BILL ANALYSIS                                                                                                                                                                                                    


          |SENATE RULES COMMITTEE            |                  AB 2404|
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                                 THIRD READING

          Bill No:  AB 2404
          Author:   Hill (D), et al
          Amended:  7/15/10 in Senate
          Vote:     21

           SENATE BANKING, FINANCE, AND INS. COMMITTEE  :  6-3, 6/30/10
          AYES:  Calderon, Correa, Kehoe, Liu, Lowenthal, Padilla
          NOES:  Cogdill, Florez, Runner
          NO VOTE RECORDED:  Cox, Price
          SENATE APPROPRIATIONS COMMITTEE  :  Senate Rule 28.8

           ASSEMBLY FLOOR  :  72-0, 5/20/10 (Consent) - See last page  
            for vote

           SUBJECT  :    Insurance

           SOURCE  :     Department of Insurance

           DIGEST  :    This bill requires insurance policies that will  
          refund premiums on other than a pro rata basis to disclose  
          that fact in writing, and authorizes the Insurance  
          Commissioner to forgo a market conduct examination of an  
          insurer up to an additional three years if certain  
          information is obtained.  

           ANALYSIS  :    

          Existing law:



                                                               AB 2404

          1. Provides that an insured person is entitled to a return  
             of his or her premium if the policy is canceled,  
             rejected, surrendered, or rescinded, unless the  
             insurance contract specifies otherwise. 

          2. Prohibits any contract for individual automobile  
             liability or homeowners' multi-peril insurance from  
             containing a provision which mandates that the premium  
             for the policy shall be fully earned upon the happening  
             of any contingency except the expiration of the policy  

          3. Provides that the Insurance Commissioner, whenever  
             he/she deems it necessary, shall examine the business  
             and affairs of an insurer, or when requested by petition  
             by 25 shareholders, policyholders, or creditors. 

          4. Requires the Insurance Commissioner to conduct an  
             examination of every insurer admitted in this state at  
             least once every five years.  In connection with this  
             examination, the Insurance Commissioner may examine or  
             investigate any person or the business of any person,  
             insofar as the examination or investigation is necessary  
             or material to the examination of the insurer.

          This bill:

          1. Requires any insurance policy which provides for a  
             refund of premium on other than on a pro rata basis,  
             including the assessment of cancellation fees, to  
             separately disclose that fact in writing, including the  
             actual fees or penalties to be applied, which may be  
             stated in the form of percentages of the premium.

          2. Requires this disclosure to be given prior to, or at the  
             same time as the application and prior to each renewal  
             to which the policy provision applies.  Disclosure is  
             not be required if the policy provision permits but does  
             not require the insurer to refund premium other than on  
             a pro rata basis, and the insurer refunds premium on a  
             pro rata basis.  The disclosure requirement shall be  
             prospective and shall apply only to policies issued,  
             amended, or renewed on or after January 1, 2012.


                                                               AB 2404

          3. Provides that when an application is made by telephone,  
             the disclosure must be mailed to the applicant or  
             insured person within three business days but would  
             permit the disclosure to be made electronically in lieu  
             of mailing if consented to by the recipient pursuant to  
             existing law.

          4. Specifies that the provisions of this bill do not apply  
             to cancellations of a financed insurance policy or when  
             the insured person stops payments to the lender. 

          5. Authorizes the Insurance Commissioner to forgo a market  
             conduct examination for a period of up to three years if  
             information from a market analysis indicates all of the  

             A.    Prior examination results showed no significant  
                negative findings.

             B.    Consumer complaint numbers for the insurer are in  
                the lowest quartile of complaints, for insurers in  
                that line of business. 

             C.    Market analysis identifies no other issues of  
                significant concern. 

           FISCAL EFFECT  :    Appropriation:  No   Fiscal Com.:  Yes    
          Local:  No

           SUPPORT  :   (Verified  6/30/10) (Unable to reverify)

          Department of Insurance (source)
          Insurance Brokers and Agents of the West 
           OPPOSITION  :    (Verified  6/30/10) (Unable to reverify)

          Association of California Insurance Companies 
          Personal Insurance Federation of California

           ARGUMENTS IN SUPPORT  :    According to the Insurance Brokers  
          and Agents of the West, which supports this "important  

            "AB 2404 ? permits insurers to adopt any short-rate  


                                                               AB 2404

            penalty provision they desire - as long as they provide  
            advance notice of that provision to the broker-agent and  
            consumer prior to policy inception.

            "Some insurers argue, in opposition to this bill, that it  
            would be impractical for them to make such disclosure in  
            advance of policy inception, given the extent to which  
            the insurance is frequently transacted over the phone or  
            in circumstances in which immediate binding is required.

            "In response, we believe the insurers' arguments actually  
            constitute a tacit admission of the need for this law.   
            It confirms the insurers do not adopt a single,  
            consistent policy; it's an implied admission that they  
            make inconsistent ad hoc decisions and do not want to  
            relinquish their ability to 'punish' consumers who want  
            to exercise the freedom of contract to find a better deal  
            in the marketplace."

           ARGUMENTS IN OPPOSITION  :    According to the Personal  
          Insurance Federation of California (PFIC):
             "[PFIC] strongly believes that the proposed changes to  
            Section 481,(c),1 would lead to increased costs,  
            inhibiting to the sales process, and is unworkable.  We  
            also feel that the Department has failed to fully  
            demonstrate, specifically, the scope and breadth of the  
            problem that this bill would correct.

          Specific objections to the bill enumerated by the PIFC  

             Increased Costs
            When an insurance company accepts a new applicant, they  
            incur administrative costs to process their application.   
            These costs are legitimate and can be recouped over the  
            life of a policy, but should be recaptured if someone  
            cancels prior to their expiration date.  Cancellation  
            fees, whether pre-set or pro rata, are the way in which  
            companies can recoup these expenses. AB 2404 would lead  
            to the expensive creation of new disclosure systems to  
            accommodate the new law. 


                                                               AB 2404

             Inhibiting to the Sales Process
            The auto and homeowners' insurance market is extremely  
            competitive in California.  One only has to watch TV or  
            listen to the radio to get a sense of this competition.   
            The marketing tools used by insurance companies are  
            driven by one thing, price.  It is our belief that  
            consumers are not purchasing insurance based on which  
            company has the lowest cancellation fee, but instead  
            purchase based on price, familiarity or because they have  
            a relationship with an agent.  
            AB 2404 proposes to change this paradigm by requiring all  
            companies to disclose their cancellation policies, "prior  
            to, or concurrent with, the application and prior to each  
            renewal."  Forcing companies to discuss cancellation fees  
            at the point of sale creates a negative environment for  
            the transaction and puts the customer in the position of  
            having to shop for a company based on something that may  
            only happen in a small number of instances - that the  
            policy might be cancelled before the term expires.

            In addition, there are a number of documents that are  
            important to one's insurance policy, for example, the  
            list of coverage exclusions, endorsements, and the  
            insured's responsibilities under the policy.  Why does  
            the Department of Insurance want to select the  
            cancellation policy to name up front instead of these?   
            Under current law, insurers provide cancellation  
            procedures when we send out the policy and other related  

           ASSEMBLY FLOOR  : 
          AYES:  Adams, Ammiano, Anderson, Arambula, Bass, Beall,  
            Bill Berryhill, Tom Berryhill, Blakeslee, Block,  
            Blumenfield, Bradford, Brownley, Buchanan, Caballero,  
            Charles Calderon, Carter, Chesbro, Conway, Cook, Coto,  
            Davis, De Leon, DeVore, Emmerson, Eng, Feuer, Fong,  
            Fuentes, Fuller, Furutani, Gaines, Galgiani, Garrick,  
            Gilmore, Hagman, Hall, Hayashi, Hernandez, Hill, Huber,  
            Huffman, Jeffries, Jones, Knight, Lieu, Logue, Bonnie  


                                                               AB 2404

            Lowenthal, Ma, Mendoza, Miller, Monning, Nestande,  
            Niello, Nielsen, Norby, V. Manuel Perez, Portantino,  
            Ruskin, Salas, Saldana, Silva, Skinner, Smyth, Solorio,  
            Audra Strickland, Swanson, Torlakson, Torres, Torrico,  
            Tran, Yamada
          NO VOTE RECORDED:  De La Torre, Evans, Fletcher, Harkey,  
            Nava, Villines, John A. Perez, Vacancy

          JJA:mw  8/4/10   Senate Floor Analyses 

                         SUPPORT/OPPOSITION:  SEE ABOVE

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