BILL ANALYSIS                                                                                                                                                                                                    



                                                                  SB 251
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          Date of Hearing:  August 13, 2013

                           ASSEMBLY COMMITTEE ON JUDICIARY
                                Bob Wieckowski, Chair
                    SB 251 (Calderon) - As Amended:  June 17, 2013

           SENATE VOTE  :  35-0
           
          SUBJECT  :  INSURANCE: ELECTRONIC TRANSMISSION

           KEY ISSUES  :  

          1)SHOULD INSURANCE COMPANIES BE AUTHORIZED TO TRANSMIT INSURANCE  
            RENEWALS AND RELATED DOCUMENTS ELECTRONICALLY TO AUTOMOBILE  
            AND PROPERTY-CASUALTY, EARTHQUAKE AND WORKERS' COMPENSATION  
            POLICYHOLDERS?

          2)IF THE LONGSTANDING PROHIBITION AGAINST ELECTRONIC TRANSMITTAL  
            OF THESE DOCUMENTS IS ABOLISHED, SHOULD THERE NEVERTHELESS BE  
            ADDITIONAL SAFEGUARDS TO PROTECT CONSUMERS AGAINST THE  
            SIGNIFICANT HARMS THAT CAN OCCUR IF THESE DOCUMENTS ARE NOT  
            RECEIVED?

          3)IN LIGHT OF THE SUBSTANTIAL UNCERTAINTY PRESENTED BY THE NOVEL  
            STATUTORY SCHEME OFFERED BY THIS BILL, MIGHT A PILOT PERIOD BE  
            APPROPRIATE TO EVALUATE ITS PRACTICAL EFFECT?

           FISCAL EFFECT  :  As currently in print this bill is keyed  
          non-fiscal.

                                      SYNOPSIS

          This bill is sponsored by the insurance industry to authorize  
          insurers selling automobile, property-casualty, earthquake and  
          workers' compensation policies to electronically provide certain  
          notices, offers of renewal, and other communications to  
          consumers if the named insured opts-in to electronic  
          transmission.  The general objective of the bill is not  
          controversial, but the devil is in the details.  The Insurance  
          Commissioner is concerned that, as proposed by the industry, the  
          bill fails to provide sufficient safeguards that these documents  
          will come to the attention of the insured when they are sent  
          electronically.  Of course, receiving these documents is  
          important, the Commissioner notes, because the consequences for  
          the consumer can be serious, including financial exposure to  








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          significant uninsured losses for auto accidents and damage to  
          one's home.  Thus, rules that may be acceptable for transmission  
          of a telephone bill or credit card statement may not be  
          appropriate for these insurance documents.  In an effort to  
          reach common ground, the Committee hosted a series of meetings.   
          Despite negotiations that appeared close to resolution, the  
          sponsor withdrew late last week.  As noted in the analysis, the  
          bill leaves many questions unanswered, suggesting at a minimum  
          the potential merits of a reasonable sunset period to ensure  
          that this new authority is working as it should.

           SUMMARY  :  Authorizes insurers to electronically provide offers  
          of coverage or renewal of certain motor vehicle,  
          property-casualty, earthquake and workers' compensation policies  
          by email or other methods, as specified.  Specifically,  this  
          bill  :    

          1)Authorizes insurers to electronically provide statutory  
            notices and offers to renew for certain automobile,  
            property-casualty, earthquake and workers' compensation  
            insurance policies if the insurer complies with several  
            requirements, including that the insured opt in, with  
            specified disclosures.

          2)Allows the Department of Insurance to suspend an insurer from  
            providing offers, notices, or disclosures by electronic  
            transmission if there is a pattern or practices that  
            demonstrate the insurer has failed to comply with the relevant  
            requirements, and provides an appeal process.

           EXISTING LAW  :  

          1)Establishes the Uniform Electronic Transactions Act (UETA)  
            which generally authorizes the transaction of business,  
            commerce and contracts by electronic means, except as  
            prohibited.  (Title 2.5 of Part 2 of Division 3 of the Civil  
            Code, commencing with Section 1633.1.)

          2)Specifies certain transactions which are prohibited from being  
            conducted by electronic means (Civil Code Section 1633.3),  
            such as:

             a)   An offer to renew private passenger automobile  
               insurance.  (Insurance Code Section 663.) 
             b)   An offer to renew a policy of property, liability, or  








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               other casualty insurance on risks located in California.   
               (Insurance Code Section 678.)
             c)   An offer to renew a commercial policy of property,  
               liability, or other casualty insurance on risks located in  
               California.  (Insurance Code Section 678.1.)
             d)   A notice of reduced earthquake insurance coverage at the  
               time of renewal of a residential property insurance policy.  
                (Insurance Code Section 10086.)

          3)Requires insurers, prior to expiration of a policy, to deliver  
            or mail to the named insured either an offer of renewal, or a  
            written notice of nonrenewal.  (Insurance Code Section 663,  
            678.)

          4)Provides that if an insurer, at renewal, exercises its  
            authority to modify the terms and conditions of an existing  
            earthquake insurance policy, then the insurer must provide the  
            named insured with the renewal notice in a stand-alone  
            disclosure document at the mailing address shown on the policy  
            or application.  (Insurance Code Section 10086.)

           COMMENTS  :  Insurance documents have historically been excluded  
          from the law allowing electronic transmittals of documents in  
          specified transactions.  As discussed below, this exclusion  
          reflects the many consumer protection issues that arise when  
          insurance documents are not properly transmitted or received.   
          This bill, sponsored by the insurance industry, would lift that  
          longstanding ban to allow transmittal by email, or other methods  
          as specified.  The bill authorizes insurers selling automobile,  
          property-casualty, earthquake and workers' compensation policies  
          to electronically provide certain notices, offers of renewal,  
          and disclosures to consumers if the named insured has consented.  
           In support of the bill, the author writes:  

               California adopted its version of the Uniform Electronic  
               Transactions Act (UETA) in 1999, just after its adoption by  
               the National Conference of Commissioners on Uniform State  
               Laws.  UETA grants electronic signatures, methods of  
               transmission, and records legal equality with mailed and  
               paper and ink documents.  California, however, excluded  
               from UETA's provisions some documents required to be  
               mailed, including insurance notices for renewal and some  
               notices related to the California Earthquake Authority. 

               Despite its position as a leader in the information  








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               technology industry, California has fallen behind in  
               accepting electronic commerce and still does not apply UETA  
               to many of its insurance documents.  These exclusions  
               potentially harm consumers whose circumstances are better  
               served through electronic access and storage of these  
               documents, such as those who travel or change addresses  
               frequently, who live in areas with scarce postal services,  
               or who just prefer to use their smartphones over their  
               mailboxes.

           Sensitivity of Documents and Risks of Harm.   The author asserts  
          that consumers are harmed by the current rules disallowing  
          electronic transmittal of these documents.  If that is true, it  
          should also be acknowledged that consumers may be harmed by the  
          rules proposed by the industry.  For example, a renewal that  
          does not come to the attention of the insured may lead to  
          cancelation, causing significant losses to the consumer if  
          coverage unknowingly expires.  So too, an insurer may change the  
          terms or costs of the insurance - reducing policy limits,  
          eliminating coverages, increasing deductibles or increasing  
          premium - all unbeknownst to the insured who has not received  
          the required document, particularly for customers who have  
          auto-pay arrangements.  

          In particular, insurers are authorized to unilaterally modify  
          earthquake policies at the time of renewal if they provide the  
          insured with a required disclosure.  Failure to receive this  
          document would be critical for the many Californians whose only  
          protection against the total loss of their most precious asset  
          is earthquake insurance.  All of these risks presumably underlie  
          the longstanding policy prohibiting electronic transmittal of  
          these documents, and may have increased rather than diminished  
          in the years since the insurance prohibition was enacted in  
          1999.  

          Among other potential problems, receipt of emailed documents can  
          be impeded by ever more robust but imprecise spam blockers that  
          filter out legitimate messages.  Whatever the problems of the  
          Post Office may be, there is at least no force or agency  
          actively seeking to intercept physical mail.  Technological  
          problems can also interfere, such as when a computer server goes  
          down.  A number of ISPs have experienced widespread service  
          failures, and of course receipt of email messages also depends  
          on proper operation of the computer systems on the receiving end  
          that are subject to technological problems of their own.  In  








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          addition, sophisticated computer hackers have regularly disabled  
          the Internet computer servers of companies through  
          denial-of-service attacks and other methods.  The targets of  
          these attacks have frequently been wealthy U.S. companies that  
          are alleged to be engaged in or supportive of controversial or  
          unpopular activities.

          Far from being resolved in the years since the insurance  
          prohibition was adopted in UETA in 1999, these problems may well  
          have gotten worse.  A recent report shows that email  
          deliverability - the term used to designate the rate of email  
          placed in the inbox - has dropped to 76.5%.  According to the  
          study, the reasons for the decline are threefold:  ISPs are  
          being more rigorous with filtering and blocking, sender  
          reputations are deteriorating, and consumers are reacting to  
          email overload, including by using a "junk" button to  
          automatically filter out emails from senders they specifically  
          opted-in to receive.  (See Return Path, Global Email  
          Deliverability Benchmark Report, 2H 2011.)  

          The phenomenon of dealing with email overload by designating a  
          sender as "junk" when the volume becomes too great - even though  
          the user initially consented to receiving messages from the  
          sender - may be particularly relevant here.  If an insurance  
          company obtains consent to send renewals by email and  
          subsequently sends other types of unwanted messages, or a  
          greater number of messages than the consumer wishes to receive,  
          the consumer may react by automatically directing further  
          messages from the insurer to a junk filter without realizing  
          that a renewal message six months later will be filtered out as  
          well.

          As troubling as these deliverability statistics may be, they do  
          not reflect the full scope of the problem.  Receipt of emails is  
          also affected by a wide variety of actions of users.  For many  
          people, email addresses are temporary and disposable.  Many  
          people use multiple addresses, often transitioning over a period  
          of time, or designating specific addresses for certain uses  
          which may shift with time and experience - for example, a  
          frequently used general address may become associated instead  
          with a more specific purpose, or may be abandoned if it is  
          overtaken by unwanted SPAM.  People change or abandon an email  
          address or a service provider and do not necessarily recall  
          whether years ago they might have given a particular address to  
          their insurance company - or if they do recall doing so, they  








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          may not know how to notify the insurance company that they no  
          longer use that new email address.  It was not long ago that  
          AOL, Hotmail, Netzero, Compuserve, Prodigy, and Yahoo were quite  
          popular, and the current popularity of Gmail was not foreseen -  
          just as it may be difficult for some Gmail or Blackberry users  
          now to imagine that they will not be using those email addresses  
          in the future.  This problem is compounded because there is no  
          system of forwarding or return receipt requests for email as  
          there is with the Postal Service.  Email transmission of  
          insurance documents may also not be effective because of the  
          increasing fear of computer viruses or scams that cause  
          consumers to be reluctant to open emails from senders, even when  
          they appear to be legitimate because of the increasing  
          sophistication of such frauds.  

          For these reasons and others, California law in many instances  
          still requires written notices and other documents to be mailed  
          to an individual's home or designated physical mailing address  
          to better ensure delivery and/or receipt for legal purposes.  

          While it may not be necessary to require that insurers obtain  
          receipts documenting that the insured has opened or read the  
          electronic transmittal, it may be appropriate to ensure basic  
          standards of trustworthiness that documents of this sensitivity  
          are properly addressed to an accurate and active email account  
          consistent with the insured's current wishes, rather than simply  
          obtaining one-time consent that is effective forever, and  
          permitting insurers to adopt potentially careless processes  
          controlled by whatever terms the insurer might dictate in a  
          dense and lengthy boilerplate adhesion agreement.  The bill does  
          provide that within two business days of receiving information  
          indicating that the offer, notice, or disclosure sent by  
          electronic transmission was not received, the insurer must  
          either contact the insured and resend by electronic transmission  
          or resend by regular mail.  However, this obligation may be  
          rarely triggered because insurers are not likely to receive a  
          notice of failure, particularly since they are not required to  
          set up processes that would inform them of the failure.

           This Bill Appears To Allow A Vague But Potentially Significant  
          Exception To The Standards For Transmission of These Documents.    
          The bill provides that insurance companies must ensure that the  
          offer, notice, or disclosure provided by electronic transmission  
          was both sent and received consistent with Section 1633.15 of  
          the Civil Code.  This cross-reference to a provision of the UETA  








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          statute creates potential confusion because the cited section  
          appears to allow an exception to the stated standards if "the  
          sender and the recipient agree to a different method of sending  
          that is reasonable under the circumstances."  (Section  
          1633.15(a).)  Although this section applies in other types of  
          transactions, research by the Committee and stakeholders  
          produced no guidance on how this exception is to be interpreted.  
           What is required to establish an "agreement" and what is meant  
          by "reasonable under the circumstances"?  If it is an open-ended  
          exemption by which an insurer may obtain a consumer's agreement  
          to virtually any rules for transmission of the documents, it may  
          create great potential for mischief among insurers less  
          scrupulous than the members of ACIC.  For example, an insurer's  
          electronic opt-in agreement might state on page 13 (with only  
          the first paragraph of the first page showing in a text box next  
          to an "Agree" button) that the consumer agrees to release the  
          insurer from any standards, or that the insurer is free to  
          decide what is reasonable, or that the insurer is not  
          responsible for errors in addressing the email or for system  
          failures of its own computers, or that the insurer is free to  
          ignore bounce-back messages. 

          Although it may be suitable in the other contexts to which it  
          currently applies, the question presented by this bill is  
          whether such an apparently open-ended exemption is proper in  
          this particular context.

          Moreover, it is not clear why such an exception is necessary or  
          appropriate.  UETA sets forth a general and highly flexible set  
          of standards:  "An electronic record is sent when the  
          information is addressed properly or otherwise directed properly  
          to the recipient and either (1) enters an information processing  
          system outside the control of the sender or of a person that  
          sent the electronic record on behalf of the sender, or (2)  
          enters a region of an information processing system that is  
          under the control of the recipient."  (Section 1633.15(a).)  If  
          the ostensible purpose of the bill is to allow electronic  
          transmission of documents according to the standards set out in  
          UETA, it may be cavalier to allow departures from these  
          standards.  In discussions with the Committee, the sponsor  
          disclaimed any need or interest in allowing insurers to write  
          their way out of the specified UETA standards.  Nevertheless,  
          insistence on retaining an exception appears to be the basis on  
          which the sponsor withdrew from negotiations.  If this broad and  
          vague exception remains in the bill, the Commissioner will  








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          evidently need to exercise his rulemaking authority to provide  
          appropriate guidance and clarity on this point, along with the  
          issues discussed above and other questions arising from the  
          legislation.

           Should This New Authorization Be Piloted Before It is Finalized?   
           Given the many outstanding issues and concerns about how the  
          new statutory scheme created by this bill will work in the novel  
          context of insurance renewals, the Committee may wish to  
          consider adopting the legislation as a pilot for some period of  
          time before determining that it should be authorized  
          indefinitely.  Typically such a period would be three years, at  
          which point the Legislature would review the success of the  
          program.

           ARGUMENTS IN SUPPORT  :  Supporters believe that electronic  
          transmission is reliable enough to justify allowing sending  
          these important documents electronically.  In particular, the  
          sponsor of the bill, Association of California Insurance  
          Companies (ACIC), argues:

               California is only one of three states in the nation that  
               continues to have a statute that expressly disallows  
               insurers from providing notice or documents related to  
               policy renewal or conditional renewal by electronic  
               transmission.  SB 251, therefore, is a necessary public  
               policy step as the nation continues to move towards  
               electronic transactions and as more consumers demand  
               paperless transactions.  To that point, a recent J.D. Power  
               and Associates study, US Auto Insurance Study (2012),  
               concluded the Gen Y consumers (born from 1974-1994) have  
               clearly shown a preference toward interacting online, and  
               that specifically:

               Among customers who utilize multiple contact channels to  
               resolve an issue, 40% of Gen Y customers begin online,  
               further underscoring their preference to seek answers to  
               their questions via this channel.  In contrast, the most  
               frequent starting point for Boomers (born from 1946-1964),  
               who have used multiple channels to resolve an issue, is  
               their agent (40%).  (Emphasis Added.)

               Current California law is simply outdated to accommodate  
               the Gen Y customer demand cited in the study above.   
               Furthermore, SB 251 is "optional" on both consumers and  








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               insurers.  Nothing in SB 251 compel consumers or insurers  
               to participate in the electronic renewal process set forth  
               in the bill and it is limited only to renewals and excludes  
               policy cancellations.  The bill is a modest step to provide  
               Gen Y consumers a way to communicate or conduct their  
               business online. It also attempts to accommodate "transient  
               consumers."  These are consumers who may be constantly on  
               the move and may not have permanent home or rental  
               addresses but rely heavily or solely on electronic mail  
               address. 

               One of the initial concerns raised by SB 251 is how to  
               protect consumers when policy renewals are conducted online  
               given the technological challenges.  ACIC submits that  
               conducting policy renewals electronically is a better  
               delivery system than regular mail because it is more  
               secured and efficient.  Each consumer is likely to have his  
               or her own password protected profile and will receive  
               renewal offers within minutes rather than days.   
               Nonetheless, to address consumer protection issues, SB 251  
               provides the following:

                        Require insurers to obtain consent from a  
               consumer prior to providing policy renewals electronically,  
               notify consumers that they have the right to "opt out," and  
               retain a record of the consumer's consent for five years;

                        Require insurers to provide one free printed copy  
               of the notices or documents provided electronically upon  
               request;

                        Require insurers to send the electronic renewal  
               consistent with "the applicable statutory regular mail  
               delivery deadline," and maintain a process or system to  
               demonstrate that the electronic policy renewal was sent and  
               received (Note: This is a higher standard than regular  
               mail.); and 

                        Provide a "catchall provision" requiring insurers  
               to contact or resend the renewal to the consumer within two  
               business days upon "receiving information indicating that  
               the renewal was not received."

           ARGUMENTS IN OPPOSITION  :  Insurance Commissioner Dave Jones and  
          the California Department of Insurance (CDI) oppose the bill and  








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          express many concerns as set forth in detail below.  In  
          addition, Consumer Attorneys of California and United  
          Policyholders oppose the bill, mainly on the grounds that  
          technology is not always reliable and that they believe that  
          this bill will increase the likelihood that consumers will fail  
                                         to receive these notices.  CDI states:

               Renewal notices for insurance are critically important  
               documents for consumers.  They frequently include changes  
               in the terms and conditions of policy coverage for a  
               consumer's most important assets.  For this reason, the  
               Legislature previously excluded them from UETA, along with  
               a very extensive list of hundreds of other sensitive and  
               important transactions and documents mentioned throughout  
               California's codes. Renewal notices are also required to be  
               issued in a specified timeframe to provide policyholders  
               the opportunity to make thoughtful and informed decisions  
               about their insurance products and coverage.

               The California Department of Insurance is absolutely not  
               opposed to the concept of the electronic issuance of  
               insurance renewal notices in general. We want consumers and  
               insurers to have this option.  ? CDI's objective is to  
               ensure that if electronic renewals of certain insurance  
               policies are permitted they exist alongside a framework of  
               consumer and business protections.  These protections guard  
               against consumers and businesses mistakenly believing they  
               are insured or filing claims when in fact the insurance  
               policy has expired due to the electronic renewal notice  
               never being properly sent by the insurer or properly  
               received by the consumer or business, thus leading to  
               cancellation.

               There are many reasons why a person may not be aware of an  
               e-mail or electronic transmission.  These include spam  
               blockers, junk mail filters, server problems, one's  
               electronic mailbox being full, the use of an outdated  
               e-mail address and many others.  Given that insurance  
               renewal offers generally happen annually or semi-annually  
               and a consumer is not necessarily on alert for the  
               information, there is a greater chance of them being  
               overlooked.  The failure rate for e-mail is higher than  
               that of traditional U.S. mail.  Numerous industry white  
               papers constantly lament the fact that so many e-mails,  
               even from companies with a business relationship to a  








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               consumer, never properly land in that consumer's e-mail  
               inbox.

               This information is directly relevant to the construct of  
               SB 251 because many e-mail messages from insurers may not  
               ever arrive in the inbox of their customers, and neither  
               the insurer nor the consumer may have any idea that this  
               was in fact the case.  This can lead to bad outcomes for  
               the consumer, as well as potentially lost business for the  
               insurer.  So it is important that the consumer protection  
               regime connected to any e-renewal program ensure that  
               consumers get properly notified of their upcoming insurance  
               policy renewal information.

               Common sense safeguards can be easily employed to help  
               ensure consumers receive their important insurance renewal  
               notices.  Those common sense safeguards, along with  
               utilizing accepted industry best practices, have been the  
               focus of CDI's participation in the negotiation process up  
               to this point on SB 251.

               To that end, CDI's position has consistently been that in  
               return for removing UETA's current prohibition on the  
               electronic transmission of some insurance policy renewal  
               documents, some guidance and clarity, done in a  
               technologically neutral way, is appropriate.  Such guidance  
               and clarity would NOT pick one technology over another, but  
               instead provide helpful markers and clarity to insurers,  
               regulators, and consumers that would ensure that an  
               e-renewal regime works in the best interests of all.

               However, in the current version of SB 251, the specific  
               tie-back language to Section 1633.15 of the Civil Code  
               would allow for the following negative consequences:

                        Language in 1633.15 of CA UETA states UETA's  
               general definition of sent and received.  However, at the  
               beginning of each relevant definition an exemption from  
               that definition is outlined, stating that "Unless the  
               sender and the recipient agree to a different method of  
               sending that is reasonable under the circumstances?."  This  
               opens up a potentially large loophole and could essentially  
               render moot the definition of sent and received in both  
               UETA, and as supplemented in SB 251 on page 6, lines 15-27  
               of the bill.  What does "reasonable under the  








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               circumstances" mean?  How would this be interpreted by  
               insurers?  An insurer could therefore potentially create  
               their own opt-in notice for e-renewal that creates  
               completely different standards for sent and received, then  
               argue that this opt-in was "reasonable under the  
               circumstances."  This language in UETA, when specifically  
               applied to insurance policy renewals subject to SB 251's  
               scope, seems unclear and the ensuing lack of clarity may  
               well lead to uncertainty on the part of consumers, insurers  
               and regulatory entities such as CDI.  This uncertainty  
               would not be beneficial to any of the stakeholders.

                        Subdivision (e) of 1633.15 of the Civil Code  
               states that an electronic record is received "even if no  
               individual is aware of its receipt."  How would this be  
               interpreted, especially in light of the "reasonable under  
               the circumstances" language mentioned in the previous  
               bullet?  This would allow insurers to assert that it  
               doesn't matter if the consumer was even aware of the e-mail  
               notification sent prior to the renewal of their insurance  
               policy, never mind the possibility that the e-mail never  
               made it to the consumer because of the tidal wave of spam  
               that the consumer's ISP is attempting to combat.

               If the e-renewal process goes wrong for any reason, the  
               consequences can be dire for consumers, as they may think  
               they have coverage when they in fact do not.  By the time  
               they try to make a claim with their insurer, it is often  
               too late to rectify the situation.  Some of these claims  
               can devastate a consumer's financial situation and  
               eliminate their most important assets, the very assets they  
               wanted to make sure they had properly insured.  That kind  
               of outcome would not be beneficial to consumers, insurers,  
               or regulators and should be avoided by including clearer  
               consumer protections in SB 251.

               CDI urges that SB 251 include clarifying broad standards  
               that are technology neutral but specific to the ways in  
               which electronic renewals of some insurance policies exist  
               and interact.  Those standards would clarify UETA as it  
               pertains to the scope of SB 251.  CDI stands committed to  
               continuing to work in good faith with the author and  
               sponsor to resolve these issues still on the negotiating  
               table regarding SB 251.  The bill as currently in print,  
               however, has not resolved those consumer protection issues.








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           Prior Related Legislation  :  SB 1212 (Calderon, 2012) was a very  
          similar bill.  It was referred to this Committee but the author  
          elected not to present it. 



           REGISTERED SUPPORT / OPPOSITION :

           Support 
           
          Association of California Insurance Companies (sponsor)
          American Insurance Association
          Californians Against Waste
          Independent Insurance Agents and Brokers of California
          National Association of Mutual Insurance Companies
          Pacific Association of Domestic Insurance Companies
          Personal Insurance Federation of California
          State Farm Insurance Company
           
            Opposition

           California Department of Insurance
          Consumer Attorneys of California
          United Policyholders

           Analysis Prepared by  :   Kevin G. Baker and Tom Watts / JUD. /  
          (916) 319-2334