BILL ANALYSIS Ó
SENATE INSURANCE COMMITTEE
Senator William W. Monning, Chair
SB 1273 (Lara) Hearing Date: April 9, 2014
As Amended: April 2, 2014
Fiscal: Yes
Urgency: No
SUMMARY Would remove the sunset date on the California Low-cost
Automobile Insurance Program; expand eligibility criteria to
include drivers with less than three years of continuous driving
experience and assess a surcharge on those drivers; and make
other changes designed to increase program participation.
DIGEST
Existing law
1. Provides that the financial responsibility of the driver or
owner of a vehicle is established if the driver or owner carries
proof of financial responsibility, as specified (Vehicle Code §
16021), and that proof of insurance satisfies that requirement
(Vehicle Code § 16431);
a. Requires that qualifying insurance cover the owner or
driver for liabilities arising from any one accident in
amounts of at least $15,000 for bodily injury or death for
each person, up to $30,000, and $5,000 for property damage
for each accident (Vehicle Code §§ 16430 and 16056);
b. Requires applicants for renewal of registration of a
vehicle to submit evidence of financial responsibility
(Vehicle Code § 4000.37).
2. Establishes the California Automobile Assigned Risk Plan
(CAARP) for the purposes of providing automobile bodily injury
and property damage liability insurance to applicants who in
good faith are entitled to but are unable to procure that
insurance through ordinary methods. (Ins. Code §§ 11620 et
SB 1273 (Lara), Page 2
seq.):
a. Required the Commissioner to approve or issue a
reasonable plan and permits the Commissioner to approve or
issue reasonable amendments to the plan that are approved by
the plan's advisory committee after a public hearing and
other procedures;
b. Creates a 15-member advisory committee comprised of
eight members elected by subscribing insurers and seven
appointed by the Commissioner;
c. Requires that the cost of the plan, including any
personnel and contracting costs, be fairly apportioned among
the subscribing insurers;
d. Requires the plan to address standards for determining
eligibility; apportion eligible applicants among insurers;
provide for rules for administering and operating the plan;
and explain the basis for premium charges; and describe other
procedures;
e. Requires that rates shall not be excessive, inadequate,
nor unfairly discriminatory, and shall be actuarially sound
so as to result in no subsidy of the plan;
f. Requires CAARP to establish a website
www.mylowcostauto.com or other relevant domain name:
i. Sets standards for the website so that it:
1. Includes a list of certified
producers in the same geographic area and will
assign randomly selected certified producers to the
consumer;
2. Establishes a process to
SB 1273 (Lara), Page 3
electronically certify the information provided by
consumers, and notifies consumers if they are not
eligible for the program and that other policies
may be available;
3. Provides information on the program
and application process; and
4. Accepts credit, debit, or other form
of electronic payment;
ii. Permits CAARP to contract with another entity
to establish and maintain the website though an open,
competitive bid process upon approval by the Department
of Insurance (DOI);
g. Requires CAARP to provide an annual report to the
Legislature on the status of the program (Ins. Code §
11629.8).
3. Establishes the California Low-cost Automobile Insurance
Program (CLCA) within CAARP) (Ins. Code §§ 11629.7 et seq.) to
provide low-cost auto liability policies:
a. Requires a CLCA policy to provide insurance coverage for
a one-year term offering coverage for liabilities arising
from any one accident in amounts of at least $10,000 for
bodily injury or death for each person, up to $20,000, and
$3,000 for property damage for each accident;
b. Provides that notwithstanding Section 16056 of the
Vehicle Code, a CLCA policy issued under the program
shall satisfy the financial responsibility requirements
of Vehicle Code Sections 4000.37, 16021, and 16431;
c. Requires the insurer to offer optional
uninsured/underinsured motorist coverage and medical payments
coverage (covering medical expenses to the insureds and
SB 1273 (Lara), Page 4
passengers) for an additional charge;
d. Provides that the policy cover the named person and any
other person permitted to use the automobile, except for
members of the insured's household who do not meet the
eligibility criteria (not including the income requirement
and college student exclusion);
e. Limits coverage to automobiles valued at the time of
purchase to $20,000 or less;
f. Sets specific rates for certain counties, unless
otherwise established by the Commissioner;
g. Requires a surcharge for drivers or members of a
household covered by the policy that are unmarried males
between the ages of 19 and 24;
h. Requires the plan to offer a six-month payment option
with no more than 15% down and prohibits any other premium
financing arrangement;
i. Requires that rates must satisfy the following
standards:
i. Rates must be sufficient to cover losses
under the policies and expenses incurred due to
participation in the program, including the costs of
administration, underwriting, taxes, commissions, and
claims adjusting;
ii. Nonparticipating consumers must not subsidize
CLCA participants; and
iii. Participating consumers in one county must
not subsidize the rate in another county;
SB 1273 (Lara), Page 5
j. Requires CAARP to annually submit a rate plan to the
Commissioner with the loss and expense data for the CLCA
program;
aa. Sets the following eligibility criteria for applicants:
i. Household income may not exceed 250 percent
of the federal poverty level or defined in an equivalent
manner by the Commissioner;
ii. Must not be less than 19 years of age or have
less than three years continuous driving experience;
iii. Must not have more than one accident
resulting in property damage or one point for a moving
violation within the prior three years;
iv. May not have had on record any at-fault
accident involving bodily injury or death;
v. May not have had a felony or misdemeanor
conviction for a violation of the Vehicle Code on his or
her record; and
vi. May not be a college student claimed as a
dependent for another person's federal or state income
tax purposes;
bb. Credits drivers who have driving experience obtained in
countries other than the U.S. or Canada for the purposes of
qualifying with sufficient experience, as specified;
cc. Provides that the policy may be cancelled or nonrenewed
for only specified reasons;
dd. Requires every producer (agent or broker) to inform
prospective applicants of the CLCA program, as specified;
ee. Declares that the CLCA program is not intended to amend,
nor is subject to, Proposition 103.
SB 1273 (Lara), Page 6
4. Provides that an application may be made through a producer
certified by the plan and requires the applicant to provide a
copy of state or federal income tax returns or other reliable
evidence from a government agency, as specified, for proof of
income;
a. Requires a certified producer to provide applicants with
a disclosure explaining that:
i. The liability coverage provided is reduced
leaving the insured potentially liable for excess
losses;
ii. The policy does not cover:
1. Damages to the insured's vehicle;
2. Losses resulting from the insured's
own bodily injury or death;
3. Losses caused by an uninsured or
underinsured driver, although that coverage and
medical payments coverage is available at the
applicants option; or
4. Drivers in the household that do not
meet certain eligibility criteria;
b. Entitles certified producers to the same commission rate
paid by CAARP for private passenger, nonfleet risks;
c. Permits a certified producer to process applications
through an Internet website.
SB 1273 (Lara), Page 7
5. Limits constitutional challenges to those commenced on February
1, 2000, or before.
6. Repeals the CLCA program on January 1, 2016, unless extended.
7. Requires the Department of Motor Vehicles to notify residents
of the CLCA program when it sends a notice of intent to suspend,
cancel, or revoke registration for reason of lack of insurance
coverage. (Vehicle Code § 4000.38.)
8. Requires insurers to pay an annual special purpose assessment
of up to twenty-five cents ($0.25), until January 1, 2016, for
each vehicle insured under an insurance policy it issues in this
state (Ins. Code § 1872.81):
a. Permits up to five cents ($0.05) of that assessment to
be used to notify insurers and other members of the public
about the existence of any low-cost automobile insurance
program;
b. Requires the Commissioner to prepare and propose an
outreach plan for the CLCA program by March 1 of each year to
the Assembly Committee on Insurance and the Senate Committee
on Banking Finance and Insurance that address issues as
specified and makes funding for the plan contingent on review
by those committees and requires the outreach plan to
include:
i. A description of methods to be used,
anticipated costs, sources of revenue, goals, targets,
objectives, and a justification of the proposed methods;
ii. The Commissioner's determination regarding
whether the program has been "successful" and an
explanation regarding that success or lack thereof,
based on the following criteria:
1. The program generated sufficient
SB 1273 (Lara), Page 8
premiums to cover losses incurred under policies
issued under the program, and expenses incurred by
the program;
2. The program served the public
purpose of offering access to automobile insurance
to otherwise "underserved" communities;
3. The program offered access to
automobile insurance to previously uninsured
motorists seeking affordable coverage;
4. The program's outreach efforts lead
uninsured motorists to contact a producer, and the
driver obtains any auto insurance policy that
complies with California law;
iii. A description of aspects of the program that
may require revision;
iv. A description of the impediments to success
of the program;
v. A detailed explanation of the DOI's use for
the program funds; and
vi. A list of the total low-cost auto premium for
each county for the prior year.
This bill
1. Would remove obsolete provisions related to the
county-by-county expansion of the program and the
statutorily rates set for specified counties.
2. Would eliminate the cap on the value of the insured vehicle
set at more than $20,000 valued at the time of purchase.
SB 1273 (Lara), Page 9
3. Would require that a surcharge be added to the base rates
of the following:
a. Unmarried males between the ages of 19 and 24 years
of age;
b. Drivers who:
i. Are licensed pursuant to Vehicle Code
Section 12801.9 with fewer than three years of
driving history;
ii. Have less than three years of driving
history;
iii. Have not been continuously licensed to
drive for the past three years.
4. Would permit the Commissioner to approve or issue
additional installment plan options.
5. Would require CAARP to submit a revised rate plan to the
Commissioner every three years rather than annually.
6. Would permit a person who has not been continually licensed
to drive or has fewer than three years of driving history to
qualify for the program if they qualify for a surcharge as
specified.
7. Would permit a producer not certified by the plan to refer
inquiring consumers to the program's website in lieu of the
program's toll-free number.
8. Would revise the disclosure provided to CLCA policy
SB 1273 (Lara), Page 10
purchasers to reflect revisions to the eligibility
requirements.
9. Would entitle certified producers of the CLCA to a
commission rate of a fixed percent (currently set with a
blank) or one set by the Commissioner that is no less than
that paid by CAARP for private passenger, nonfleet risks.
10. Would require CAARP and the insurer to notify producers of
any pending policy cancelations and would allow the consumer
to reinstate, in lieu of canceling, policies canceled for
nonpayment of premium.
11. Would require CAARP and insurers to accept payment by check
or money order, and accept down or installment payments by
debit or credit card by telephone or through its website.
12. Would require CAARP to submit the report required by
Insurance Code Section 11629.81 to the Commissioner (instead
of the Legislature) so that the DOI may combine that report
with the outreach plan required by Insurance Code Section
11629.85 and submit a consolidated report to the Legislature
(rather than specified legislative committees) on March 15
of each year, and eliminate the requirement that funding for
the outreach plan be contingent on review by specified
legislative committees.
13. Would eliminate the January 1, 2016, sunset date.
14. Would revise provisions related to the program's website
located at www.mylowcostauto.com website by eliminating the
alternative contracting provisions related to the website
and permitting an applicant to apply for the program
directly through the website rather than through a certified
producer.
15. Would recognize the validity of electronic signatures for
the purposes of the CLCA program.
SB 1273 (Lara), Page 11
16. Would require CAARP and subscribing insurers to establish a
data system that tracks renewed policies, policy
cancellations, and nonrenewals and grant the DOI access to
that data.
COMMENTS
1. Purpose of the bill . According to the author, SB 1273 will
reform and enhance California's Low Cost Auto Insurance
(CLCA) program to provide income eligible drivers with
affordable automobile liability insurance. Insurance
industry estimates state that approximately 15 percent of
the cars on the road do not have insurance for various
reasons, with cost being one of them. Although the numbers
of applications are up, it is estimated that only 10% of low
income individuals currently qualify for the low cost
program. The limit on the value of an automobile that can be
insured through the program excludes Californians who are
just over the threshold but still have lower annual incomes.
The California Low Cost Automobile insurance program will
face a sunset provision that would terminate the program as
of January 1, 2016. Also, the eligibility criteria that
requires at least three years of previous driving experience
would exclude many new low-income drivers as well as the
estimated 1.4 million newly licensed drivers now eligible
under AB 60.
2. Background . Private passenger automobile insurance protects
the owner of the vehicle, the driver, passengers, and any
person potentially injured by an accident involving the
insured vehicle or person. It basically provides some
resources in making an injured party "whole"; without auto
liability coverage, injured parties may receive nothing to
assist in the payment of medical costs, lost wages, etc.,
and may be stuck paying the bills themselves. Since 1974,
California law has required drivers to carry liability
coverage for bodily injury or death of at least $15,000 for
each person up to $30,000 as well as coverage for property
damage of least $5,000 per accident.
The problem of uninsurance plagues the entire nation and a
SB 1273 (Lara), Page 12
lack of affordable liability coverage hits low-income
drivers the hardest. The Department of Insurance (DOI)
estimates that there are approximately 3 million cars on the
road that are uninsured, or roughly one in ten. A March
2014 study by the Consumer Federation of America (CFA),
Uninsured Drivers: A Societal Dilemma in Need of a Solution,
explains that the data available "conclusively show that
lower-income drivers are far more likely, than higher income
motorists, to drive without liability coverage." (Page 4.)
The California Automobile Assigned Risk Plan (CAARP) was
originally created in 1947 to provide insurance to those who
could not otherwise acquire it due to a poor driving record.
Applicants for CAARP coverage are assigned randomly to auto
insurers based on each insurer's portion of the voluntary
market. Its primary impact has evolved over the years,
eventually becoming a primary source of low-cost insurance.
(See the Senate Floor Analysis to SB 429 (Lewis), 1993-94
Legislative Session).
In 2000, two CLCA pilot programs were established within
CAARP in Los Angeles and San Francisco Counties. Since then
the program has been expanded to all counties, and according
to the DOI, more than 73,000 people have been covered by
affordable auto insurance through the program. Last year the
CLCA experienced a 22 percent increase from 2012. At the
end of 2013, 11,521 CLCA policies were in force.
a. Expansion of Program Eligibility. The bill, with
suggested amendments, would expand eligibility for the
program by eliminating the three-year continuous driving
experience requirement, permitting new classes of
eligible drivers to participate in the program,
including:
i. Newly Licensed Drivers under AB 60. Last
year, AB 60 (Alejo) authorized the Department of
Motor Vehicles (DMV) to issue a driver's license to
an applicant who, meeting other criteria, is unable
to submit satisfactory proof that his or her
presence in the United States is authorized under
federal law. According to the Senate Appropriations
Committee analysis on that bill, DMV estimated that
1.4 million new licenses will be issued over three
years under AB 60.
SB 1273 (Lara), Page 13
ii. Novice Drivers. Inexperienced, and
particularly young and inexperienced, drivers have a
higher probability of getting into an accident than
their more experienced peers, although, the impact
of inexperience on the probability of accidents
lessens as the driver ages. (Department of Motor
Vehicles, Teen and Senior Drivers (2003), p. 40.)
Additionally, there may be an increased probability that
an accident or traffic violation might not appear on a
previously unlicensed driver's record. Unlicensed
drivers are not tracked until a crash or traffic
violation conviction is reported to the DMV and saved in
its electronic database. The DMV must then match an
applicant's preexisting records based on the name, date
of birth, and address previously reported. (Department
of Motor Vehicles, Estimation Of Fatal Crash Rates For
Suspended/Revoked and Unlicensed Drivers In California
(2012), pp. 2-3.)
This bill would also increase eligibility by eliminating
the $20,000 cap on the value of the vehicle insured
measured at the time of purchase (regardless of when
purchased or fair market value).
Applicants meeting current eligibility will probably not
be affected significantly by these changes since the
costs of additional risks are paid via surcharge.
a. Elimination of the Sunset Clause. SB 1273 would
eliminate the January 1, 2016, sunset date for the
program. Concerns have been raised that given the
significance of the proposed changes and unknown
variables that may impact program's operations,
functionality, and rate structure, additional legislative
oversight may be necessary.
b. Elimination of the Annual Rate Review. Currently,
CAARP must submit a rate plan every year; this bill would
SB 1273 (Lara), Page 14
change that to every three years. Personal Insurance
Federation of California (PIFC), although not opposed to
the bill, recommends that CAARP continue to be required
to review rates on an annual basis in order to give all
the interested parties an opportunity to assess and
evaluate all the changes until they are more
comprehensively understood. According to PIFC, given the
eligibility enhancements, more frequent review of data to
ensure rate adequacy in the specific geographic areas is
appropriate.
c. Changes to Producer Involvement. Currently,
applicants must work through certified producers, i.e.
agents and brokers, to apply for the CLCA program. This
bill revises aspects of the producer's relationship to
the program, including the following:
i. Increased Commissions. This bill
would set a commission rate (currently blank) and,
alternatively, allow the Commissioner to set a
commission rate paid to producers above that
provided by CAARP for other programs. PIFC states
that although an increased commission is a laudable
goal, PIFC is concerned that the increase will be
passed on via increased rates. PIFC is also
concerned because the higher commissions may
incentivize producers to sell the CLCA policy over a
similarly priced standard policy with higher limits
and better coverage. PIFC emphasizes that the
program is intended to be a mere safety net for
drivers who cannot afford coverage in the voluntary
market.
ii. Direct Sale Via Website. This bill
permits CAARP to provide applicants the opportunity
to apply directly through the website without a
producer. Concerns have been raised that without a
producer to provide analysis and advice, an
applicant might not be aware or fully understand
aspects of the policy, such as the lower limits and
the lack of property coverage on their own vehicle.
1. Arguments in Support
SB 1273 (Lara), Page 15
a. The Department of Insurance (DOI), the sponsor of
the bill, writes that SB 1273 enhances eligibility for
CLCA via new segments of the driving population coming on
board through AB 60 and related reforms; encourages more
CLCA applications and improves the marketability of CLCA
to targeted populations by updating the program to
reflect the ways in which consumers seek to conduct their
business; enhances retention of drivers currently with
CLCA policies; and streamlines and reforms administrative
functions by modifying reporting requirements, as well as
those of insurers involved in CLCA.
b. The DOI notes that SB 1237 would allow more
low-income Californians the opportunity to purchase
affordable automobile insurance, most importantly
newly-licensed non-citizen individuals who will receive a
driver's license pursuant to the process set forth in
Assembly Bill 60 of 2013. With AB 60 now California law,
there is significant potential to add enrollees as we
prepare to welcome approximately 1.4 million newly
registered drivers, according to DMV estimates. An
unknown but potentially significant number of these newly
licensed drivers will be eligible for low-cost auto
insurance via CLCA. The DOI further explains that a
recent Sacramento State University report demonstrated
that the existing CLCA program serves important needs in
the community, particularly as it relates to California's
senior and Latino populations.
2. Arguments in Opposition
None received.
3. Suggested Amendments .
a. As explained by the author and sponsor, the
intention behind SB 1273 is to open the eligibility
criteria for drivers who have less than three years of
recorded or actual driving experience, but require the
new categories of driver to pay for their own additional
risk. The bill accomplishes this by requiring and
establishing the standards for a surcharge and then
exempting anyone from the three-year continuous driving
SB 1273 (Lara), Page 16
requirement if they qualify for the surcharge. The CLCA
already surcharges younger unmarried males, but the bill
must establish a surcharge for other drivers with less
than three years of continuous driving experience. The
surcharges must be actuarially sound, but whether
categories of drivers in subparagraphs (A),(B), and (C)
will be surcharged differently or whether they will
grouped together has not been determined. The Committee
may wish to consider the following amendment to clarify
the surcharge eligibility requirement.
Amend subdivision (a) of Section 11629.72 to read:
The annual rate offered under the program for each of
the counties in California shall be established at a
date according to the discretion of the Commissioner. A
surcharge Surcharges , as a percentage of the base rate,
shall be added to the base rate and that percentage
shall be set at the discretion of the Commissioner, if
the named insured or a resident of the household of the
named insured will be a driver of the automobile covered
under the low-cost policy, and is either or both of the
following:
(1) An unmarried male between 19 and 24 years of
age.
(2) To whom one or more of any the following
applies:
(A) Operates a vehicle with a driver's
license issued by the Department of Motor
Vehicles pursuant to Section 12801.9 of
the Vehicle Code and has fewer than three
years of driving history.
(B) Has fewer than three years of driving
history.
(C) Has not been continually licensed to
drive for the past three years.
a. The revisions to the eligibility criteria and other
proposed changes substantially impact program operations
and purpose. Given the extent of the changes proposed by
the bill, the committee may wish to consider extending
the sunset date from January 1, 2016, to January 1, 2019.
1. Prior and Related Legislation
SB 1273 (Lara), Page 17
a. Chapter 794, Statutes of 1999 (SB 171, Escutia)
established the Low-Cost Automobile Insurance Pilot
Program in the County of Los Angeles until January 1,
2004.
b. Chapter 807, Statutes of 1999 (SB 527, Speier)
established Low-Cost Automobile Insurance Pilot Program
in the County of San Franciso until January 1, 2004.
c. Chapter 742, Statutes of 2002 (SB 1427, Escutia)
extended the sunset date of the pilot programs to 2007;
reduced the premium; changed the gross annual household
income limit from 150 percent to 250 percent of the
federal poverty level; and established other duties to
make the program more available to eligible consumers.
d. Chapter 435, Statutes of 2005 (SB 20, Escutia)
extended the sunset date on the pilot programs until
January 1, 2011, and also expanded the low cost auto
insurance programs to the Counties of Alameda, Fresno,
Orange, Riverside, San Bernardino, and San Diego and made
the expansion of the program subject to the discretion of
the Commissioner (the program was extended to all
counties after this bill).
e. AB 725 (Jones), 2009-10 Legislative Session, would
have extended the sunset date and made other changes.
Vetoed by Governor Schwarzenegger.
f. Chapter 234, Statutes of 2010 (AB 1597, Jones)
extended the program sunset date to 2016 and made various
statutory changes to conform its operations to standard
California administrative practices and to provide for
more efficient administration of CAARP.
g. Chapter 401, Statutes of 2011 (AB 1024, Hueso)
authorizes producers to sell CLCA policies through an
Internet website, required CAARP to create a website for
referring consumers to certified agents or brokers for
the purchase of low-cost automobile insurance, and
required the DMV to update the insert regarding the
SB 1273 (Lara), Page 18
low-cost automobile insurance program that is included in
registration renewals to reflect the online program
established by this bill.
h. Chapter 321, Statutes of 2013 (AB 1391, Assembly
Insurance) authorized the Commissioner to approve changes
to the plan of operations without having to comply with
the full rulemaking provisions of the Administrative
Procedure Act, but only if the changes are approved by
the advisory committee and after a public hearing, unless
the Commissioner receives comments raising fundamental
issues related to the validity of the proposed plan
amendments.
i. Chapter 347, Statutes of 2013 (SB 476, Steinberg)
requires a special purpose assessment of $0.25 until
January 1, 2016, on each vehicle insured under an
insurance policy issued in this state by the insurer and
authorized the DOI to use up to $0.05 of the $0.25
assessment to notify insurers and other members of the
public about the existence of any low-cost automobile
insurance program.
POSITIONS
Support
Department of Insurance (sponsor)
California Catholic Conference, Inc.
California Immigrant Policy Center
Coalition for Humane Immigrant Rights of Los Angeles
Coalition of California Welfare Rights Organizations
Consumer Federation of California
Friends Committee on Legislation of California
Oppose
None received.
Consultant: Hugh Slayden (916) 651-4102
SB 1273 (Lara), Page 19