BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 1063
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          Date of Hearing:   May 4, 2011

                           ASSEMBLY COMMITTEE ON INSURANCE
                                 Jose Solorio, Chair
                AB 1063 (Bradford) - As Introduced:  February 18, 2011
                            And As Proposed To Be Amended
           
          SUBJECT  :   Automobile insurance: underinsured motorist coverage

           SUMMARY  :   Expands the scope of underinsured motorist coverage 
          by repealing certain statutory limitations on the scope of 
          coverage.  Specifically,  this bill :  

          1)Redefines "underinsured motor vehicle" as an insured vehicle 
            which has liability limits, or coverage available, less than 
            the damages suffered by the injured person or persons.

          2)Repeals the statutory setoff that allows an insurer to reduce 
            its maximum liability pursuant to underinsured motorist 
            coverage by the amount paid by a person or organization liable 
            to the injured party, and instead specifies that policy limits 
            for underinsured motorist coverage shall not be reduced by any 
            amounts paid, whether in the case of the policyholder or a 
            non-policyholder passenger.

          3)Repeals the statutory "setoff" language that entitled the 
            underinsured motorist insurer to obtain reimbursement or apply 
            a reduction of the amount it owes to the extent of the amount 
            received by the insured from the owner or operator of the 
            underinsured vehicle.

          4)Adds a provision to clarify that the bill does not require an 
            underinsured motorist coverage to apply until after other 
            recoveries have been paid.

          5)Redrafts the statutory prohibitions on "stacking" policy 
            limits from two or more vehicles that are owned by the injured 
            party and either insured in the same policy, or by separate 
            policies.

           EXISTING LAW  :

          1)Defines "underinsured motor vehicle" as a vehicle that is 
            insured for an amount that is less than the underinsured 
            motorist limits carried on the vehicle of the injured party.








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          2)Provides that the maximum liability of the insurer providing 
            underinsured motorist coverage shall not exceed the policy 
            limits less the amount paid to the insured by any person or 
            organization that is legally liable for the injury.

          3)Provides that the insurer paying a claim pursuant to 
            underinsured motorist coverage is entitled to a setoff of 
            amounts received from or on behalf of the operator of the 
            underinsured motor vehicle.

          4)Provides that uninsured motorist coverage and underinsured 
            motorist coverage must be sold as one bundled coverage.

          5)Provides that uninsured and underinsured motorist coverage 
            must be sold in the same amount of coverage as the liability 
            limits to any purchaser of an automobile insurance policy, 
            unless the policyholder waives, in writing, the right to buy 
            this coverage.

           FISCAL EFFECT  :   Undetermined.

           COMMENTS  :   

           1)Purpose  .  According to the author, consumers are not getting 
            what they pay for under existing law.  Specifically, the 
            author points out that the offset provision of existing law 
            denies the consumer the full benefit of the policy limit as 
            stated on the consumer's policy.  The author notes that half 
            of the states have a rule such as proposed by the bill.  The 
            author and proponents, the Consumer Attorneys of California 
            (CAOC), argue that a person's right to recover under his or 
            her underinsured motorist coverage should not depend on the 
            "luck of the draw" of who it is that happens to hit them.

           2)How does current law work  ?  There are two aspects of current 
            law that operate to limit an underinsured motorist claim in a 
            manner that results in no recovery, or a lower recovery, than 
            might appear to be available by merely looking at coverage 
            limits as stated on a declarations page of an automobile 
            insurance policy.  First, the definition of an "underinsured 
            motor vehicle" is a vehicle that is insured, but the liability 
            policy limits on the vehicle are less than the underinsured 
            motorist policy limits of the injured party.  Thus, if the two 
            policy limits are the same, the at-fault vehicle is not 








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            defined as an underinsured motor vehicle, and therefore 
            underinsured motorist coverage is not in play.  Whether the 
            two vehicles' relevant coverage are both $15,000, or $100,000, 
            or any other number that is the same, there is no underinsured 
            motorist claim at all.

          Second, in a related but legally distinct provision of law, the 
            insurer that is providing first-party underinsured motorist 
            insurance is entitled to a setoff of amounts its insured has 
            received from or on behalf of an underinsured motorist.  For 
            example, if that at-fault driver has a minimum limits policy 
            providing $15,000 of bodily injury liability, and the injured 
            party has underinsured motorist coverage of $100,000, the 
            injured party has a claim against his or her own insurer 
            pursuant to the underinsured motorist coverage for any losses 
            above $15,000, but subject to the limits.  However, the stated 
            limits are subject to the setoff.  Thus, if the injured party 
            had damages of $105,000, he or she would recover the first 
            $15,000 from the at fault party's insurer, then $85,000 from 
            his or her own insurer, but be out of pocket for $5,000 
            because his or her own insurer is entitled to a setoff of 
            $15,000 that was actually received against the stated policy 
            limit of $100,000.

           3)Intended changes  .  According to the author and CAOC, the 
            purpose of the bill is to repeal these two rules.  The 
            intended effect of changing the first rule would be to allow, 
            for example, a driver with between $15,000 and $30,000 of 
            damages to recover the first $15,000 from the at fault driver, 
            and then the remainder of their damages from their own $15,000 
            limit underinsured motorist coverage.  The intended effect of 
            changing the second rule would be to allow the injured party 
            to recover their full damages up to the stated policy limit 
            without reference to the setoff of amounts received from or on 
            behalf of the at-fault driver.

           4)Stacking  .  The bill, as proposed to be amended, calls for a 
            third change to existing law, related to stacking of 
            coverages.  Current law clearly prohibits stacking of limits 
            from multiple vehicles in the same policy.  The bill redrafts 
            this provision, and adds a provision than prohibits stacking 
            coverage from multiple policies.  Stacking works like this:  
            Assume a policyholder has two vehicles, each with $100,000 
            limits on underinsured motorist coverage.  This policyholder 
            is driving one of the vehicles, and hit by an underinsured 








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            motor vehicle with $15,000 policy limits.  The damages are 
            substantial - over $200,000.  The injured party would recover 
            the first $15,000 from the at fault party's liability insurer. 
             Then, the injured party would recover $100,000 from the 
            underinsured motorist coverage on the vehicle he or she was 
            driving.  Without the anti-stacking statute, the injured party 
            would also be able to recover up to the policy limits of the 
            underinsured motorist coverage on vehicle number 2, which is 
            covered by the same policy, and which has had a premium 
            charged for that coverage.

          The proposed amendments related to stacking are designed to make 
            sure that stacking does not occur, but that the anti-stacking 
            provisions do not impede the other changes proposed by the 
            bill.  The drafting of this language has been fluid, with 
            changes to the working draft as late as the Friday prior to 
            the hearing.  Staff believe that the description of the effect 
            of the language, as described above, is correct.  But these 
            provisions are complex, as evidenced by the multiple efforts 
            late last week to get it right.

           5)Cost implications of the bill (without stacking)  .  There has 
            been substantial debate and confusion about the cost 
            implications of the bill.  Soon after the bill was introduced, 
            the Department of Insurance (DOI) provided a rough estimate 
            that, on average, the bill would result in a 10% increase in 
            underinsured motorist insurance costs.  Some insurers have 
            argued that this is a low estimate, and that the variation 
            among insurers can be significant.  For example, it has been 
            argued, which substantial logic, that an insurer with mostly 
            minimum limits policies would face much steeper cost 
            increases, because they would experience increases from $0 
            payouts for this coverage to up to $15,000 payouts, whereas an 
            insurer with mostly high limit policyholders would experience 
            a smaller percentage increase (for example, from $85,000 to up 
            to $100,000.)  The Committee has requested the DOI to look 
            into this distinction, but the DOI has only very general data 
            to be able to respond.  Using rough data, and broad 
            assumptions, DOI remains comfortable with the rough 10% 
            figure, even as it acknowledges the probability of variation 
            among companies.  DOI also notes that for "good drivers" 
            underinsured motorist coverage costs $25 or $35, and even a 
            50% increase is minor for a valuable coverage.

          There have been other cost estimates provided to the Committee.  








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            Consumer Watchdog, which supports the bill, looked at one 
            State Farm rate filing and concluded that the increased losses 
            under the bill would be minor based on State Farm's reported 
            losses.  State Farm disputes Watchdog's conclusions because it 
            asserts that its analysis failed to take into consideration 
            the correct developed loss data.  State Farm concludes, 
            similarly to other insurers, that the cost of underinsured 
            motorist coverage would approximately double under the bill.  
            ACIC presents data that it interprets as suggesting a 9+% 
            increase in overall automobile liability premiums.  
            Ultimately, there is very little certainty about how much 
            costs will increase, and which policyholders will experience 
            greater or lesser impacts.

          The Personal Insurance Federation of California (PIFC) argues 
            that the increased costs would be primarily for increasing 
            contingency fees.  PIFC further argues that the original 
            intent of the underinsured motorist statute was to allow 
            consumers to ensure that they are not at risk of out-of-pocket 
            losses due to drivers who buy low limit policies, and that the 
            law has worked well for over 25 years.

           6)Proposition 103 issues  .  Regardless of the magnitude of 
            increase, it is clear that the bill would result in cost 
            increases for insurers as the expanded coverage leads to 
            higher compensation for policyholders.  Pursuant to the rate 
            regulation laws as adopted by initiative statute, and 
            implemented by regulations adopted by the IC, in order for an 
            insurer to build these new costs into its rates, it would have 
            to make a rate change filing with the DOI.  Under the 
            regulations, this would have to be a complete rate filing, 
            placing all rating issues before the IC.  Since there are 
            several hundred insurers that sell automobile insurance, it is 
            possible that the DOI would be inundated with filings, and it 
            would be virtually impossible to process them all in a timely 
            fashion, even if the DOI looked only at the underinsured 
            motorist component (which is not what the regulations 
            prescribe.)  Thus, absent a delayed implementation date, or 
            streamlined rate review procedure (which would trigger a 2/3 
            vote requirement, and might not pass the "further the 
            purposes" test for amendments to Proposition 103), adoption of 
            the coverage changes required by the bill would create a 
            situation where insurers are mandated by law to provide 
            coverage when they have not had their rate filings approved.  
            CAOC believes that the insurers' objections related to 








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            Proposition 103 are simply an effort to use this bill to make 
            exceptions to a procedure that they do not support.  In this 
            regard, CAOC points to provisions of the Proposition 103 
            regulations that allow variances for changes in the law.  The 
            insurers are not convinced that these procedures would operate 
            in a reasonable or effective manner.

          Insurers further believe that the Proposition 103 procedure, as 
            implemented by the IC's regulations, would place them "between 
            a rock and a hard place" by mandating a filing to recoup 
            increased costs, but providing the IC the opportunity to 
            reduce their rates overall.  Insurers argue that they should 
            not be required to "bet the financial future" of the company 
            in order to fairly recover newly legislated costs.

           7)Will consumers decide to drop coverage  ?  Since it is likely 
            that the largest cost impact will be in lower limit policies, 
            and these policies tend to be purchased by lower income 
            consumers who are more price sensitive than high limits 
            policyholders, is there a risk that the increased costs 
            associated with the bill will lead to fewer people buying the 
            coverage at all?  It seems probable that some consumers will 
            be priced out of this optional coverage, but it is impossible 
            to determine the extent of this problem, particularly when 
            precise rate impacts have proven so elusive to obtain.

           8)Are consumers paying for coverage they do not receive  ?  It has 
            been argued that policyholders who have minimum limits 
            policies are paying for coverage they can never access.  
            Because the uninsured and underinsured coverages are by 
            statute bundled, it appears as if a 15/30 policy includes 
            underinsured motorist coverage that will always be subject to 
            the setoff.  However, it is also the case that the Proposition 
            103 process prevents an insurer from obtaining a rate where 
            there are no losses.  Thus, it is a quirk in the law that 
            makes it appear that a "paid for" coverage can never result in 
            a recovery.  As long as the IC does his job, there is no 
            charge for the underinsured motorist portion of the bundled 
            coverage in a minimum limits policy, and people are not paying 
            for coverage they are not receiving.

           


          REGISTERED SUPPORT / OPPOSITION  :   








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           Support 
           
          Congress of California Seniors
          Consumer Attorneys of California
          Consumer Federation of California
          Consumer Watchdog

           Opposition 
           
          Association of California Insurance Companies
          California Chamber of Commerce
          Civil Justice Association of California
          Liberty Mutual Insurance Company
          Personal Insurance Association of California
          State Farm Insurance Company

           
          Analysis Prepared by  :    Mark Rakich / INS. / (916) 319-2086