BILL ANALYSIS
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|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:
CONTINUED
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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rejected, surrendered, or rescinded, unless the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
itself.
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.
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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
following:
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
bill":
"AB 2404 ? permits insurers to adopt any short-rate
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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
include:
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.
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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.
Unworkable
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
information.
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
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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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