BILL NUMBER: AB 1728 CHAPTERED 09/20/04 CHAPTER 599 FILED WITH SECRETARY OF STATE SEPTEMBER 20, 2004 APPROVED BY GOVERNOR SEPTEMBER 20, 2004 PASSED THE ASSEMBLY AUGUST 18, 2004 PASSED THE SENATE JULY 12, 2004 AMENDED IN SENATE JUNE 17, 2004 AMENDED IN SENATE JUNE 9, 2004 AMENDED IN SENATE MAY 3, 2004 AMENDED IN SENATE APRIL 15, 2004 AMENDED IN ASSEMBLY APRIL 7, 2003 INTRODUCED BY Committee on Insurance (Vargas (Chair), Calderon, Chavez, Correa, Diaz, Dutra, Jerome Horton, Koretz, Nakano, and Ridley-Thomas) MARCH 4, 2003 An act to amend Sections 900, 923, 931, 934, 1215.1, 1215.2, and 1872.85 of, and to repeal Section 1861.135 of, the Insurance Code, relating to insurance. LEGISLATIVE COUNSEL'S DIGEST AB 1728, Committee on Insurance. Insurance company regulation: disability insurance fraud. Existing law requires that on or before the first day of March of each year every insurer doing business in this state shall make and file with the Insurance Commissioner, in triplicate, statements exhibiting its condition and affairs as of the previous December 31. This bill would provide that the statements be filed in a form, number, and by methods prescribed by the commissioner, and that if the first day of March is not a business day, the statements are due on the first business day preceding that day. The bill would also require quarterly filings of statements exhibiting the condition and affairs of the insurer, as specified. Existing law requires every domestic, foreign, and alien insurer doing business in the state to file an annual statement, as specified, with the National Association of Insurance Commissioners. This bill would in addition, require quarterly statements be filed, as specified. Existing law authorizes the Insurance Commissioner to suspend, revoke, or refuse to renew the certificate of authority of any insurer failing to file its annual statement with the National Association of Insurance Commissioners when due or within any extension of time which the commissioner, for good cause, may grant. This bill would extend that authority to cases of failure to file quarterly statements. Existing law authorizes domestic insurers to make investments in common stock and other securities in specified circumstances. Existing law authorizes certain domestic insurers to organize or acquire subsidiaries, and to invest any amount in securities of subsidiaries, subject to specified restrictions. Existing law also authorizes an insurer to invest any amount in securities of any subsidiary exclusively engaged in holding title to or holding title to and managing or developing real or personal property, as specified. This bill would eliminate these special provisions that authorize the investment of any amount in the securities of subsidiaries. Existing law provides that purchases, exchanges, or other specified acquisitions of control of a domestic insurer may not be made until the Insurance Commissioner approves the transaction, or fails to disapprove the transaction, as specified. This bill would require the commissioner to approve or disapprove the transaction in 60 days. Existing provisions of statutory law exempt surety insurance from a specified rate rollback, and from certain requirements for receiving approval from the insurance commissioner before setting and modifying rates, and provide in their stead that surety insurance rates shall not be excessive, inadequate, or unfairly discriminatory, as specified. The rollback and other requirements from which surety insurers were exempted by these provisions were added by an initiative that requires any amendment to the initiative be in furtherance of its purpose. The California Supreme Court held that these provisions exempting surety insurers from the rollback and other requirements constituted an amendment of the initiative not in furtherance of that purpose, and were therefore invalid. This bill would repeal this language purporting to exempt surety insurers from specified aspects of the initiative's rate regulation scheme. The bill would make other conforming technical changes. Existing law requires a disability insurer, or an entity otherwise liable for any loss due to health insurance fraud, to pay an annual fee in order to fund increased investigation and prosecution of fraudulent health insurance claims. Existing law requires moneys from these fees to be deposited in the Insurance Fund, for use upon appropriation by the Legislature, of which 50% is required to be distributed to local district attorneys for investigation and prosecution of health insurance fraud cases. Existing law requires the Insurance Commissioner to prepare an annual report with respect to the Bureau of Fraudulent Claims. This bill would require the moneys from these fees to be deposited in the Disability Insurance Fraud Account, which would be created in the Insurance Fund, and to be available upon appropriation by the Legislature for enhanced investigation and prosecution of disability insurance fraud. The bill would require the commissioner to distribute funds to district attorneys based on whether they are able to show that it will enhance their prosecution of disability insurance fraud. The bill would require a district attorney applying for these funds to submit an application that contains specified information to the commissioner. The bill would also require a district attorney receiving these funds to submit accountings and final reports for each case or project funded. The bill would authorize the commissioner to conduct a fiscal audit of the program and would authorize the commissioner to discontinue and redistribute funds if he or she determines that a district attorney is unable or unwilling to investigate or prosecute a relevant disability insurance fraud case. The bill would make the applications, distributions, and the annual report regarding the Bureau of Fraudulent Claims public documents. The bill would exempt certain policies from the fee. THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS: SECTION 1. Section 900 of the Insurance Code is amended to read: 900. (a) On or before the first day of March of each year every insurer doing business in this state shall make and file with the commissioner, in the number, form, and by the methods prescribed by the commissioner, statements exhibiting its condition and affairs as of the previous December 31. If the first day of March falls on a day other than a business day, the filing is due to the commissioner by the first business day preceding the first day of March. (b) Each year, on or before the following dates, every insurer doing business in this state shall make and file with the commissioner, in the number, form, and methods prescribed by the commissioner, statements exhibiting its condition and affairs for the period beginning on January 1 of the current calendar year through the end of each quarter of the current year as described below. These quarterly filings shall cover the period of time beginning January 1 of the current year through and including the last day of the quarter for which the report is being made. The first quarter filing shall be filed with the commissioner on or before May 15th of every year. The second quarter filing shall be filed with the commissioner on or before August 15th of every year. The third quarter filing shall be filed with the commissioner on or before November 15th of every year. If any of these dates fall on a day other than a business day, then the filing is due to the commissioner by the first business day preceding that date. SEC. 2. Section 923 of the Insurance Code is amended to read: 923. The commissioner shall require every insurer which is required to file an annual or quarterly statement to use the statement blanks and instructions thereto for the appropriate year adopted by the National Association of Insurance Commissioners. The statements shall be completed in conformity with the Accounting Practices and Procedures Manual adopted by the National Association of Insurance Commissioners, to the extent that the practices and procedures contained in the manual do not conflict with any other provision of this code. The commissioner may make changes from time to time in the form of the statements and the number and method of filing reports as seem to him or her best adapted to elicit from the insurers a true exhibit of their condition. The commissioner shall notify each insurer of any changes from the National Association of Insurance Commissioners' statement blanks which the commissioner has determined pursuant to this section to be appropriate. SEC. 3. Section 931 of the Insurance Code is amended to read: 931. (a) Each domestic, foreign, and alien insurer doing business in this state shall annually, on or before the first day of March of each year, file with the National Association of Insurance Commissioners a copy of its annual statement convention blank, along with any additional filings as prescribed by the commissioner for the preceding year. The information filed with the National Association of Insurance Commissioners shall be in the same format and scope as that required by the commissioner and shall include the signed jurat page and the actuarial certification. Any amendments and addendums to the annual statement filing subsequently filed with the commissioner shall also be filed with the National Association of Insurance Commissioners. (b) Each year, on or before the following dates, every domestic, foreign, and alien insurer doing business in this state shall make and file with the National Association of Insurance Commissioners, in the number, form, and methods prescribed by the commissioner, a copy of the quarterly statements exhibiting its condition and affairs for the period beginning on January 1 of the current calendar year through the end of each quarter of the current year as described below. These quarterly filings shall cover the period of time beginning January 1 of the current year through and including the last day of the quarter for which the report is being made. The first quarter filing shall be filed on or before May 15th of every year. The second quarter filing shall be filed on or before August 15th of every year. The third quarter filing shall be filed on or before November 15th of every year. If any of these dates fall on a day other than a business day, then the filing is due to the National Association of Insurance Commissioners by the first business day preceding that date. The information filed with the National Association of Insurance Commissioners shall include a jurat page. A copy of any amendments and addendums to the quarterly statement filings subsequently filed with the commissioner shall also be filed with the National Association of Insurance Commissioners. (c) Foreign insurers that are domiciled in a state which has a law substantially similar to subdivision (a) of this section shall be deemed in compliance with this section. SEC. 4. Section 934 of the Insurance Code is amended to read: 934. The commissioner may suspend, revoke, or refuse to renew the certificate of authority of any insurer failing to file its annual or quarterly statement with the National Association of Insurance Commissioners when due or within any extension of time which the commissioner, for good cause, may grant. SEC. 5. Section 1215.1 of the Insurance Code is amended to read: 1215.1. (a) Any domestic insurer, either by itself or in cooperation with one or more persons, may organize or acquire one or more subsidiaries subject to the limitations of this section. (b) In addition to investments in common stock, preferred stock, debt obligations, and other securities permitted under all other sections of this chapter, a domestic insurer may also do one or more of the following: (1) Invest in common stock, preferred stock, debt obligations, and other securities of one or more subsidiaries, amounts that do not exceed the lesser of 10 percent of the insurer's assets or 50 percent of the insurer's surplus as regards policyholders. However, after these investments, the insurer's surplus as regards policyholders shall be reasonable in relation to the insurer's outstanding liabilities and adequate to its financial needs. In calculating the amount of these investments, there shall be excluded investments in insurance subsidiaries, and there shall be included (A) total net moneys or other consideration expended and obligations assumed in the acquisition or formation of a subsidiary, including all organizational expenses and contributions to capital and surplus of the subsidiary whether or not represented by the purchase of capital stock or issuance of other securities, and (B) all amounts expended in acquiring additional common stock, preferred stock, debt obligations, and other securities and all contributions to the capital or surplus of a subsidiary subsequent to its acquisition or formation. "Insurance subsidiary" is an insurer that is organized within the United States and is controlled, directly or indirectly, by a reporting insurer subject to this article. For purposes of this paragraph, "investments in insurance subsidiaries" shall include the following: (A) Any direct investment in an insurance subsidiary. (B) The insurer's proportionate share of any investment in an insurance subsidiary held by any subsidiary of the insurer. This shall be calculated by multiplying the amount of the subsidiary's investment in the insurance subsidiary by the insurer's percentage of ownership of the subsidiary. (2) Invest any amount in common stock, preferred stock, debt obligations, and other securities of one or more subsidiaries, provided that each subsidiary agrees to limit its investments in any asset so that these investments will not cause the amount of the total investment of the insurer to exceed any of the investment limitations specified in paragraph (1) or in this chapter applicable to the insurer. For the purpose of this paragraph, "the total investment of the insurer" shall include (A) any direct investment by the insurer in an asset, and (B) the insurer's proportionate share of any investment of an asset by any subsidiary of the insurer, which shall be calculated by multiplying the amount of the subsidiary's investment by the percentage of the insurer's ownership of that subsidiary. (3) With the approval of the commissioner, invest any amount in common stock, preferred stock, debt obligations, or other securities of one or more subsidiaries, provided that after this investment the insurer's surplus as regards policyholders shall be reasonable in relation to the insurer's outstanding liabilities and adequate to its financial needs. (c) Investments in common stock, preferred stock, debt obligations, or other securities of subsidiaries made pursuant to subdivision (b) shall neither limit nor be subject to any of the otherwise applicable authorizations, restrictions, or prohibitions contained in this part applicable to these investments of insurers. (d) Whether any investment pursuant to subdivision (b) meets the applicable requirements thereof is to be determined immediately after the investment is made, taking into account the then outstanding principal balance on all previous investments in debt obligations, and the value of all previous investments in equity securities as of the date they were made. (e) If an insurer ceases to control a subsidiary, it shall dispose of any investment therein made pursuant to this section within three years from the time of the cessation of control, or within any further time as the commissioner may prescribe, unless at any time after the investment has been made, the investment has met the requirements for investment under any other section of this part. SEC. 6. Section 1215.2 of the Insurance Code is amended to read: 1215.2. (a) No person shall make a tender offer for, or a request or invitation for tenders of, or enter into an agreement to exchange securities for or acquire in the open market, any voting security, or any security convertible into a voting security, of a domestic insurer or of any other person controlling a domestic insurer, if the other person is not substantially engaged either directly or through its affiliates in any businesses other than that of insurance, if, as a result of the consummation thereof, the person would, directly or indirectly, acquire control of the insurer, and no person shall enter into an agreement to merge with or otherwise to acquire control of a domestic insurer, unless, at the time copies of the offer or purchase or request or invitation are first published or sent or given to security holders or the agreement or transaction is entered into, as the case may be, the person has filed with the commissioner, and has sent to the insurer, a statement containing the following information, and any additional information, as the commissioner may by rule or regulation prescribe as necessary or appropriate in the public interest or for the protection of policyholders or shareholders: (1) The background and identity of all persons by whom or on whose behalf the purchases or the exchange, merger, or other acquisition of control are to be effected. (2) The source and amount of the funds or other consideration used or to be used in making the purchases or in effecting the exchange, merger, or other acquisition of control, and, if any part of the funds or other consideration has been or is to be borrowed or otherwise obtained for the purpose of making the purchases or effecting the exchange, merger, or other acquisition of control, a description of the transaction and the names of the parties thereto. However, where a source of funds is a loan made in the lender's ordinary course of business, if the person filing the statement so requests, the name of the lender shall not be made available to the public. (3) Any plans or proposals which those persons may have to liquidate the insurer, to sell its assets or merge it with any person, or to make any other major change in its business or corporate structure or management. (4) The amount of each class of voting securities or securities which may be converted into voting securities of the insurer or the controlling person which are beneficially owned, and the amount of each class of voting securities or securities which may be converted into voting securities of the insurer or the controlling person concerning which there is a right to acquire beneficial ownership, by each person and by each affiliate of each person, together with the name and address of each affiliate. (5) Information as to any contracts, arrangements, or understandings with any person with respect to any securities of the insurer or the controlling person, including, but not limited to, transfer of any of the securities, joint ventures, loan or option arrangements, puts or calls, guarantees of loans, guarantees against loss or guarantees of profits, division of losses or profits, or the giving or withholding of proxies, naming the persons with whom the contracts, arrangements, or understandings have been entered into, and giving the details thereof. All requests or invitations for tenders or advertisements making a tender offer or requesting or inviting tenders of the voting securities of the insurer or the controlling person made by or on behalf of the person, and a copy of the agreement to exchange or otherwise acquire securities or to merge with or otherwise to acquire control of the insurer, shall be filed with the commissioner and sent to the insurer as a part of the statement and shall contain the information contained in the statement as the commissioner may by rule or regulation prescribe. Copies of any additional material soliciting or requesting the tender offers subsequent to the initial solicitation or request, and copies of any amendment to the agreement, shall contain the information as the commissioner may by rule or regulation prescribe as necessary or appropriate in the public interest or for the protection of policyholders or shareholders, and shall be filed with the commissioner and sent to the insurer not later than the time copies of the material are first published or sent or given to security holders or the amendment is entered into. (b) If the person required to file the statement referred to in subdivision (a) of this section is a partnership, limited partnership, syndicate, or other group, the commissioner may require that the information called for by paragraphs (1) to (5), inclusive, of subdivision (a) shall be given with respect to: (1) each partner of the partnership or limited partnership, (2) each member of the syndicate or group, and (3) each person who controls the partner or member. If a person referred to in paragraph (1), (2), or (3) of this subdivision is a corporation or the person required to file the statement referred to in subdivision (a) is a corporation, the commissioner may require that the information called for by paragraphs (1) to (5), inclusive, of subdivision (a) shall be given with respect to the corporation and each officer and director of the corporation and each person who is directly or indirectly the beneficial owner of more than 10 percent of the outstanding voting securities of the corporation. (c) If any tender offer, request, or invitation for tenders, or agreement to exchange or otherwise acquire securities or to merge or otherwise acquire control referred to in subdivision (a) of this section, is proposed to be made by means of a registration statement under the federal Securities Act of 1933, or in circumstances requiring the disclosure of similar information under the federal Securities Exchange Act of 1934, or under a state law requiring similar registration or disclosure, the person required to file the statement referred to in subdivision (a) may file that registration statement with the commissioner as full satisfaction of the requirement in subdivision (a). (d) The purchases, exchanges, mergers, or other acquisitions of control referred to in subdivision (a) of this section may not be made until the commissioner approves the purchases, exchanges, mergers, or other acquisitions of control. The commissioner shall approve or disapprove the transaction within 60 days after the statement required by subdivision (a) has been filed with the commissioner. The commissioner may disapprove the transaction if the commissioner finds any of the following: (1) After the change of control the domestic insurer referred to in subdivision (a) could not satisfy the requirements for the issuance of a license to write the line or lines of insurance for which it is presently licensed. (2) The purchases, exchanges, mergers, or other acquisitions of control would substantially lessen competition in insurance in this state or create a monopoly therein. (3) The financial condition of an acquiring person might jeopardize the financial stability of the insurer, or prejudice the interests of its policyholders. (4) The plans or proposals which the acquiring person has to liquidate the insurer, to sell its assets, or to merge it with any person, or to make any other major change in its business or corporate structure or management, are not fair and reasonable to policyholders. (5) The competence, experience, and integrity of those persons who would control the operation of the insurer indicate that it would not be in the interest of policyholders, or the public to permit them to do so. (e) The commissioner shall require the payment of two thousand three hundred sixty dollars ($2,360) as a fee for filing an application under this section, the amount to accompany the application. (f) The provisions of this section shall not apply to any offer for or request or invitation for tenders of any voting securities, or any agreement to exchange securities for or otherwise acquire control, if the insurer whose shares are to be acquired remains a direct or indirect subsidiary of the same ultimate controlling company person within the insurer's insurance holding company system, neither the acquiring person nor any affiliate acquires or incurs any debt, guarantee, or other liability related to the transaction, and no shares are purchased by or sold to a person who is not an affiliated person in that insurance holding company system, or if, and to the extent that, the commissioner, by rule or regulation or by order, exempts the offer, request, invitation, or agreement from the provisions of this section as not comprehended within the purposes thereof. SEC. 7. Section 1861.135 of the Insurance Code is repealed. SEC. 8. Section 1872.85 of the Insurance Code is amended to read: 1872.85. (a) Every admitted disability insurer or other entity liable for any loss due to health insurance fraud doing business in this state shall pay an annual fee to be determined by the commissioner, but not to exceed ten cents ($0.10) annually for each insured under an individual or group insurance policy it issues in this state, in order to fund increased investigation and prosecution of fraudulent disability insurance claims. After incidental expenses, 50 percent of those funds received from the assessment fee per insured shall be distributed to the Bureau of Fraudulent Claims of the Department of Insurance for enhanced investigative efforts, and 50 percent of the funds shall be distributed to local district attorneys, pursuant to subdivisions (b) and (c), for investigation and prosecution of disability insurance fraud cases. The funds received under this section shall be deposited into the Disability Insurance Fraud Account, which is hereby created in the Insurance Fund, and shall be expended and distributed, when appropriated by the Legislature, only for enhanced investigation and prosecution of disability insurance fraud. In the course of its investigation, the Bureau of Fraudulent Claims shall aggressively pursue all reported incidents of probable fraud and, in addition, shall forward to the appropriate disciplinary body the names of any individuals licensed under the Business and Professions Code who are convicted of engaging in fraudulent activity along with all relevant supporting evidence. (b) The commissioner shall distribute funds pursuant to subdivision (a) to district attorneys who are able to show a likely positive outcome that will enhance the prosecution of disability insurance fraud in their jurisdiction based on specific criteria promulgated by the commissioner. A district attorney desiring funds pursuant to subdivision (a) shall submit to the commissioner an application that includes, but is not limited to, all of the following: (1) The proposed use of the moneys and the anticipated outcome. (2) A list of all prior cases or projects in the district attorney' s jurisdiction that have been funded under the provisions of this section, and a copy of the final accounting for each case or project. If a case or project is ongoing, the most recent accounting shall be provided. (3) A detailed budget for the moneys, including salaries and general expenses, that specifically identifies the purchase or rental cost of equipment or supplies. (c) (1) A district attorney who receives moneys pursuant to this section shall submit a final detailed accounting at the conclusion of each case or project funded. For a case or project that continues for longer than six months, an interim accounting shall be submitted every six months, or as otherwise directed by the commissioner. (2) A district attorney who receives moneys pursuant to this section shall submit a final report to the commissioner, which may be made public, as to the success of each case or project funded by this section. The report shall provide information and statistics on the number of active investigations, arrests, indictments, and convictions associated with a case or project. The applications for moneys, the distribution of moneys, and the annual report required by Section 1872.9 shall be public documents. (3) Notwithstanding any other provision of this section, information submitted to the commissioner pursuant to this section concerning criminal investigations, whether active or inactive, shall be confidential. (4) The commissioner may conduct a fiscal audit of the programs administered under this subdivision. The fiscal audit shall be conducted by an internal audit unit of the department. The cost of fiscal audits shall be paid from the Disability Insurance Fraud Fund, upon appropriation by the Legislature. (5) If the commissioner determines that a district attorney is unable or unwilling to investigate or prosecute a relevant disability insurance fraud case, the commissioner may discontinue distribution of moneys allocated for that matter pursuant to this section, and may redistribute moneys to other eligible district attorneys. (d) Activities of the Bureau of Fraudulent Claims with regard to investigating and prosecuting fraudulent disability insurance claims pursuant to this section shall be included in the report required by Section 1872.9. (e) This section shall not apply to policies issued by a reciprocal or interinsurance exchange, as defined by Sections 1303 and 1350, or coverage provided by or through a motor club, as defined by Section 12142, affiliated with a reciprocal or interinsurance exchange, if the annual premium charged for the coverage or the annual cost to the insurer for providing that coverage does not exceed one dollar ($1) per insured.