BILL ANALYSIS Ó
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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