BILL ANALYSIS Ó AB 1804 Page 1 Date of Hearing: April 23, 2014 ASSEMBLY COMMITTEE ON INSURANCE Henry T. Perea, Chair AB 1804 (Perea) - As Amended: April 10, 2014 SUBJECT : Insurance policies: notice of lapse SUMMARY : Provides that policyholders of most individual insurance policies are entitled to designate a third-party who will be sent a notice if the policy is about to lapse for nonpayment of premium. Specifically, this bill : 1)Provides that an individual policy shall not be issued until the applicant has been given the right to designate at least one person, in addition to the applicant, to receive a notice of lapse, termination, expiration, cancellation or nonrenewal of the policy for nonpayment of premium 2)Provides that an applicant has 30 days after the insurer sends the notice to submit to the insurer the name, address and phone number of the person or persons designated by the applicant, or to submit a signed form waiving the right. 3)Contains a statutory waiver form that insurers would be required to send to applicants with the notice of the right to designate. 4)Allows an insurer to deem the right to designate waived by the applicant if no response is received within 30 days after the notice and waiver form was sent. 5)Requires insurers to maintain records of the designee information for the life of the policy, and allow the policyholder to update the information upon the policyholder's request. 6)Provides that insurers shall notify the policyholder every two years of the right to either update designee information, or the right to make a designation, as the case may be. 7)Provides that no policy subject to the bill's requirements can be cancelled for nonpayment of premium, unless the designated third party has been notified at least 10 days prior to the cancellation date. AB 1804 Page 2 8)Provides that the bill's requirements apply to: a) Policies covering real property used for residential purposes that consist of 4 units or less; b) Personal liability policies and policies covering liability from or damage to personal property; c) Disability and health insurance policies. 9)Provides that the bill does not apply to policies that take effect prior to July 1, 2015. EXISTING LAW : 1)Establishes, with various time frames depending on the type of insurance policy, that a policy cannot be cancelled for nonpayment of premium unless the named insured is provided a notice that the policy will be cancelled on a date certain. 2)Provides that an individual life insurance policy shall not be issued or delivered in California unless the policyholder has been afforded the right to designate at least one person in addition to the policyholder to receive a notice that the policy is going to lapse for nonpayment of premium. 3)Provides that no individual policy or certificate under a group policy of Long Term Care (LTC) insurance shall be issued in California unless the policyholder has been afforded the right to designate at least one person in addition to the policyholder to receive a notice that the policy is going to lapse for nonpayment of premium. FISCAL EFFECT : Undetermined COMMENTS : 1)Purpose . According to the sponsor, the California Department of Insurance (DOI), the bill is an important consumer benefit for people who have difficulty managing their insurance responsibilities either due to heath or residency issues. DOI notes that policyholders of all ages can find themselves in AB 1804 Page 3 situations that might cause important insurance protections to lapse due to a failure to pay the premium. In addition to older policyholders who might want a relative or close family friend to keep an eye on their insurance protections, others who might have prolonged separations from their primary residence, such as college students, members of the military, or people who work for extended periods away from home will find the bill's proposal a great benefit. 2)Opt in . The bill is a consumer opt-in proposal. Insurers would be required to make the policyholders aware of the right to designate third parties, and the policyholders would have the right to accept or waive the right. In this regard, insurers that oppose the bill point out that existing law relating to life and LTC insurance provides more flexibility to the insurer in implementing what is, essentially, the same right that this bill would create for other types of insurance. 3)"At least one" designee . Both the life insurance and LTC provisions of existing law specify that an insurer must allow those policyholders to designate "at least one" other person to receive lapse notices. The bill has followed the life insurance/LTC model in this respect. However, because the volume of homeowners', automobile, and other insurance policies subject to the bill is much larger than life and LTC, insurers opposed to the bill believe the administrative burden and costs associated with the right would be too high if multiple designees are required. The author has agreed to amend the bill to clarify that the right created by the bill is to designate 1 person to receive lapse notices. 4)Additional insureds . In addition to the named insured person on an insurance policy, there are often "additional insureds" named who, for specified reasons or limited purposes, are also covered by the policy. The insurers who are opposed to the bill have expressed concern that a third-party lapse designee might be confused, and believe they have coverage protections of the policy as an additional insured. The author has agreed to amend the bill to clarify that the designee has no additional insured rights, and no role in the policy other than receiving notices as designated by the policyholder. 5)Military personnel . United Services Automobile Association (USAA), an insurer that covers active and retired military and AB 1804 Page 4 their families, believes that the bill has possible benefits for the military personnel who are forced to leave their homes with very short notice in order to be deployed for long periods of time. The opportunity to plan ahead with an opt-in provision provides the clarity needed when putting personal business in order, and allows our military to have faith that a policy that is critical to their family well-being is responsibly handled. While sharing some workability concerns with other insurers, USAA has expressed a Support If Amended position on the bill. 6)Records retention . Insurers opposed to the bill object to the statutory waiver and records retention provisions in the bill. They argue that the life insurance and LTC provisions are preferable. Those provisions simply direct the insurer to make the opt-in right available to the policyholder ("No policy shall be issued unless . . . . ."), but do not express how the insurer is supposed to be able to prove that it has done so. 7)Scope of bill . With respect to the life insurance and LTC laws, it is clear to which policies the right to designate attaches. Insurers opposed to the bill have argued that the language describing the policies to which the bill applies is not adequately precise. DOI has committed to working on language that will clarify the scope of the bill better than the current language. 8)Health insurance . Insurers opposed to the bill have objected to inclusion of health insurance policies because recent legislation, and regulations adopted by the DOI and the Department of managed Health Care have adequately addressed the bill's purposes. DOI has agreed to evaluate this concern in connection with providing greater clarity in defining the scope of policies to which the bill applies. 9)Age threshold . Insurers opposed to the bill suggest that other states limit similar lapse rules to senior citizens, and seek that limitation in this bill. As noted above, the author and sponsor believe that there are sound reasons why the bill's benefits will be valuable to non-seniors, notably to military personnel, students, and others who frequently work away from their principal residence, among others. REGISTERED SUPPORT / OPPOSITION : AB 1804 Page 5 Support Department of Insurance (Sponsor) California Advocates for Nursing Home Reform (CANHR) California Retired County Employees Association (CRCEA) California Senior Legislature (CSL) Consumer Federation of California United Services Automobile Association (if Amended) Opposition American Insurance Association Association of California Insurance Companies Association of California Life and Health Insurance Companies Independent Insurance Agents and Brokers of California National Association of Mutual Insurance Companies Pacific Association of Domestic Insurance Companies Personal Insurance Federation of California Analysis Prepared by : Mark Rakich / INS. / (916) 319-2086