BILL ANALYSIS Ó
SB 713
Page 1
Date of Hearing: June 28, 2011
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 713 (Calderon) - As Amended: June 15, 2011
PROPOSED CONSENT
SENATE VOTE : 39-0
SUBJECT : INSURANCE: PROCEEDS: DISCLOSURE
KEY ISSUE : SHOULD CALIFORNIA ADOPT NATIONAL DISCLOSURE
STANDARDS, RECOMMENDED BY THE NATIONAL ASSOCIATION OF INSURANCE
COMMISSIONERS, TO REQUIRE LIFE INSURERS TO DISCLOSE DEATH
SETTLEMENT PAYMENT OPTIONS AND OTHER SPECIFIED INFORMATION TO
BENEFICIARIES OF RETAINED ASSET ACCOUNTS?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
A retained asset account (RAA) is a type of interest-bearing
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. Although some of the accrued interest
is distributed to the beneficiary, much of it is typically
distributed to the insurer maintaining the account. According
to the author, current law "lacks clear ground rules" for life
insurers to disclose to their beneficiaries this and other key
facts about retained asset accounts, and the rights of
beneficiaries with respect to such accounts. To address this
problem, this bill seeks to require insurers to provide
beneficiaries, at the time a claim is made, written information
describing the settlement options available under the policy,
and any other option available for the receipt of proceeds and
how to obtain specific details relevant to those options. If a
RAA is one of the options under the policy, then this bill
requires the insurer, at the time the claim is made, to provide
specified disclosures consistent with a set of disclosures
recently recommended by the National Association of Insurance
Commissioners for adoption in all fifty states. This bill
requires, in any case, that the same written disclosures be
provided to the beneficiary before a RAA may be established. In
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addition, this bill requires an insurer to provide the
beneficiary with a supplemental contract that clearly discloses
the rights of the beneficiary and the obligations of the insurer
if a retained asset account is to be used to settle life
insurance benefits. For violations of these provisions, this
bill subjects insurers to civil penalties identical to those
that currently apply to insurers for violations of existing law
prohibiting unfair methods of competition and unfair or
deceptive acts. This bill contains language that makes it
operative only if SB 599 is also enacted this session and
becomes operative. Finally, this bill is supported by the
California Department of Insurance and several major life
insurance companies, and has no known opposition.
SUMMARY : Enacts the Life Insurance Proceeds Disclosure Act of
2011, to establish disclosure standards for payment of life
insurance benefits to a beneficiary by means of a retained asset
account. Specifically, this bill :
1)Defines "retained asset account" (RAA) as a mechanism where
life insurance settlement proceeds are payable by the insurer
depositing the proceeds into an account with check or draft
writing privileges, where the proceeds are retained by the
insurer pursuant to a supplemental contract not involving
annuity benefits.
2)Requires that insurers provide beneficiaries, at the time a
claim is made, written information describing the settlement
options available under the policy, and any other option
available for the receipt of proceeds and how to obtain
specific details relevant to those options. Provides that if
a RAA is one of the options under the policy, then the
information provided at the time a claim is made must include
the specified disclosures below.
3)Requires the insurer to provide the following disclosures,
unless previously disclosed as above, before a retained asset
account may be established:
a) Payment of the full benefit is accomplished by delivery
of the draft book or checkbook.
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
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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 any.
g) The frequency of statements showing the current account
balance, the interest credited, drafts or checks written,
and any other account activity.
h) The guaranteed minimum interest rate to be credited to
the account, how the actual interest rate will be
determined, and the actual interest rate that would be
credited to a newly opened account as of the date the
disclosure is issued.
i) 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.
aa) 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 Web site
address and telephone number for NOLHGA.
bb) A description of the insurer's policy regarding RAAs
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.
4)Requires insurers to send the beneficiary at least one
statement per quarter, and a statement for any month in which
there has been account activity.
5)Requires an insurer to provide the beneficiary with a
supplemental contract that clearly discloses the rights of the
beneficiary and the obligations of the insurer if the insurer
settles life insurance benefits through a RAA.
6)Provides that an insurer that fails to comply with these
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requirements is in violation of existing law prohibiting
unfair methods of competition and unfair or deceptive acts in
the business of insurance, thereby making the insurer liable
to the state for a civil penalty to be fixed by the Insurance
Commissioner, up to five thousand dollars ($5,000) for each
violation, or up to ten thousand dollars ($10,000) per
violation if willful.
7)Contains language providing that this act will become
operative only if SB 599 of this session also is enacted and
becomes effective.
EXISTING LAW :
1)Prohibits insurance companies from engaging in any unfair
method of competition or any unfair or deceptive act or
practice, including but not limited to knowingly
misrepresenting to claimants pertinent facts or policy
provisions relating to any issues of coverage or claims
handling. (Insurance Code Section 790.03(h)(1).)
2)Requires an insurer to disclose to a first party claimant or
beneficiary that all benefits, coverage, time limits, or other
provisions of an insurance policy issued by that insurer that
may apply to the claim presented by the claimant. (California
Code of Regulations, Title 10, Section 2695.4(a).)
3)Provides that any person who engages in any unfair methods of
competition or unfair or deceptive acts, as specified, is
liable to the state for a civil penalty to be fixed by the
Insurance Commissioner, not to exceed five thousand dollars
($5,000) for each act, or, if the act or practice was willful,
not to exceed ten thousand dollars ($10,000) for each act.
(Insurance Code Section 790.35.)
COMMENTS : According to the author, current law "lacks clear
ground rules" for life insurers to disclose to their
beneficiaries certain key facts about retained asset accounts
(RAA) and their rights with respect to such accounts. To
address this problem, this bill seeks to require insurers to
provide beneficiaries, at the time a claim is made, written
information describing the settlement options available under
the policy, and any other option available for the receipt of
proceeds and how to obtain specific details relevant to those
options. If a RAA is one of the options under the policy, then
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this bill requires the insurer, at the time the claim is made,
to provide specified disclosures consistent with a set of
disclosures recommended by the National Association of Insurance
Commissioners for adoption in all fifty states. This bill
requires, in any case, that the same written disclosures be
provided to the beneficiary before a RAA may be established. In
addition, this bill requires an insurer to provide the
beneficiary with a supplemental contract that clearly discloses
the rights of the beneficiary and the obligations of the insurer
if a retained asset account is to be used to settle life
insurance benefits. For violations of these provisions, this
bill subjects insurers to civil penalties identical to those
that currently apply to insurer for violations of existing law
prohibiting unfair methods of competition and unfair or
deceptive acts.
Background on retained asset accounts and related consumer
concerns. A retained asset account is a type of
interest-bearing 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. According to
Liberty Mutual and Pacific Life Insurance, two prominent
insurers who utilize such accounts:
Retained asset accounts were developed in response to
policyholders who wanted their life insurer to provide
a service that would allow them to delay major
financial decisions during an emotional and vulnerable
time. RAA's provide consumers with the option of
leaving death benefit proceeds in an account on deposit
with the insurance company instead of receiving a lump
sum payment. If the beneficiary elects to participate
in the retained asset service, a bank account is
established in the beneficiary's name and the
beneficiary will received a personalized checkbook
In 2010, the life insurance industry drew negative attention
when it came to light that some insurers were paying life
insurance benefits to families of deceased U.S. soldiers into
RAAs as the default option of payment. Although some of the
accrued interest in RAAs is distributed to the beneficiary, much
of it is typically distributed to the insurer maintaining the
account. For this reason, RAA's have been criticized as
allowing insurers to profit from the death of beneficiaries'
loved ones. (Evans, Fallen Soldiers' Families Denied Cash as
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Insurers Profit, Bloomberg, Jul. 28, 2010.)
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. 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.
According to a presentation by the Consumer Liaison Committee
(CLC) at the Fall 2010 NAIC national meeting, RAAs are
associated with many reported consumer protection problems. For
example, it appears that some leading insurers that utilize RAAs
fulfill consumer selection of a "lump sum" payment request by
issuing an RAA checkbook as the default option, instead of
issuing a single check for the death benefits, as might be
expected when a lump sum payment is requested. According to the
CLC, this practice may violate the life insurance contract, and
potentially mislead the beneficiary because an RAA is simply not
the equivalent of a true lump sum payment. Other problems for
consumers result when insurers: (1) make misleading statements
to the beneficiary implying that RAAs are insured by the FDIC,
when in fact they are not; (2) fail to disclose to RAA
beneficiaries that financial institutions will invest and earn
money from these accounts; (3) imply that the RAAs are
guaranteed by State Guaranty Funds to the same level of
protection that FDIC-insured accounts are guaranteed.
This bill implements RAA disclosure standards for insurers
developed and recommended by NAIC. In December 2010, NAIC
adopted a sample bulletin to reflect uniform standards for
disclosure by insurers regarding the use of RAAs. This bulletin
contains disclosure language which the NAIC recommends to be
adopted by each member state. This bill adopts these NAIC
recommendations into California law, often verbatim but in a few
cases with a stronger standard tailored for California. It is
clear that many of the disclosures are intended to address the
precise problems described by the CLC in its report. For
example, under this bill, the insurer must disclose prior to
establishing an RAA that such funds held by insurance companies
are not guaranteed by the FDIC, and that one RAA check may be
written to access the entire amount of the RAA at any time,
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among other things. In addition, this bill seeks to 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 RAA.
PENDING LEGISLATION: SB 599 (Kehoe), sponsored by the
California Department of Insurance, seeks to require life
insurers to provide beneficiaries with settlement options in the
life insurance benefit claim form, and requires insurers to
provide the beneficiary the written terms of each settlement
option whenever the insurer recommends that the life insurance
proceeds be distributed in the form of an RAA or any option
other than a lump-sum payment. SB 599 is currently awaiting
hearing in the Assembly Appropriations Committee
After recent amendments, this bill is supported by the
Department of Insurance and double jointed with SB 599 . The
author reports diligently working with the California Department
of Insurance (CDI) to address its concerns, and with the most
recent set of amendments, including contingent enactment
language with SB 599, CDI now officially supports the bill. In
CDI's letter of support, the Insurance Commissioner states:
CDI greatly appreciates (the author) working with us to
enhance some of the NAIC-based disclosures, and the
current version of SB 713 reflects these efforts. SB
713 ensures life insurance beneficiaries receive the
information needed to help them to make informed
decisions on whether an RAA is an appropriate benefit
settlement option for them. SB 599 guarantees
beneficiaries are afforded the opportunity to choose
how they want to receive their benefits. Together,
these bills create a sound RAA-related consumer
protection package.
REGISTERED SUPPORT / OPPOSITION :
Support
California Department of Insurance
Liberty Mutual Group
Metropolitan Life Insurance Company
Pacific Life Insurance Company
SB 713
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Opposition
None on file
Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334