BILL ANALYSIS Ó
SENATE INSURANCE COMMITTEE
Senator Ronald Calderon, Chair
AB 125 (Insurance Committee) Hearing Date: April 13, 2011
As Amended: March 7, 2011
Fiscal: No
Urgency: Yes
SUMMARY Clarifies that a deductible required by an automobile
insurance policy may be covered by guaranteed automobile
protection (GAP) insurance & related contracts.
DIGEST
Existing law
1. Defines "guaranteed automobile protections insurance" to
be insurance that covers a vehicle purchaser or lessee for
the difference between the actual cash value of the
insured's vehicle at the time of a total loss or
unrecovered theft and the amount owed on the vehicle.
2. Includes within this definition an allowance for up to
$5,000 above the amount necessary to cover the gap for
purchase of another vehicle.
3. Provides for "waiver" clauses in vehicle conditional
sales contracts or lease agreements allowing the seller,
lender, or lessor to waive the difference between the
actual cash value of a vehicle at the time of a total loss
or unrecovered theft and the amount owed on the vehicle.
This bill
1. Changes the definition of "GAP" so that the deductible
amount provided by a standard property damage insurance
policy may also be covered by GAP insurance.
2. Provides that a "waiver" clause in a vehicle conditional
sales contract or lease agreement, which is similar to GAP
insurance, but does not constitute insurance, and which can
be sold by people who are not licensed insurance agents,
may include the deductible amount provided by a standard
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125 (Insurance Committee), Page 2
property damage insurance policy.
3. Replaces the word "automobile" with the word "asset" in
the definition of these contracts so that other vehicles,
such as motorcycles, motorhomes, boats, and off-road
vehicles, are also eligible to be covered by GAP
protection.
4. Authorizes waiver clauses to also include a discount or
incentive, above the amount required to satisfy the
obligation on the loan, lease or sales contract, for the
vehicle owner to purchase a replacement vehicle using the
same seller, lender or lessor.
5. Provides that the bill is an urgency measure, to take
effect immediately.
COMMENTS
1. Purpose of the bill: AB 125 was introduced by the
Assembly Insurance Committee to fix an error in last year's
AB 2782 (Committee on Insurance) omnibus bill and ensure
that California law does not unreasonably frustrate the
legitimate expectations of California consumers with
respect to what "Gap" insurance extends to.
2. Background and Discussion: During the prior session, the
Assembly Insurance Committee undertook to recognize in
statute, and acknowledge the differences which exist
between true insurance products, and waiver provisions in
loans, leases and sales contracts which have long been
marketed as "GAP" products. In doing so, the committee's AB
2782 inadvertently eliminated coverage for the deductible
amounts commonly provided for in automobile insurance
policies. This oversight renders most subject contracts in
the California market non-compliant . It also puts at risk
consumers' reasonable expectations about the scope of the
protection they are purchasing since these expectations
cannot be met under the definitions enacted by AB 2782.
Summary of Arguments in Support:
3. GAP insurance and related waiver products provide a
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125 (Insurance Committee), Page 3
sound consumer protection service because it is common with
respect to vehicle purchases that loan or lease amounts
exceed the "actual cash value" of the vehicle in the early
years of a loan or lease. Until these products came into
the market, consumers often found themselves owing a lender
more than the correct insurance settlement would provide.
The result for consumers was either out-of-pocket losses to
make up the difference, or damage to the consumer's credit
rating due to defaulting on the remainder of the loan or
lease balance.
4. The Consumer Credit Industry Association (CCIA) states
"We believe that a misinterpretation of California AB 2782,
which passed in 2010, has led to the unintended prohibition
against lenders ability to waive the loan or lease amount
including insurance deductibles. Prior to passage of AB
2782, a GAP waiver product could and did provide this
deductible coverage. Consumers are harmed by the inability
of GAP waiver providers to continue to provide this
benefit. The failure of the availability of this benefit
would harm consumers by the inability of GAP waiver to
continue to provide this benefit."
5. The American Financial Services Association (AFSA)
states "AB 125 will ensure that GAP continues to cover the
deductible amount in the state - thus ruling out any
potential interpretations that may be detrimental to
consumers."
6. California Financial Services Association (CFSA),
indicates it strongly supports AB 125 related to Guaranteed
Automobile Protection (GAP) insurance because it "would
rectify a drafting error from last year's AB 2782" which
"inadvertently eliminated coverage for the deductible
amounts commonly provided for in automobile insurance
policies."
7. The Guaranteed Asset Protection Alliance (GAPA) states
"A year ago GAPA was pleased to see the passage of AB 2782
which made clear that GAP waiver is not an insurance
product. However, the law as passed resulted in the
unforeseen consequence of GAP providers being unable to
waive the amount attributable to a primary carrier's
deductible. This coverage is typically provided to
consumers as part of a GAP waiver and its removal would
harm California consumers. Even though these consumers
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125 (Insurance Committee), Page 4
purchased a waiver, they would be forced to pay the portion
of the debt attributable to their deductible. AB 125 will
repair this unintended consequence and will return a
valuable protection to California Consumers".
Summary of Arguments in Opposition:
8. None Received
Amendments: None Proposed
Prior and Related Legislation:
a. AB 2782 (Committee on Insurance) Chapter 400,
Statutes of 2010
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
American Financial Services Association (AFSA)
California Financial Services Association (CFSA)
Consumer Credit Industry Association (CCIA)
Guaranteed Asset Protection Alliance (GAPA)
OwnerGUARD
Opposition
None
Consultant: Ken Cooley (916) 651-4110