BILL ANALYSIS                                                                                                                                                                                                    



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          Date of Hearing:   April 20, 2016


                           ASSEMBLY COMMITTEE ON INSURANCE


                                   Tom Daly, Chair


          AB 2588  
          (Chu) - As Amended April 18, 2016


          SUBJECT:  Independent insurance adjusters


          SUMMARY:  Creates new individual licensing programs for  
          independent property/casualty insurance adjusters (adjuster) and  
          apprentice independent property/casualty insurance adjusters  
          (apprentice).  Specifically, this bill:  


          1)Adds adjusters to an existing statute that defers license  
            renewal for insurance licensees who are actively serving in  
            the military.


          2)Provides that fees collected under the adjuster licensing law  
            are earned fees and cannot be refunded.


          3)Defines "catastrophe" for the purpose of the insurance  
            adjuster law to mean an event that causes a large number of  
            deaths or injuries, extensive damage to infrastructure,  
            overwhelming demand on first responders, or severe long-term  
            impact on economic activity.


          4)Requires an individual or business entity that investigates,  








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            negotiates, or settles property and casualty claims for an  
            insurer to be licensed by the Department of Insurance (DOI) as  
            an adjuster.


          5)Exempts the following from the adjuster licensing requirement:


               a.     An officer, manager, director, or employee of an  
                 insurer, surplus line insurer, risk retention group,  
                 managing general agent, or the attorney-in-fact of a  
                 reciprocal insurer.


               b.     An individual employed solely to obtain facts  
                 related to a claim or furnish technical assistance to a  
                 licensed adjuster.


               c.     Fraud investigators.


               d.     Health care providers and their employees.


               e.     Managed care organizations and their employees.


               f.     Individuals employed by an employer who self-insures  
                 for property/casualty risks.


               g.     Individuals who adjust workers' compensation claims.


          6)Requires an individual or business entity seeking a license as  
            an adjuster to submit fingerprints, the completed application,  
            and required fees.  









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          7)Requires applicants for an adjuster license to:


               a.     Have either two years of experience adjusting claims  
                 or worked for one year as an apprentice.


               b.     Complete a 20 hour pre-license course of study.


               c.     Pass a written examination.


          8)Requires an individual who resides in a state that does not  
            license adjusters to become licensed in California.


          9)Exempts individuals licensed as an adjuster and in good  
            standing in another state from the pre-license education  
            requirement.


          10)Establishes the apprentice license to gain the experience  
            required to become an adjuster.  A licensed adjuster must  
            agree to provide training, direction and control of the  
            apprentice.


          11)Establishes a non-resident adjuster license for applicants  
            who meet the following criteria:


               a.     Is licensed in good standing as an adjuster in their  
                 state.


               b.     The applicant's home state issues non-resident  
                 adjuster licenses to California applicants on the same  








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                 basis that California issues non-resident licenses.


          12)Enacts an adjuster "code of conduct" which generally requires  
            adjusters to treat consumers fairly, not engage in the  
            practice of law, comply with applicable laws, and be free of  
            financial conflicts of interest.


          13)Requires adjusters to complete 24 hours of continuing  
            education in each two-year licensing cycle.


          14)Requires the fee for an apprentice license to be set by the  
            commissioner and be reasonably related to the cost of  
            licensing.


          15)Delays implementation of these changes until January 1, 2018.


          EXISTING LAW:  


          1)Requires business entities providing insurance adjusting  
            services to be licensed by the DOI.


          2)Requires a business entity to designate a qualified individual  
            to be responsible for the operation of the business entity's  
            adjusting functions.  That individual must have at least two  
            years of experience adjusting claims and pass an examination.


          3)Exempts individuals working for an insurer or a business  
            entity that adjusts claims for an insurer from being licensed.


          FISCAL EFFECT:  Undetermined.








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          COMMENTS:  


           1)Purpose  .  According to the author, this bill will improve the  
            caliber of independent insurance adjusters in California by  
            requiring anyone who is not employed by an insurer (including  
            self-insured entities) who adjusts property/casualty insurance  
            claims to be licensed.  To become licensed, individuals will  
            have to complete pre-licensing education, pass a qualifying  
            examination, and pass a fingerprint-based background check.   
            In addition licensees must complete 24 hours of continuing  
            education every two years.  Furthermore, the bill creates the  
            apprentice independent insurance adjuster license for those  
            seeking to become licensed. This  bill will also allow  
            California and other states with similar licensing laws (34  
            other states license individual adjusters) to license  
            non-residents on a reciprocal basis.  These changes will  
            streamline the process for non-residents to obtain an adjuster  
            license as currently these applicants must pass California's  
            examination which is substantively similar to the examination  
            passed in their resident states.
           2)Claims Adjusters .  Claims adjusters are central to the  
            operation of an insurer.  They investigate and evaluate  
            insurance claims, decide whether an insurance company must pay  
            a claim, and, if so, how much the insurance company must pay  
            to satisfy the claim.  This frequently requires on-site  
            physical inspection in a property damage claim (commonly a  
            home, business location, or automobile) which brings them into  
            regular contact with the insured and with other members of the  
            public.  This bill is proposing new, broader licensing  
            requirements for property/casualty adjusters.








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           3)NAIC Guideline  .  The National Association of Insurance  
            Commissioners (NAIC) is composed of the insurance  
            commissioners for each state and has a number of functions.   
            Among those is promoting consistency in insurance law by  
            developing model laws and guidelines for the states.  Adopting  
            some NAIC model laws related to the financial solvency of  
            insurers is required for a state to maintain its accreditation  
            status with NAIC.  Accreditation is crucial to the effective  
            functioning of the oversight of financial solvency and states  
            effectively have to adopt NAIC model laws that are part of the  
            accreditation standards.  NAIC model laws and guidelines that  
            are not part of the accreditation standards are strictly  
            advisory and states are under no obligation to enact them.   
            This bill is based on a guideline developed by the NAIC that  
            is not an accreditation standard.  The DOI reports that 35  
            states license adjusters in varying forms and this bill  
            closely follows the NAIC guideline, including the creation of  
            the apprentice license which is noted as an option in the  
            guideline.  


           4)Contractor vs. Employee  .  The bill only applies the new  
            individual license requirement to individuals who adjust  
            claims for an insurer or self-insured entity on a contract  
            basis while exempting individuals who are employees of an  
            insurer or self-insured entity.  This is analytically  
            troublesome.  Adjusters perform the same service and present  
            the same risk regardless of their status as an employee or a  
            contractor.  The argument that individual adjusters must be  
            licensed to ensure their competence and protect the public  
            applies equally to both employees and contractors who are  
            adjusting claims.  Tax filing status seems a poor proxy for  
            determining the necessity of a license.  









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           5)DOI Workload  .  The DOI has a working estimate of 40,000 new  
            licenses being issued over a two-year period if this bill is  
            enacted.  This working estimate is based the assumption that  
            the number of independent adjusters in California would be  
            similar to other large states, such as Florida.  It is often  
            difficult to estimate the number applicants when establishing  
            a new licensing program because the affected population is  
            typically unknown, and it can be hard to predict how  
            businesses may alter their practices based on new licensing  
            requirements.  This in turn frustrates any attempt to set fees  
            and budgets at an appropriate level.  The bill allows for a  
            fee of up to $170 for each license which is valid for two  
            years, and requires a license renewal fee of up to $170 every  
            two-years.  First time applicants would also pay an exam fee  
            of $50.  The DOI estimates that the added licensing and  
            enforcement costs for these new licensees would be $400,000 -  
            $500,000 per year.  If the volume of applications is near the  
            DOI estimate and the maximum $170 license fee is charged, the  
            DOI would expect to receive roughly $4 million per year in  
            added revenue which far exceeds the estimated cost of the  
            licensing program.  Assuming costs are at the high end of DOI  
            estimates and the application volume estimate is accurate, a  
            license fee of $12.50 would cover the costs incurred by DOI.   
            Given the broad disparity between the estimated costs and the  
            maximum possible revenue, DOI will have to refine its  
            estimates before establishing the fee and implementing the  
            license requirement.  


           6)Impact of Expanding Licensing Requirements  .  There has been  
            some attention paid recently to the expanding number of  
            occupations that require a license.  Most notably a study  
            co-authored by the US Treasury Department, Council of Economic  
            Advisors, and the US Department of Labor found that  
            occupational licensing requirements have a measurable economic  
            impact.  The study found that: 










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            "?by making it harder to enter a profession, licensing can  
            also reduce employment opportunities and lower wages for  
            excluded workers, and increase costs for consumers. 


               a.     Research shows that by imposing additional  
                 requirements on people seeking to enter licensed  
                 professions, licensing can reduce total employment in the  
                 licensed professions. 


               b.     Estimates find that unlicensed workers earn 10 to 15  
                 percent lower wages than licensed workers with similar  
                 levels of education, training, and experience. 


               c.     Licensing laws also lead to higher prices for goods  
                 and services, with research showing effects on prices of  
                 between 3 and 16 percent. Moreover, in a number of other  
                 studies, licensing did not increase the quality of goods  
                 and services, suggesting that consumers are sometimes  
                 paying higher prices without getting improved goods or  
                 services."


          REGISTERED SUPPORT / OPPOSITION:




          Support


          Department of Insurance (sponsor)




          Opposition








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          American Association of Independent Claims Professionals




          Analysis Prepared by:Paul Riches / INS. / (916) 319-2086