BILL ANALYSIS �
AB 862
Page 1
Date of Hearing: April 24, 2013
ASSEMBLY COMMITTEE ON INSURANCE
Henry T. Perea, Chair
AB 862 (Wieckowski) - As Amended: April 11, 2013
SUBJECT : Automobile insurance: underinsured motorist coverage
SUMMARY : Provides automobile insurers the option to offer
expanded underinsured motorist coverage. Specifically, this
bill :
1)Authorizes an automobile insurer the option to offer, as an
alternative to the statutorily mandated "setoff" underinsured
motorist coverage, a "nonsetoff" version of the coverage.
2)Requires an insurer that opts to make this alternative
coverage available to repeat the offer to policyholders at
least every other year.
3)Requires the offer by an insurer that opts to make this
alternative coverage available to be in writing, including a
clear and concise plain language explanation of the benefits
of the nonsetoff coverage and any additional costs to the
policyholder
4)Declares that it is in the public interest that consumers have
additional choices when purchasing underinsured motorist
coverage.
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.
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.
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4)Requires that uninsured motorist coverage and underinsured
motorist coverage be sold as one bundled coverage.
5)Requires that uninsured and underinsured motorist coverage be
sold to any purchaser of an automobile insurance policy,
unless the policyholder waives, in writing, the right to buy
this coverage.
6)Specifies that the written, signed agreement between the
insurer and policyholder to waive or reduce that uninsured or
underinsured motorist coverage is binding on all persons
insured under the policy.
FISCAL EFFECT : Unknown.
COMMENTS :
1)Purpose . According to proponents, consumers are not receiving
a sufficient range of options for underinsured motorist
coverage under existing law. Specifically, the author points
out that the offset provision of existing law is mandated by
statute, and denies the consumer the full benefit of the
policy limit as stated on the consumer's policy. 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, but rather
on the choices they make when they purchase the policy. They
argue that the offset feature of current law is frequently not
understood by consumers until they discover this significant
limitation on their coverage at the moment they need the
coverage.
2)Insurer option . Uninsured and underinsured motorist coverage
is strictly prescribed by statute. Insurers must make the
coverage a part of any automobile insurance policy, unless the
policyholder executes a written waiver. But there is no
flexibility in this coverage, other than the policy limits.
An insurer is not authorized by law to make other alternatives
available. The bill merely creates a statutory authorization
for an insurer to add coverage options for its customers.
3)How does current law work ? There are two aspects of current
law that operate to limit an underinsured motorist claim in a
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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
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 for 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.
4)Intended changes . According to the author and CAOC, the
purpose of the bill is to repeal the second of these two
rules. It should be noted that this would have the effect of
eliminating the setoff where the at-fault party has a lower
limit (i.e., the injured party would recover the full $105,000
in the example, above.) However, if both drivers had the same
policy limit, it is the definitional limitation, not the
setoff rule, that would apply, and the injured party would
only receive a recovery from the at-fault party, and nothing
from his or her own insurer.
5)Cost implications of the bill . It has been suggested that the
setoff rule results in consumers not receiving the benefits
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which they have paid premiums to receive. This is not
correct. Through the Proposition 103 rate regulation process,
the Insurance Commissioner makes sure that the premium paid
for an offset policy is based on the fact that insurers get
the benefit of an offset in the cases where those facts apply.
Nonetheless, it is clear that the premium for a nonoffset
policy would necessarily be higher than an offset policy due
to the higher benefits paid out. Exactly what the pricing
implications might be are uncertain, as different companies
face different cost structures, and different policy limits
are impacted differently (i.e., a $15,000 limit might be
subject to a higher percentage increase when the offset is
eliminated than a $100,000 policy.)
6)Independent insurance agent perspective . Three associations
of independent insurance agents and brokers (agents and
brokers that have access to multiple insurers when placing
coverage for their clients) have expressed opposition to the
bill. They argue that insurance purchasers tend to make
conservative decisions with their money when selecting
insurance coverages, and tend not to buy coverage that is not
perceived as absolutely necessary. These agents are concerned
that customers will want the cheapest premium possible when
purchasing insurance, but the best coverage possible once a
claim arises. They fear that these customers will experience
"buyer's remorse," and seek to hold the agent or broker
responsible for not steering them to the richer coverage.
They are also concerned that the administrative burdens and
increased liability associated with the fact that some but not
all of the companies they represent may offer this coverage
will simply not be worth the additional coverage that a small
number of policyholders will purchase. In this regard, the
agents assert that they do not perceive a consumer demand for
enhanced underinsured motorist coverage.
7)Insurer perspective . Insurers do not believe that AB 862 is
necessary, and argue that there is no evidence of consumer
demand for this enhanced underinsured motorist coverage. They
argue that there is no public policy or market reason to
introduce this new alternative, and that it would be confusing
to consumers. They assert that if a consumer believes a
particular coverage level under the current rules does not
provide adequate protection, then that consumer can buy a
higher coverage level. The insurers collectively complain
that in other states where this sort of option is available,
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there is needless litigation associated with consumers
choosing the lesser, cheaper coverage, then litigating various
theories after an accident in an effort to obtain the higher
coverage. Finally, insurers believe the disclosure
requirements in the bill will have a negative impact on their
agents, including confusion, litigation, record-keeping, and
other burdens.
8)Coverage limits . The mandate to sell these coverages with all
automobile insurance policies, subject to the policyholder's
written waiver, provides that the limits be "at least" the
same as the bodily injury liability limits in the policy.
While this coverage level mandate is capped at $30,000 per
person, and $60,000 total per accident, insurers typically
sell uninsured and underinsured motorist coverage in higher
amounts if the policyholder is purchasing higher bodily injury
liability coverage limits. However, it is virtually universal
that insurers do not sell uninsured and underinsured motorist
coverage in amounts greater than a policyholder's bodily
injury liability coverage limits.
Insurers have suggested this long-standing and industry-wide
underwriting rule is premised on the notion that a
policyholder should not be purchasing first-party coverage to
protect themselves in amounts higher than the liability
coverage that is aimed at protecting others. In this regard,
they note that the effect of a nonsetoff policy would be to
provide a policyholder the option to do just that - obtain
better protection for themselves than for others who they
might harm.
9)Statutory disclosure ? The bill requires any insurer that
chooses to offer the nonsetoff option to provide a written
notification to its customers that includes a clear and
concise plain-language explanation of the benefit to the
policyholder of a nonsetoff policy. However, the actual
disclosure language is left to each insurer to draft. The
author may wish to consider developing a prescribed notice
that is required by statute, along with a signature
requirement similar to the existing waiver of coverage statute
that provides that the policyholder's signature is binding on
all insureds.
10)Prior legislation . Last Session saw two bills that addressed
underinsured motorist coverage. In 2011, AB 1063 (Bradford)
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proposed a much broader approach. First, it would have
mandated that changes proposed by the bill be implemented,
thus requiring all insurers to make rate filings with the
Insurance Commissioner (as opposed to the optional approach AB
862 proposes.) Second, AB 1063 proposed 3 changes to the
underinsured motorist rules: 1) the setoff rule addressed by
AB 862, 2) the definitional rule, discussed above, and 3) a
so-called "stacking" rule not addressed or impacted by this
bill. AB 1063 was held in the Insurance Committee for further
study.
In 2012, AB 2589 (Bradford) proposed a study relating to
underinsured motorist coverage. The Assembly passed AB 2589,
but it was held in the Senate Rules Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
California Alliance for Retired Americans
Congress of California Seniors
Consumer Attorneys of California
Consumer Federation of California
Opposition
American Agents Alliance
American Insurance Association
Association of California Insurance Companies
California Chamber of Commerce
Civil Justice Association of California
Independent Insurance Agents and Brokers of California
National Association of Insurance and Financial Advisors of
California
National Association of Mutual Insurance Companies
Pacific Association of Domestic Insurance Companies
Personal Insurance Association of California
Analysis Prepared by : Mark Rakich / INS. / (916) 319-2086