BILL ANALYSIS Ó AB 1163 Page 1 Date of Hearing: May 6, 2015 ASSEMBLY COMMITTEE ON INSURANCE Tom Daly, Chair AB 1163 (Rodriguez) - As Amended April 21, 2015 SUBJECT: Health plans and health insurers: agents and brokers contracts SUMMARY: Requires health insurers and health care service plans (health plans) to provide their agents at least 60 days written notice of contract changes. Specifically, this bill: 1)Requires health plans to provide agents and brokers with at least 60 days written notice of any material change in their contract. 2)Defines material change as one that that causes the contract to no longer reflect the terms the parties intended to be the basis for their mutual contractual obligations. EXISTING LAW: AB 1163 Page 2 1)Provides for the regulation of insurers and health insurance agents and brokers by the California Department of Insurance. 2)Defines a health insurance agent as a "life licensee," which is a person authorized to transact insurance coverage for sickness, bodily injury, or accidental death and may include benefits for disability income. 3)Establishes the Knox-Keene Health Care Service Plan Act of 1975, the body of law governing plans in the state, and provides for the licensure and regulation of plans by the Department of Managed Health Care. 4)Prohibits, with certain exceptions, a property and casualty insurer from terminating or amending a contract with an agent or broker of property and casualty insurance that has been in effect for at least one year, unless 120 days advanced written notice has been given by the insurer to the agent or broker. FISCAL EFFECT: Undetermined COMMENTS: 1)Purpose . According to the author, AB 1163 was introduced in response to recent actions by a health insurance carrier that made substantial and material changes to their agreement with health insurance agents only 48 hours before the changes took effect. AB 1163 would level the playing field and provide for a fair and reasonable notice to agents when their contract is substantially changed. An agent or producer agreement is a written contract setting out the terms between an insurance agency and the health plan it represents. Important details such as ownership of renewal, commissions, and general duties AB 1163 Page 3 and responsibilities of each party are usually spelled out in this agreement. Most agent agreements contain provisions that address how and when notice of changes to the agency agreement can be implemented. 2)Commissions . Health plans pay commissions to licensed agents for selling and servicing the plan contract or insurance policy. Commissions are paid based on a schedule outlining the amount and timing of payments that is part of the contract between the health plan and the agent. Health plans sometimes use commissions to drive agents to sell certain products by increasing commissions for products they wish to aggressively market. Conversely, they may lower commissions to deter agents from selling certain products. For example, if a health plan has saturated a market with a certain product, or determines that a product is creating losses, they may opt to lower commissions, thus decreasing financial incentives for agents to sell the product. 3)Supporters . CAHU, Independent Insurance Agents and Brokers Association of California, and the National Association of Insurance and Financial Advisors state that not only does this bill respond to recent actions by a health insurance carrier that made material changes to a contract with only 48 hours' notice, it also levels the playing field and provides fair and reasonable notice to licensed agents when their contract is substantially changed. The sponsors state that most contracts contain provisions that address how and when notice of changes to the contract can be implemented; however, some contracts contain separate clauses that allow carriers to make substantial changes to the agreement without any notice at all. The sponsors state that agents understand that business needs can sometimes drive a need for a material change, and this bill ensures that a change desired by the carrier can take effect as soon as proper notice is given. 4)Opponents . The Association of California Life and Health Insurance Companies (ACLHIC) and the California Association of Health Plans (CAHP) oppose this bill, stating that it would unnecessarily interfere with private party contracts and seeks AB 1163 Page 4 to offer a legislative remedy to an issue better handled through the course of contractual negotiations and agreements. ACLHIC and CAHP state that this bill usurps current contract negotiation practices which already have self-imposed time frames and notification agreements, and where violations are treated as a breach of contract. The opposition argues that a vast majority of their member companies currently have a 30-day notification agreement built into their existing contract frameworks and deviation from that would result in significant expense and confusion. Lastly, ACLHIC and CAHP state that the definition of "material" change under this bill is vague and may introduce further confusion into the contractual negotiation process. Suggested Amendment . The definition of a material change included in the bill is unnecessarily vague and invites needless litigation. The author should consider amending the bill to define material changes as a change to a provision of the contract relating to: a. Commissions, bonuses, and incentives. b. Right of survivorship. c. Indemnification of the agent. d. Errors and omissions coverage requirements. REGISTERED SUPPORT / OPPOSITION: Support California Association of Health Underwriters Independent Insurance Agents and Brokers of California AB 1163 Page 5 National Association of Insurance and Financial Advisors Opposition Association of California Life and Health Insurance Companies California Association of Health Plans Analysis Prepared by:Paul Riches / INS. / (916) 319-2086