BILL ANALYSIS                                                                                                                                                                                                    



                                                                  SB 713
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          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
           








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            Opposition 
           
          None on file


           Analysis Prepared by  :    Anthony Lew / JUD. / (916) 319-2334