverage inquiries are not reported to
CLUE as claims or treated as such by insurers,
and the Legislature should either outlaw giving
erroneous data to a centralized database or
prohibit the use of erroneous data by insurers;
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g) The Legislature should change the law so that
insurable homes are offered coverage;
h) Underwriting guidelines should be made public
so that consumers can know who will accept them
as consumers and so that they can shop, and
better exercise their purchasing power;
i) Consumers should use their homeowners'
insurance for damage caused by accidental
incidents and not for damage caused by a lack of
maintenance.
After entering office, Insurance Commissioner Garamendi
instructed insurers that only factors that predict the
future risk of loss may be used in underwriting a
policy. An advisory notice with this directive was
circulated, and later regulations were also drafted and
were going to be implemented. However, insurers sued
and the Commissioner was enjoined from implementing the
regulations. The matter remains before the courts with
the Commissioner arguing that existing statutes give
him the authority to issue the regulations, and
insurers arguing otherwise.
The apparent intent of the guidelines and regulations
was to ensure that losses were evaluated for their
predictive value. As the advisory notice stated,
"?..not every prior loss is substantially related to
the risk of loss?Losses that have been fully remedied
or otherwise resolved and no longer present a risk of
loss exposure shall not be considered? (emphasis
added)."
Overlap and conflicts between this bill and three
others that are available for action by the
Legislature- Senate Bill 1474 (Escutia), Senate Bill
691 (Escutia) and Senate Bill 64 (Speier).
The committee has already passed two bills that deal
with the issues in SB 1323 and SB 1474. The bills (SB
64- Speier, SB 691- Escutia, described below) generally
dealt with the terms under which a homeowner can expect
an offer of original or renewal of insurance, and
proposed to explicitly prohibit credit scoring via
statute. The only new proposal in SB 1323 is a
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proposed ban on the reporting of coverage inquiries to
industry databases.
3. Support . According to the author, consumers are
concerned about homeowners' insurance cancellations or
non-renewals because of the filing of legitimate
claims. Consumers have had applications denied, and
policy cancellations and premium increases after only
one claim. Homeowners should not be fearful about
filing a legitimate claim.
The author also believes that this bill will allow a
homeowner to file up to two claims in two years, and
the insurer cannot refuse to issue or renew the
homeowners' insurance. There are concerns that credit
scoring, credit reports or credit ratings lack validity
for underwriting purposes, and may therefore be unfair.
Use of credit information in making underwriting
decisions may also have a disparate impact on
low-income or minority consumers, as indicated in
several studies. Also, credit reports contain errors.
A study by the National Credit Reporting Agency and the
Consumer Federal of America showed 29 percent of
individuals had significant errors in their credit
reports, and that this resulted in a 50-point or more
error in a credit score. Commentators have stated that
credit reporting agencies receive huge numbers of
complaints, and often the agencies lack staff and
resources to deal with complaints and errors.
Homeowners who have only made inquiries about coverage
are often unable to get insurance even though the
homeowners haven't made claims. This bill will prevent
such information from being entered into the databases.
The American Federation of State, County and Municipal
Employees (AFSCME) supports SB 1323 because it will
ensure fairness for insurance policyholders. AFSCME
notes that the loss of a home can be devastating to a
family. This bill will provide a level playing field,
AFSCME believes, between the insurer and homeowner.
The DOI supports this bill if the language is amended
to reflect the DOI's sponsored bill, SB 1474, also
before the committee today.
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4. Opposition . The Personal Insurance Federation of
California (PIFC) makes the following points: a. The
bill create a disincentive for insurers to do business
in the state; b. The bill makes it difficult for
insurers to manage their risks; c. There is no
evidence of an availability problem because nonrenewals
are at 1% or less.
The Insurance Agents and Brokers Legislative Council,
First American Corporation, Liberty Mutual Group, and
Nationwide Insurance Company generally make the same
points as above, but also believe that credit-related
scores are valuable in evaluating risks. Thus, they
assert, an outright ban would increase premiums . The
Pacific Association of Domestic Insurance Companies
states that there will be adverse consumer impacts if
credit-scoring is eliminated. (ed. note: To date, the
Insurance Commissioner has never authorized the use of
credit-scoring or related techniques in the
underwriting or rating of automobile or homeowners'
insurance and so, in theory, a statutory ban would have
zero impact upon premiums because, in theory, no
California auto or homeowners' insurance policy is
currently being rated using credit-scoring.)
State Farm argues that SB 1323 is, in effect, a "take
all comers" rule and that it "virtually" treats all
risks the same. Past claims are a valid predictor of
future losses. "For example, the goal of insurance is
for the average policy holder to have a relative loss
ratio of 100%. Policy holders with two or more claims
have a relative loss ratio of 156.4%. SB 1323 would
require the policy holders with no or only one claim to
pay higher rates to cover those policy holders with two
claims in two years. This bill, and SB 1321 and SB
1323, ignore the economic reality of
insurance?.California strictly regulates rates, making
it difficult to raise rates to meet market conditions?
[and the bill] would exacerbate that problem ?." State
Farm argues that SB 1049 (Calderon) prohibiting the use
of an "inquiry" from an insurer database makes
unnecessary the language in SB 1323 prohibiting the
reporting of an inquiry.
ChoicePoint and its insurance information service
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Comprehensive Loss Underwriting Exchange (CLUE) also
oppose the bill, based upon the proposed explicit ban
on credit scoring. ChoicePoint sells credit scoring
information to insurers. ChoicePoint's letter makes a
number of arguments in favor of the predictive value of
credit scoring, notwithstanding the fact that these
products are not presently approved for use in
California with respect to underwriting or rating auto
and homeowners' insurance.
5. Related legislation.
a. SB 64 (Speier): Would generally provide that a
home that is an insurable risk must be offered renewal
of a policy, and would explicitly ban credit scoring in
underwriting homeowners' insurance. Status: Before
Assembly Insurance Committee, and granted
reconsideration.
b. SB 691 (Escutia): Would explicitly ban credit
scoring in the rating or underwriting of homeowners'
policies. Status: Before Assembly Insurance
Committee, and granted reconsideration.
c. SB 1474 (Escutia): Would, generally speaking,
require that new offers and renewals of homeowners'
coverage be made unless the owner of the home has made
three or more covered claims in a three year period,
with some exceptions. Status: To be heard today in
committee.
d. SB 1855 (Alpert- this bill): Would require
insurers to offer buyers cost comparisons for various
coverages under a policy, and would require insurers to
explain how they calculated the proposed policy limits.
Status: To be heard today in committee
e. AB 1049 (Calderon): Prohibited an adverse
underwriting decision based upon an inquiry about
coverage, when knowledge of the inquiry was obtained by
the insurer from an industry database such as CLUE
Status: Chapter 442, Statutes of 2003.
f. AB 2199 (Kehoe): Would set limits on the amount
that may be withheld or denied under an open policy
providing replacement cost, and the conditions under
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which these limits may be invoked.
An open policy is one without a pre-agreed value on the
thing insured. Status: Assembly Insurance hearing May
5th.
g. AB 2399 (Liu): Would prohibit discrimination in
the issuance of homeowners' policies based upon dog
breeds, would allow for differential pricing based upon
breed and related actuarial data, and would grant a
discount to those homeowners with breeds granted an
American Kennel Club "Canine Good Citizen"
certification. Status: Hearing in Assembly Insurance
May 5th.
h. AB 2962 (Pavley): Would establish, in statute,
generally accepted understandings of actual cash value
for purposes of an open policy.
6. Suggested amendments .
It would be possible for the committee to create three
bills along these lines, if the committee chose to do
so:
a. Credit scoring- explicitly prohibit it
b. Mandatory offer of renewal under some
circumstances (i.e. as proposed in this bill or
SB 1474.)
c. Prohibit inquiries from being reported
to industry database (current law only prohibits
inquiries from being used in an underwriting
decision, should information about the inquiry be
obtained from the industry database).
POSITIONS
Support
Department of Insurance (with amendment)
AFSCME
Oppose
Personal Insurance Federation of California
Insurance Agents and Brokers Legislative Council
The First American Corporation
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Liberty Mutual Group
Nationwide Insurance Company
Pacific Association of Domestic Insurance Companies
State Farm
ChoicePoint/CLUE
Consultant: Brian Perkins (916) 445-0503