BILL ANALYSIS                                                                                                                                                                                                    Ó






                             SENATE JUDICIARY COMMITTEE
                             Senator Noreen Evans, Chair
                              2011-2012 Regular Session


          SB 713 (Calderon)
          As Amended April 28, 2011
          Hearing Date: May 10, 2011
          Fiscal: No
          Urgency: No
          TW
                    

                                        SUBJECT
                                           
                          Insurance:  Proceeds:  Disclosure

                                      DESCRIPTION  

          This bill would establish the Life Insurance Proceeds Disclosure 
          Act of 2011, which would require life insurers to provide 
          disclosures regarding death settlement payment options, 
          including retained asset accounts, to policyholders and 
          beneficiaries, as specified.  This bill would require the 
          insurer to provide to the beneficiary a supplemental contract 
          disclosing the rights of the beneficiary and obligations of the 
          insurer if the beneficiary chooses death settlement payment to 
          be placed into a retained asset account.

                                      BACKGROUND  

          A retained asset account (RAA) is an interest-bearing money 
          market checking account that is established by an insurer for 
          the beneficiary of a life insurance policy, and into which the 
          insurer deposits the policy's death benefit.  Insurers are 
          increasingly defaulting to depositing beneficiary insurance 
          settlement payments into RAAs, which are not FDIC insured.  

          Last year, the life insurance industry came under fire for 
          paying life insurance benefits to families of deceased soldiers 
          into RAAs.  These RAAs accrue interest, some of which is 
          distributed to the beneficiary, but much of the interest is 
          distributed to the insurer maintaining the account.  (Evans, 
          Fallen Soldiers' Families Denied Cash as Insurers Profit, 
          Bloomberg (Jul. 28, 2010) 
           İas of 
          Apr. 23, 2011].)

          The California Department of Insurance (CDI) participates in an 
          insurance regulator accreditation program developed by the 
          National Association of Insurance Commissioners (NAIC).  This 
          accreditation program provides uniformity among the member state 
          insurance departments as well as consumer protections.  
          Periodically, NAIC develops uniform insurance standards which 
          are included in NAIC's model laws.  

          After the media fallout regarding retained asset accounts 
          maintained by insurers, the NAIC began drafting revisions to its 
          retained asset account bulletin in order to provide for better 
          consumer protection.  In December 2010, NAIC adopted a sample 
          bulletin which provided minimum disclosures by insurers 
          regarding the use of RAAs.  This bulletin contains disclosure 
          language which the NAIC recommends to be adopted by each member 
          state.   Another measure, SB 599 (Kehoe, 2011), provides 
          disclosure language as well as disclosure procedures for 
          insurers.  This bill, which focuses on disclosure requirements, 
          is the companion to SB 599.

          This author-sponsored bill would require life insurers to 
          provide disclosures regarding death settlement payment options, 
          including retained asset accounts, to policyholders and 
          beneficiaries, as specified.  This bill would require the 
          insurer to provide to the beneficiary a supplemental contract 
          disclosing the rights of the beneficiary and obligations of the 
          insurer if the beneficiary chooses death settlement payment to 
          be placed into a retained asset account.

                                CHANGES TO EXISTING LAW
           
           Existing law  prohibits insurers from knowingly misrepresenting 
          to claimants pertinent facts or insurance policy provisions 
          relating to any insurance coverage.  (Ins. Code Sec. 
          790.03(h)(1).) 
           
          Existing law  requires an insurer to disclose to a first party 
          claimant or beneficiary that all benefits, coverage, time 
          limits, or other provisions of any insurance policy issued by 
          that insurer may apply to the claim presented by the claimant.  
          (Cal. Code Regs., tit. 10, sec. 2695.4, subd. (a).)


                                                                      



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           This bill  would enact the Life Insurance Proceeds Disclosure Act 
          of 2011, which would establish disclosure standards for payment 
          of life insurance benefits to a beneficiary by means of a 
          retained asset account if a life insurance company offers 
          consumers a retained asset account or establishes such an 
          account as an alternative to the receipt of lump-sum payment 
          made directly to the beneficiary.


           This bill  would define "insurer" to mean an insurance company 
          that delivers or issues for delivery in this state any policy of 
          individual or group life insurance.


           This bill  would define "retained asset account" to mean any 
          mechanism where the settlement of proceeds payable under a life 
          insurance policy is accomplished by the insurer, or an entity 
          acting on behalf of the insurer, by depositing the proceeds into 
          an account with check or draft writing privileges, and where 
          those proceeds are retained by the insurer, pursuant to a 
          supplemental contract not involving annuity benefits.


           This bill  would require life insurers to provide the 
          beneficiaries, at the time a claim is made, written information 
          describing the settlement options available under the policy and 
          any other option available to the beneficiary for the receipt of 
          proceeds, including retained asset accounts, and how to obtain 
          specific details relevant to those options.


           This bill  would require the life insurer, if the insurer settles 
          the life insurance benefits through a retained asset account, to 
          provide the beneficiary with a supplemental contract that 
          clearly discloses the rights of the beneficiary and the 
          obligations of the insurer under the supplemental contract.


           This bill  would require the life insurer to provide the 
          following written disclosures to the beneficiary before the 
          retained asset account is established:


             (a)       payment of the full benefit is accomplished by 
               delivery of the draft book or checkbook;

                                                                      



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             (b) one draft or check may be written to access the entire 
               amount, including interest, of the retained asset account 
               at any time;

             (c)       whether the available settlement options are 
               preserved until the entire balance is withdrawn or the 
               balance drops below the insurer's minimum balance 
               requirements;

             (d) a statement identifying the account as either a checking 
               or draft account and an explanation of how the account 
               works, including, but not limited to, any minimum check or 
               draft amount requirements;

             (e)       information about the account services provided and 
               contact information where the beneficiary may request and 
               obtain more details about those services;

             (f)       a description of any fees charged, if applicable;

             (g)       the frequency of statements showing the current 
               account balance, the interest credited, drafts or checks 
               written, and any other account activity; the insurer would 
               be required to send the beneficiary at least one statement 
               per quarter, and a statement for any month in which there 
               has been account activity other than just the crediting of 
               interest;

             (h) the minimum interest rate to be credited to the account 
               and how the actual interest rate will be determined;

             (i)       that the interest earned on the account may be 
               taxable;

             (j)       retained asset account funds held by insurance 
               companies are not guaranteed by the Federal Deposit 
               Insurance Corporation (FDIC), but are guaranteed by State 
               Guaranty Associations, and that the State Guaranty 
               Association coverage limits vary by state;

             (k) a statement that advises the beneficiary to contact the 
               National Organization of Life and Health Insurance Guaranty 
               Associations (NOLHGA) to learn more about the coverage 
               limitations applicable to his or her account, and that 
               provides the beneficiary with the current Internet website 
               address and telephone number for NOLHGA; and
                                                                      



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             (l)       a description of the insurer's policy regarding 
               retained asset accounts that become inactive, including the 
               policy with respect to inactive accounts that are at risk 
               of escheating to the state pursuant to the California 
               Unclaimed Property Law.
           This bill  would provide that an insurer that fails to conform to 
          the requirements under this bill would be in violation of 
          existing law prohibiting unfair methods of competition and 
          unfair and deceptive acts or practices.

                                        COMMENT
           
          1.  Stated need for the bill  
          
          The author writes:
          
            Under current law, there İare] no specific statutory rules on 
            retained asset accounts İRAAs].  The alternative of RAA's for 
            settlement of a life insurance policy . . . emerged in the 
            1980's.  This was a time when two factors in the U.S. economy 
            had people in a vise:  1) payment of interest by banks was 
            restricted under federal law, and yet 2) high inflation in the 
            U.S. economy was eroding the value of people's savings.  In 
            this environment, the innovation represented by RAAs offered a 
            distinct advantage relative to the bank options available to 
            consumers.

            İSB 713] İm]andates that the disclosures it sets forth be 
            provided to a beneficiary at the time of a claim under a life 
            insurance policy and before the RAA is selected or 
            established.  It imposes requirements for at least a quarterly 
            statement to the beneficiary of the status of the funds in the 
            RAA account.
          
          2.  Providing settlement payment disclosures for consumer 
            protection 

          This bill would require insurers to inform life insurance 
          policyholders and beneficiaries of death benefit settlement 
          options.  Existing law does not require insurers to make 
          policyholders and beneficiaries aware of life insurance death 
          settlement payment options.  Accordingly, insurers can pay life 
          insurance benefits into an RAA, which can accrue interest for 
          the benefit of the insurers.  RAAs are maintained by the insurer 
          and not held at banks or FDIC insurers.  
                                                                      



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          A Bloomberg article demonstrates how an RAA may benefit the 
          insurer more than the beneficiary.  (Evans, Fallen Soldiers' 
          Families Denied Cash as Insurers Profit, Bloomberg (Jul. 28, 
          2010) 
           İas of 
          Apr. 23, 2011].)  The mother of a fallen soldier was paid 
          $400,000 in death benefits, which was placed into an RAA. The 
          insurer, Prudential Financial, Inc., which provides group life 
          insurance for the Department of Veterans Affairs, sent to the 
          mother a package with information on the death benefit 
          settlement.  This package contained checks which could be drawn 
          against the "convenient interest bearing account."  The mother, 
          believing the checks could be used like normal bank account 
          checks, attempted to write two different checks against the RAA 
          at two different retailers, but these retailers did not accept 
          RAA checks for payment.  The article notes that while the mother 
          was paid one percent interest on the RAA, the insurer earned a 
          4.8 percent return on this account.  Prudential uses RAAs as the 
          default settlement payment mechanism.

          The National Association of Insurance Commissioners (NAIC) 
          recognized the lack of consumer protection regarding RAAs and 
          issued a sample bulletin in December 2010, which recommends RAA 
          disclosures to be used by life insurers.  In conjunction with 
          the NAIC recommendations, the author argues that this bill is 
          necessary "to ensure that persons whose life insurance proceeds 
          are being paid via an RAA know their rights with respect to this 
          account and . . . İreceive] ongoing notices which alert them to 
          the availability of these funds."  

          The California Department of Insurance (CDI), which has not 
          taken a formal position on this bill, notes that this bill does 
          not require life insurers to disclose the amount of interest a 
          retained asset account would accrue at the time the claim 
          information is sent to the beneficiary.  Rather, this bill only 
          would require life insurers to disclose the minimum amount of 
          interest the beneficiaries would receive on the proceeds in the 
          RAA.  This disclosure would assist the beneficiary in deciding 
          whether the proceeds in the RAA were accruing interest at a rate 
          satisfactory to the beneficiary or whether another 
          interest-bearing account mechanism would be more beneficial.  
          However, the beneficiary, at the time he or she is deciding 
          whether or not to utilize the retained asset account option, 
          also should have information as to the actual amount of interest 
                                                                      



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          the retained asset account would accrue.  For this reason, the 
          committee may wish to consider amending this bill to require the 
          insurer to disclose this information.   CDI states it would be 
          able to support this bill if it was so amended.

             Suggested amendment  :

             1.   On page 4, line 15, replace "and" with","
             2.   On page 4, line 16, after "determined" insert ", and the 
               actual interest rate that would be credited as of the date 
               of the disclosure to a newly opened account"

          3.  Author's amendments  

              a.   Declaratory language  

            This bill would declare that "a retained asset account . . . 
            can provide desired flexibility and fit the consumer's needs 
            and the needs of the consumer's family."  This declaratory 
            language unnecessarily promotes the use of a retained asset 
            account.  Accordingly, the author has agreed to accept an 
            amendment to strike this language.

              b.   Retained asset account statements  

            This bill would require an insurer to send the beneficiary at 
            least one statement per quarter, and a statement for any month 
            in which there has been account activity other than just the 
            crediting of interest.  Although this language is provided 
            under a list of required disclosures contained in this bill, 
            this provision is substantive and therefore should be provided 
            as a requirement under its own section.  Accordingly, the 
            author has agreed to accept an amendment to require, under a 
            separate statute, the insurer to provide these statements.

             Suggested amendments  :

             1.   On page 2, line 19, strike "that"
             2.   On page 2, strike lines 20-21
             3.   On page 3, line 28 after "10509.936" insert "If the life 
               insurance benefits are placed in a retained asset account, 
               the insurer shall send the beneficiary at least one 
               statement per quarter, and a statement for any month in 
               which there has been account activity other than just the 
               crediting of interest.

                                                                      



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               10509.937"
             4.   On page 4, line 34, replace "10509.937" with "10509.938"


           Support  :  Liberty Mutual Group; Metropolitan Life Insurance 
          Company; Pacific Life Insurance Company

           Opposition  :  None Known

                                        HISTORY
           
           Source  :  Author

           Related Pending Legislation  :  See Background.

           Prior Legislation  :  AB 786 (Jones, 2010) would have required 
          insurers to provide disclosures to beneficiaries regarding 
          retained asset accounts.  This bill was gutted and amended with 
          these provisions on the Senate Floor and referred to the Senate 
          Rules Committee where it was held.

           Prior Vote  :  Senate Committee on Insurance (Ayes 8, Noes 0)

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