BILL ANALYSIS Ó AB 1063 Page 1 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. AB 1063 Page 2 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 AB 1063 Page 3 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 AB 1063 Page 4 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. AB 1063 Page 5 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 AB 1063 Page 6 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 : AB 1063 Page 7 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