BILL NUMBER: AB 1401 CHAPTERED 10/08/07 CHAPTER 335 FILED WITH SECRETARY OF STATE OCTOBER 8, 2007 APPROVED BY GOVERNOR OCTOBER 8, 2007 PASSED THE SENATE SEPTEMBER 5, 2007 PASSED THE ASSEMBLY SEPTEMBER 5, 2007 AMENDED IN SENATE JULY 16, 2007 AMENDED IN SENATE JUNE 27, 2007 AMENDED IN SENATE JUNE 21, 2007 AMENDED IN ASSEMBLY APRIL 17, 2007 INTRODUCED BY Assembly Member Aghazarian FEBRUARY 23, 2007 An act to amend Sections 1872.8, 1872.81, and 1874.8 of, to add Sections 1872.86 and 1872.87 to, and to repeal Section 1872.7 of, the Insurance Code, relating to insurance fraud. LEGISLATIVE COUNSEL'S DIGEST AB 1401, Aghazarian. Insurance fraud: assessments. Existing law provides that the costs of administration and operation of the Fraud Division are to be borne by all of the insurers admitted to transact insurance in this state. The assessment is equal among all insurers, in an amount adequate to operate the division, not to exceed $1,300 each fiscal year. This bill would repeal and recast this provision to require each insurer doing business in this state to pay an annual special purpose assessment to be determined by the commissioner, not to exceed $5,100, to be used exclusively for the support of the Fraud Division. All moneys received by the commissioner from insurers pursuant to this special purpose assessment would be transmitted to the Treasurer to be deposited in the State Treasury to the credit of the Insurance Fund. This bill would also require the department to report annually on the department's Internet Web site specified information, and make other conforming changes. THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS: SECTION 1. Section 1872.7 of the Insurance Code is repealed. SEC. 2. Section 1872.8 of the Insurance Code is amended to read: 1872.8. (a) Each insurer doing business in this state shall pay an annual special purpose assessment to be determined by the commissioner, but not to exceed one dollar ($1) annually for each vehicle insured under an insurance policy it issues in this state, in order to fund increased investigation and prosecution of fraudulent automobile insurance claims and economic automobile theft. Thirty-four percent of those funds received from ninety-five cents ($0.95) of the special purpose assessment per insured vehicle shall be distributed to the Fraud Division for enhanced investigative efforts, 15 percent of that ninety-five cents ($0.95) shall be deposited in the Motor Vehicle Account for appropriation to the Department of the California Highway Patrol for enhanced prevention and investigative efforts to deter economic automobile theft, and 51 percent of the funds shall be distributed to district attorneys for purposes of investigation and prosecution of automobile insurance fraud cases, including fraud involving economic automobile theft. (b) (1) The commissioner shall award funds to district attorneys according to population. The commissioner may alter this distribution formula as necessary to achieve the most effective distribution of funds. Each local district attorney desiring a portion of those funds shall submit to the commissioner an application detailing the proposed use of any moneys that may be provided. The application shall include a detailed accounting of assessment funds received and expended in prior years, including at a minimum, all of the following: (A) The amount of funds received and expended. (B) The uses to which those funds were put, including payment of salaries and expenses, purchase of equipment and supplies, and other expenditures by type. (C) Results achieved as a consequence of expenditures made, including the number of investigations, arrests, complaints filed, convictions, and the amounts originally claimed in cases prosecuted compared to payments actually made in those cases. (D) Other relevant information as the commissioner may reasonably require. Any district attorney who fails to submit an application by the deadline set by the commissioner shall be subject to loss of distribution of the moneys. The commissioner may consider recommendations and advice of the Fraud Division and the Commissioner of the California Highway Patrol in allocating moneys to local district attorneys. Any district attorney that receives funds shall submit an annual report to the commissioner, which may be made public, as to the success of the program administered. The report shall provide information and statistics on the number of active investigations, arrests, indictments, and convictions. Both the application for moneys and the distribution of moneys shall be public documents. The commissioner shall conduct a fiscal audit of the programs administered under this subdivision at least once every three years. The cost of a fiscal audit shall be shared equally between the department and the district attorney. Information submitted to the commissioner pursuant to this section concerning criminal investigations, whether active or inactive, shall be confidential. If the commissioner determines that a district attorney is unable or unwilling to investigate and prosecute automobile insurance fraud claims as provided by this subdivision or Section 1874.8, the commissioner may discontinue the distribution of funds allocated for that county and may redistribute those funds to other eligible district attorneys. (2) The Department of the California Highway Patrol shall submit to the commissioner, for informational purposes only, a report detailing the department's proposed use of funds under this section and an annual report in the same format as required of district attorneys under paragraph (1). (c) The remaining five cents ($0.05) shall be spent for enhanced automobile insurance fraud investigation by the Fraud Division. (d) Except for funds to be deposited in the Motor Vehicle Account for allocation to the Department of the California Highway Patrol for purposes of the Motor Vehicle Theft Prevention Act, (Chapter 5 (commencing with Section 10900) of Division 4 of the Vehicle Code), the funds received under this section shall be deposited in the Insurance Fund and be expended and distributed when appropriated by the Legislature. (e) In the course of its investigations, the Fraud Division 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 suspected of actively engaging in fraudulent activity along with all relevant supporting evidence. (f) As used in this section "economic automobile theft" means automobile theft perpetrated for financial gain, including, but not limited to, the following: (1) Theft of a motor vehicle for financial gain. (2) Reporting that a motor vehicle has been stolen for the purpose of filing a false insurance claim. (3) Engaging in any act prohibited by Chapter 3.5 (commencing with Section 10801) of Division 4 of the Vehicle Code. (4) Switching of vehicle identification numbers to obtain title to a stolen motor vehicle. SEC. 3. Section 1872.81 of the Insurance Code is amended to read: 1872.81. In addition to the special purpose assessment imposed pursuant to Section 1872.8, each insurer doing business in this state shall pay to the commissioner an annual special purpose assessment of thirty cents ($0.30) for each vehicle insured under an insurance policy it issues in this state, for expenditure as follows: (a) An amount equivalent to twenty cents ($0.20) of the special purpose assessment imposed per insured vehicle by this section shall be used for the purpose of paying for consumer service functions of the department that are related to automobile insurance. The revenues under this subdivision shall be used to improve service to consumers through the rating and underwriting services bureau, the claims services bureau, the investigations bureau, or any successor bureaus of the department that may assume the consumer service functions of these bureaus, and legal services in support of these bureaus. The department shall develop a plan for the use of the revenues available under this subdivision for the purposes authorized, and shall submit the plan to the Assembly and Senate Committees on Insurance. (b) An amount equivalent to ten cents ($0.10) of the special purpose assessment imposed per insured vehicle by this section shall be used for the purpose of improving consumer functions of the department related to automobile insurance. Revenues available under this subdivision shall be used to improve consumer functions through one or more of the following: (1) The rating and underwriting services bureau. (2) The claims services bureau. (3) The investigations bureau. (4) Any successor bureau of the department that may assume automobile insurance consumer functions of these bureaus, and legal services in support of these bureaus. These revenues may also be used for improving the ability of the department to respond to consumer complaints and information requests through the department's toll-free telephone number, and for improving the ability of the department to offer information about automobile insurance rates to the public. The department shall develop a plan for the use of the revenues available under this subdivision for the purpose authorized, and shall submit the plan to the Assembly and Senate Committees on Insurance. (c) Notwithstanding subdivision (b), the Department of Insurance, after January 1, 2006, and the Department of Motor Vehicles, after that date, may propose to the budget committees of the Legislature a proposed use of up to five cents ($0.05) of the 10-cent special purpose assessment levied pursuant to subdivision (b) related to informing consumers about the existence of any low cost automobile insurance program authorized in law pursuant to Section 11629.7 or other statutes that also establish a program of the type identified in Section 11629.7. No funds for this purpose may be expended without prior budget approval. The total amount of funds authorized to both departments in total, or to one department in total, for this purpose shall not exceed five cents ($0.05). The departments shall explain, with as much specificity as is reasonably possible, the objectives for the use of the funds and quantitative criteria by which the Legislature may evaluate the effectiveness of the department's use of funds. (d) At least five cents ($0.05) of the 10-cent special purpose assessment shall be directed to the purpose set forth in subdivision (a) until January 1, 2009, and to the degree that funding for low cost auto insurance is not fully appropriated up to five cents ($0.05), the difference thereof shall be additionally allocated to purposes set forth in subdivision (a). (e) This section shall remain in effect only until January 1, 2010, and as of that date is repealed, unless a later enacted statute, that is enacted before January 1, 2010, deletes or extends that date. SEC. 4. Section 1872.86 is added to the Insurance Code, to read: 1872.86. (a) Each insurer doing business in this state shall pay an annual special purpose assessment to be determined by the commissioner, not to exceed five thousand one hundred dollars ($5,100), to be used exclusively for the support of the Fraud Division. All moneys received by the commissioner from insurers pursuant to this section shall be transmitted to the Treasurer to be deposited in the State Treasury to the credit of the Insurance Fund. (b) The Fraud Division shall report annually, on the department's Web site, all of the following information: (1) The number of suspected fraudulent claim referrals made to the Fraud Division pursuant to Section 1872.4, by line of insurance. (2) The number of investigations opened by the Fraud Division, by line of insurance at the local, state, and federal level. (3) The number of investigations referred by the Fraud Division for criminal prosecution, by line of insurance, at the local, state, and federal level. (4) The number of insurer fraud cases investigated by the department's Enforcement Branch. (5) The number of criminal complaints filed by prosecutors at the local, state, and federal level. (6) The number of convictions at the local, state, and federal level. (7) The total amount of court ordered restitution, and the amount collected by the courts for the victims. (8) The number of training presentations focusing on the current schemes and trends, investigative tools and techniques, and proper reporting requirements needed to increase the quality of suspected fraudulent referrals by insurance industry special investigation units. (9) The number of vacant peace officer positions, including information on the number and rate of vacancies for which an employment commitment has been made and on the number and rate of vacancies required to meet budgeted salary savings requirements. SEC. 5. Section 1872.87 is added to the Insurance Code, to read: 1872.87. (a) Each insurer required to pay special purpose assessments pursuant to Sections 1872.8, 1872.81, 1874.8, or subdivision (a) of Section 1872.86 may, over a reasonable length of time, but in no event later than the calendar year in which the assessment is paid, recoup the special purpose assessments by way of a surcharge on premiums charged for the insurance policies to which those sections apply or by including the assessments within the insurer's rates. Amounts recouped shall not be considered premiums for any purpose, including the computation of gross premium tax or agents' commission. (b) The amount of the surcharge shall be separately stated on either a billing or policy declaration sent to an insured. (c) The commissioner, in consultation with the Director of Motor Vehicles, shall report to the Governor and to the chair and vice chair of the Joint Legislative Budget Committee prior to October 1, 2008, on the feasibility and fiscal impact of transferring collection of the assessments specified in Sections 1872.8, 1872.81, and 1874.8 to the Department of Motor Vehicles to be performed in conjunction with the registration of motor vehicles. SEC. 6. Section 1874.8 of the Insurance Code is amended to read: 1874.8. (a) Each insurer doing business in this state shall pay an annual special assessment to be determined by the commissioner, but not to exceed fifty cents ($0.50) annually for each vehicle insured under an insurance policy it issues in this state, in order to fund the Fraud Division and an Organized Automobile Fraud Activity Interdiction Program. The commissioner shall award 3 to 10 grants for a coordinated program targeted at the successful prosecution and elimination of organized automobile fraud activity. The grants may only be awarded to district attorneys. (b) In determining whether to award a district attorney a grant, the commissioner shall consider factors indicating organized automobile fraud activity in the district attorney's county, including, but not limited to, the county's level of general criminal activity, population density, automobile insurance claims frequency, number of suspected fraudulent claims, and prior and current evidence of organized automobile fraud activity. Funding priority shall be given to those grant applications with the potential to have the greatest impact on organized automobile insurance fraud activity. (c) All participants of a grant referred to in subdivision (a) shall coordinate their efforts and work in conjunction with the bureau, other participating agencies, and all interested insurers in this regard. Of the funds collected pursuant to this section, 42.5 percent shall be distributed to district attorneys, 42.5 percent shall be distributed to the Fraud Division, and 15 percent shall be distributed to the Department of the California Highway Patrol. Funds distributed pursuant to this section to the Fraud Division and to the Department of the California Highway Patrol shall be used to fund bureau and Department of the California Highway Patrol investigators who shall be assigned to work solely in conjunction with district attorneys who are awarded grants. Each grantee shall be notified by the Fraud Division of the investigators assigned to work with the grantee. Nothing shall prohibit the referral of any cases developed by the Fraud Division to any appropriate prosecutorial entity. (d) A grant under this section shall be awarded on the basis of a single application for a period of three years and shall be subject where applicable to the requirements of subdivision (b) of Section 1872.8, except for the requirement that grants be awarded according to population. Continued funding of a grant shall be contingent upon a grantee's successful performance as determined by an annual review by the commissioner. Any redirection of grant funds under this section shall be made only for good cause. The Department of the California Highway Patrol shall submit to the commissioner, for informational purposes only, an annual report on its expenditure of funds under this section in the same format as is required of grantees under this section. (e) There shall be no prohibition against a joint application by two or more district attorneys for a grant award under this section. (f) The Fraud Division shall report to the Governor, the Legislature, and to the committees of the Senate and Assembly having jurisdiction over insurance on the results of the grant program established by this section, including funding distributed to the Department of the California Highway Patrol in the annual report submitted pursuant to Section 12922. (g) For purposes of this section, "organized automobile fraud activity" means two or more persons who conspire, aid and abet, or in any other manner act together, to engage in economic automobile theft as defined in subdivision (f) of Section 1872.8, or to violate any of the following provisions in relation to an automobile insurance claim: (1) Section 650 or 6152 of the Business and Professions Code. (2) Section 750 of the Insurance Code. (3) Section 549, 550, or 551 of the Penal Code. (h) This section shall remain in effect only until January 1, 2010, and as of that date is repealed, unless a later enacted statute, that is enacted before January 1, 2010, deletes or extends that date.