BILL ANALYSIS Ó AB 2588 Page 1 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, AB 2588 Page 2 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. AB 2588 Page 3 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 AB 2588 Page 4 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. AB 2588 Page 5 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. AB 2588 Page 6 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. AB 2588 Page 7 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: AB 2588 Page 8 "?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 AB 2588 Page 9 American Association of Independent Claims Professionals Analysis Prepared by:Paul Riches / INS. / (916) 319-2086