BILL ANALYSIS                                                                                                                                                                                                    



                                                                  AB 1597
                                                                  Page  1

          Date of Hearing:   April 7, 2010

                           ASSEMBLY COMMITTEE ON INSURANCE
                                 Jose Solorio, Chair
                     AB 1597 (Jones) - As Amended:  March 8, 2010
           
          SUBJECT  :   Automobile insurance: assigned risk plans and  
          low-cost automobile insurance.

           SUMMARY  :  Extends the sunset date of the low-cost automobile  
          insurance program by five years, and makes procedural and  
          clarifying changes to this program.  Specifically,  this bill  :

          1)Extends the sunset date of the low-cost automobile insurance  
            program until January 1, 2016.  

          2)Eliminates the requirement to publish a notice of a public  
            hearing in a newspaper located in the City of San Francisco  
            and a newspaper located in the City of Los Angeles whenever  
            the Insurance Commissioner (IC) proposes to amend the  
            "assigned risk plan."  The assigned risk plan is the plan  
            adopted by the IC that requires all automobile insurers to  
            accept an equitable share of applicants who are unable to  
            purchase insurance through the normal channels.

          3)Requires the manager of the assigned risk plan to ensure  
            access at no cost to the user as part of the electronic  
            effective date procedure, rather than requiring the manager to  
            maintain a toll-free number as part of this procedure.  

          4)Requires the electronic effective date procedure to include a  
            procedure to prevent fraudulent applications, rather than  
            requiring the reference number or a verification code on the  
            application.

          5)Provides that in order for the insurance coverage to be  
            effective on the day the application is transmitted through  
            the plan's electronic effective date procedure, the  
            application forms and deposit shall be submitted to the plan  
            manager no later than two days after the forms are completed.   
            The mailing date would be established in accordance with the  
            procedure established by the plan.  

          6)Provides that if the application is made without using the  
            electronic effective date procedure, the insurance coverage  








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            shall be effective in accordance with an alternative procedure  
            established by the plan. 

          7)Requires the plan to establish a procedure for the maintenance  
            of appropriate records of risks in order to provide evidence  
            of the requested effective date of insurance coverage, rather  
            than specifying in statute the types of evidence required for  
            the effective date.  

          8)Requires the application form to contain a notice advising the  
            applicant that coverage is not effective unless the agent or  
            broker has transmitted the application within two days of its  
            completion, and that failure to do so can delay the effective  
            date of the insurance coverage. 

          9)Eliminates the requirement that the IC's outreach plan on  
            low-cost automobile insurance contain the most recent report  
            to the Legislature on the status of the low-cost automobile  
            insurance program from the California Automobile Assigned Risk  
            Plan.  

           EXISTING LAW  :

          1)Authorizes the Insurance Commissioner to approve amendments to  
            the assigned risk plan after holding a public hearing to  
            determine whether the amendments are in keeping with the  
            intent of this law.  

          2)Requires the notice of the public hearing to consider  
            amendments to the assigned risk plan to be published at least  
            60 days before the hearing in two newspapers of general  
            circulation, including one in the City of San Francisco and  
            another in the City of Los Angeles. 

          3)Provides that an applicant for insurance under the assigned  
            risk plan may request a future effective date for coverage  
            which is no more than 15 days from the application date. 

          4)Requires the manager of the assigned risk plan to maintain a  
            toll-free telephone number as part of the electronic effective  
            date procedure. 

          5)Provides that insurance coverage for vehicles becomes  
            effective when certain requirements are met including: (a) the  
            producer of record inserts the reference number or other  








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            required verification code on the application, and (b) the  
            application forms and the required deposit are mailed to the  
            plan manager.  

          6)Requires the producer of record to maintain appropriate  
            records of all insured risks in order to provide evidence of  
            the requested effective date of coverage.  This evidence shall  
            consist of the completed applications, eligibility  
            certification forms, a mail log, a check copy, a check  
            register, a receipt, and other records created  
            contemporaneously with the application. 

          7)Requires the application form to contain a notice advising the  
            applicant that coverage is not effective unless the agent or  
            broker has mailed the application within two days of its  
            completion, and that failure to do so can delay the effective  
            date of the insurance coverage.  

          8)Sunsets the low-cost automobile insurance program on January  
            1, 2011.  

          9)Requires the Insurance Commissioner to annually propose a plan  
            to the Assembly and Senate Committees on Insurance that  
            specifies the methods of informing eligible households about  
            the availability of the low-cost automobile insurance.  This  
            plan must include, among other requirements, the most recent  
            annual report to the Legislature on the status of the low-cost  
            automobile insurance program from the California Automobile  
            Assigned Risk Plan. 

           FISCAL EFFECT  :   Undetermined.

           COMMENTS  :

           1)Purpose of bill  .  The primary purpose of this bill is to  
            extend the sunset date of the Low-Cost Automobile Insurance  
            Program until January 1, 2016, in order to ensure that  
            low-income, good drivers will continue to have access to  
            affordable auto insurance.

           2)Background  .  California law requires motorists to purchase  
            auto insurance or to be otherwise financially responsible.   
            Motorists benefit when all drivers carry insurance.  The  
            low-cost automobile insurance program was created to make  
            available low-cost liability insurance to "good drivers" who  








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            demonstrate financial need and have reached age 19.  A good  
            driver is defined as having:
                     no more than one at-fault property damage accident  
                 or no more than one point for a moving violation (cannot  
                 have one of each);
                     no at-fault auto accident involving bodily injury or  
                 death within the past three years; and 
                     no felony or misdemeanor conviction for a violation  
                 of the California Vehicle Code.

            Originally created in 1999 for drivers in Los Angeles and San  
            Francisco, the program has been extended statewide since 2007  
            (SB 171 Escutia, Chapter 794 of 1999; SB 527 Speier, Chapter  
            807, Statutes of 1999; and SB 20 Escutia, Chapter 435,  
            Statutes of 2005).  Annual auto insurance premiums are set by  
            county and currently range from $161 to $368 per year.  The  
            premium rates are set by a public rate-setting process.  The  
            Department of Insurance (DOI) uses a 5-cent assessment on  
            every insured vehicle in the state toward this program's  
            consumer education and outreach campaign.

            In 2009, the program experienced a 19 percent increase in  
            demand, attributed chiefly to the economic downturn.  The  
            low-cost automobile insurance program has provided  
            approximately 50,000 policies since its inception, and had  
            11,439 policies in force during the last reporting period  
            (December 31, 2009).

            The DOI is working with the California Automobile Assigned  
            Risk Plan (CAARP) to change the online application system  
            (EASi) in order to capture better statistics about  
            Californians who approach producers as a result of advertising  
            regarding the low-cost auto insurance program but who decide  
            to purchase a standard auto policy. 

           1)Arguments in support  .  According to the author and the  
            sponsor, the DOI, this bill enables good drivers to purchase  
            insurance with lower coverage requirements than are available  
            on the open market, which often allows premiums to be lower.   
            These policies are required to be actuarially sound, to be  
            sold by licensed private insurance agents, and to be  
            underwritten by private insurance companies.  The proponents  
            also state that as a result of the consumer education and  
            outreach efforts made on behalf of the low-cost auto program,  
            consumers are informed about higher levels of coverage  








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            available from regular policies that may cost the same, less,  
            or only slightly more.  In some instances the consumer chooses  
            the standard policy with the higher coverage benefits.  These  
            numbers are not now reflected in the "success" total of  
            consumers who benefit from this program.  However, this  
            outcome should be counted as a success since the advertising  
            directly led the consumers to becoming insured.

           2)What counts as success?   The bill amends the section of law  
            that identifies the indicators of success for the low-cost  
            automobile insurance program (Section 11629.85 of the  
            Insurance Code).  In light of the new information recently  
            provided to the Insurance Committee that a significant number  
            of meetings with insurance agents generated by this program's  
            advertising result in the purchase of standard auto policies,  
            it is recommended that the bill be amended to also identify  
            those instances as an indicator of success.  Section 4 of the  
            bill (at page 8, after line 8) could be amended to include:   
            "(4) the program's outreach efforts lead uninsured motorists  
            to contact a producer, and the driver obtains any auto  
            insurance policy that complies with California law."

           3)Assure that proof of financial responsibility law continues in  
            effect in counties of Los Angeles and San Francisco.   In 1996,  
            AB 650 (Speier), Chapter 1126, Statutes of 1996, enacted the  
            requirement that the Department of Motor Vehicles require  
            individuals who apply to renew their vehicles to submit a  
            proof of financial responsibility (usually in the form of auto  
            insurance).  That law also requires every driver to provide  
            evidence of financial responsibility upon the demand of a  
            peace officer.  In 1999, SB 171 (Escutia), Chapter 794,  
            Statutes of 1999, established a 4-year pilot project to  
            authorize the sale of low-cost auto insurance in the County of  
            Los Angeles.  Also in 1999, SB 527 (Speier), Chapter 807,  
            Statutes of 1999, established a 4-year pilot project to  
            authorize the sale of low-cost auto insurance in the City and  
            County of San Francisco.  Both of these laws contained a  
            provision providing that when the authority to obtain the low  
            cost auto insurance expired (in 1-1-2004), the financial  
            responsibility requirements, noted above, would also expire.   
            The linking of authorizing the sale of low-cost auto insurance  
            with the application of the financial responsibility laws has  
            continued until the present day (with other authorizing laws).  
             The most recent law that extended the sunset date on the  
            low-cost auto insurance is SB 20 (Escutia), Chapter 435,  








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            Statutes of 2005, which extends the authority of the low-cost  
            auto insurance program until January 1, 2011.

          Unless the Legislature takes action in this bill or another  
            bill, the proof of insurance requirement in the counties of  
            Los Angeles and San Francisco will sunset.  That result would  
            be inconsistent with current state policy, especially if the  
            low-cost auto insurance program is extended.  Thus, it is  
            recommended that this bill amend Sections 16020.1 and 16020.2  
            of the Vehicle Code to extend the sunset date to January 1,  
            2016 on the proof of insurance requirement for the two  
            counties. 

           4)Technical correction recommended  .  The bill proposes to  
            require that the application forms and the required deposit be  
             submitted  , instead of mailed, to the plan manager no later  
            than two days after the application forms are completed.  The  
            bill, however, still requires the  mailing date  to be  
            established in accordance with the procedure established by  
            the plan.  Thus, the bill is recommended to be amended to  
            require that the  submission date  of the application forms be  
            established in accordance with the procedure established by  
            the plan.  This change is proposed for page 4, line 37, of the  
            bill.

           REGISTERED SUPPORT / OPPOSITION  :   

           Support 
           
          California Department of Insurance (Sponsor)
          California Communities United Institute
          Consumer Federation of California
          Consumer Watchdog

           Opposition 
           
          None received.
           
          Analysis Prepared by  :    Manny Hernandez / INS. / (916) 319-2086