BILL ANALYSIS                                                                                                                                                                                                    



          SENATE COMMITTEE ON INSURANCE
                             Senator Richard Roth, Chair
                                2015 - 2016  Regular 

          Bill No:              AB 2588       Hearing Date:    June 22,  
          2016
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          |Author:    |Chu                                                  |
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          |Version:   |June 13, 2016    Amended                             |
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          |Urgency:   |No                     |Fiscal:    |Yes              |
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          |Consultant:|Hugh Slayden                                         |
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                      Subject:  Independent insurance adjusters


           SUMMARY     Makes comprehensive revisions to the Insurance Adjuster Act  
          relative to qualifications for an independent insurance  
          adjusters (IA) license.
          
           
          DIGEST
           
          Existing law


            1.  Titles the collective laws relating to an independent insurance  
              adjuster (IA) the  "Insurance Adjuster Act" ("the Act")


           2.  Requires an individual or business entity that  
              investigates, negotiates, or settles property and casualty  
              claims for an insurer to be licensed by the Department of  
              Insurance (CDI) as an adjuster.


           3.  Exempts individuals working for an insurer or a business  
              entity that adjusts claims for an insurer from the license  
              requirement (permitting employees to work under single  
              licenses is sometimes referred to as a "company license").


           4.  Exempts specified certain categories of persons such as  







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              attorneys, collection agencies, banks, etc.


           5.  Permits unlicensed individuals to adjust claims in an  
              emergency, as specified, if they register with the insurance  
              commissioner (IC) within 15 working days of starting to adjust  
              claims.


           6.  Requires an individual license applicant to pass an exam, have  
              at least two-years of experience, pay a fee, and not have  
              committed certain acts or crimes.


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


           8.  Sets various license fees in statute and provides that the IC  
              may set some fees by regulation.


           9.  Requires license applicants to post a $2,000 surety bond.


           10. Permits certain types of licensees that are actively  
              serving in the military to defer license renewal.
           
          This bill


            1.  Retitles the Act as the "Independent Insurance Adjuster  
              Act."


           2.  Redefines IA as an individual, business entity, independent  
              contractor, or employee of a contractor, who contracts for  
              compensation with insurers; is treated as an independent  
              contractor for federal tax purposes; and who investigates,  
              negotiates, or settles property and casualty claims for  
              insurers.








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           3.  Requires unlicensed individuals adjusting claims during  
              emergency, disaster, or catastrophe to register with CDI  
              within 5 working days of commencing to adjust claims in  
              California and defines "catastrophe" 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.  Eliminates, as of January 1, 2018, the company license and  
              requires all individuals employed by an IA that adjusts  
              claims to be licensed as well.


           5.  Revises some of the other exemptions and adds new  
              categories of exempted persons including employees of an  
              insurer, fraud investigators, individuals employed by an  
              employer who self-insures property and casualty risks; and  
              individuals collecting information related to portable  
              electronic insurance claims.


           6.  Creates an apprentice IA license and requires apprentices  
              to be supervised by a fully licensed IA.


           7.  Requires an individual applicant to submit fingerprints for  
              a background check; complete either two years in adjusting  
              insurance claims or one year as a licensed apprentice IA;  
              and complete 20 hours of pre-licensing education (this  
              requirement is deferred until January 1, 2019, for  
              applicants currently listed as an employee of a licensee);  
              pass an examination; and pay a fee.


           8.  Requires business entity applicants to provide certain  
              documents and information, and, starting January 1, 2018, to  
              designate a licensed individual to be responsible for the  
              organization's compliance with state law.


           9.  Establishes "reciprocity" with states with similar  








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              licensing requirements by creating a nonresident license and  
              exempts nonresident licensees from examination, education,  
              and other requirements so long as the applicant is licensed  
              and in good standing in the home state, pays the applicable  
              fees, and the licensees home state issues non-resident IA  
              licenses to California applicants on the same basis.


           10. Enacts a "code of conduct" which generally requires IAs to  
              treat consumers fairly, not engage in the practice of law,  
              comply with applicable laws, and be free of financial  
              conflicts of interest.


           11. Authorizes the IC to place a licensee on inactive status  
              for failing to complete the necessary continuing education  
              coursework.


           12. Adds or adjusts various fees.


           13. Requires CDI to annually report to the Legislature, on or  
              before March 1, 2019, and for a total of three years  
              thereafter, the number of individuals licensed; the  
              implementation costs and the revenues received; and the  
              annual projected costs and revenues associated with  
              licensure and enforcement activities.


           14. Permits IAs that actively serving in the military to defer  
              license renewal.


           COMMENTS
            
          1.  Purpose of the bill   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.  Company adjusters are directly  
              employed by insurers; IAs are independent contractors.   
              Thirty-five states license IAs, but of those, only  
              California permits employees of a licensed IA to work under  








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              a company license.  The remaining 34 states have adopted  
              laws similar to the Independent Adjuster Licensing Guideline  
              adopted by National Association of Insurance Commissioners  
              (NAIC) and require all individuals that adjust claims to be  
              licensed if they adjust claims as independent contractors  
              rather than employees.  This bill would adopt the NAIC  
              Guideline.

              According to the author, unlicensed employees of IA's are  
              not subjected to exam, fingerprint, education and background  
              review requirements.  Since IAs work as contractors for  
              insurance companies, complaints submitted to CDI from  
              consumers about claims adjusting practices usually come in  
              the form of complaints against the insurance companies, not  
              IAs.  Consumers typically have no idea whether the adjuster  
              handling their claim on behalf of the insurance company is  
              an independent or employee adjuster.

              Further, whereas NAIC's Guideline provides for reciprocity  
              between states for issuing licenses to non-resident  
              independent adjusters, California does not provide  
              reciprocity with other states' licensing of independent  
              adjustors. Specifically, California law currently requires  
              non-residents to pass the California exam, which is  
              substantively similar to the exam offered in their resident  
              state.  California law also does not allow residents of  
              fifteen states that do not license independent adjusters to  
              designate California as their "Home State."

              California seeks to join these 34 other states by requiring  
              that anyone acting as an IA be licensed, including employees  
              of licensed IAs who currently are not licensed. Taken  
              together, these proposed changes will enhance consumer  
              protection and conform to national licensing reciprocity and  
              uniformity standards.

           2.  Background   California first began licensing some insurance  
              adjusters in 1980.  In 1985, adjusting licenses were split  
              into two classes, IA and public adjusters. California chose  
              to offer a company license for property and casualty  
              insurance.  In 2008, the NAIC took a different approach and  
              did not adopt the company license.  But, since it requires  
              all individual IAs to be licensed, it also establishes  
              apprenticeship licenses and reciprocity.  (Reciprocity  








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              permits licensees to practice in several states without  
              having to repeat individual licensing requirements, which  
              may be particularly helpful in smaller states.)

              This bill would follow the NAIC Guideline and eliminate  
              California's company license.  Proponents argue that this  
              bill would help to create uniformity and consistency with  
              national standards, enhance public safety, and establish  
              reciprocity.  

              Adopting some NAIC model laws can be critical to the  
              interstate regulation of insurers and may even be blessed by  
              federal law.  NAIC accreditation means insurers primarily  
              overseen by an accredited state are subject to minimum  
              standards.  In order to receive and retain NAIC  
              accreditation, a state must adopt NAIC specific model laws  
              that are part of the accreditation standards.  Other NAIC  
              model laws and guidelines not part of the accreditation  
              standards are strictly advisory.  This bill is based on a  
              guideline, not an accreditation standard, but it does  
              facilitate reciprocity among adopting states.  Notably, the  
              underlying substantive law related to claims practices, the  
              Unfair Claims Settlement Practices Act and the Fair Claims  
              Settlement Practices Regulations, significantly deviate from  
              the NAIC models and non-resident adjusters may have to apply  
              substantially different standards in California than those  
              of their home state.
              
              Claims investigations sometimes require on-site physical  
              inspection (commonly a home, business location, or  
              automobile) which brings some IA's into regular contact with  
              insureds and with other members of the public.  Existing law  
              does not require background checks for IAs or company  
              adjusters.  This bill will require IAs to go through a  
              background check.  However, concerns have been raised that  
              CDI has offered no evidence of a public safety problem.

              Establishing reciprocity will give non-residents licensees  
              the authority to work in California (any person from another  
              state can work as an employee of a licensee now).   
              Reciprocity will primarily benefit non-resident licensees  
              and California licensees who wish to work in other states.
              
              Portable Electronics Exemption.  This bill would add an  








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              exception to portable electronic insurance.  These contracts  
              cover small electronic devices, such as cell phones, and  
              related services, when they are lost or broken.  Claims  
              usually do not involve controversial facts and are generally  
              handled in a rote matter, unless they involve some form of  
              fraud. 

           3.  Support   Insurance Commissioner Dave Jones supports the bill  
              because, taken together, these changes will enhance consumer  
              protection and conform to national licensing and reciprocity  
              standards.

           4.  Opposition   The American Association of Independent Claims  
              Professionals (AAICP) primarily opposes this bill because it  
              believes that CDI has not offered any evidence of any flaw  
              or failure in the existing system and that AB 2588 moves in  
              the wrong direction.  Moreover, they are concerned that the  
              bill lacks a grandfathering provision and would require many  
              highly experienced adjusters to go through the licensing  
              process.  
              AAICP notes that the NAIC Guideline applicable to  
              third-party administrators and California law permit  
              business entity licensing for life and health insurance  
              adjusters without each individual adjuster having to be  
              licensed. Other states, such as Utah and Montana, similarly  
              permit company-level licensure.

              According to AAICP, there are hundreds, if not thousands, of  
              adjusters residing in states that do not provide a home  
              state license, and that are doing business in California  
              today that have already chosen a state other than California  
              as their "designated home state."  This bill would require  
              them to change their home state to California.  These  
              adjusters cannot change that designation and shift their  
              designated home state to California without having to change  
              every license they hold (and the typical adjuster holds  
              between 8-12 licenses).  

              This bill is not intended to cover workers' compensation,  
              which may be considered a line of casualty insurance.  AAICP  
              believes that this bill could apply to workers' compensation  
              insurance and requests that the bill be clarified  
              accordingly.  
           








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          5.  Questions   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 "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."  Does the evidence presented by the bill's  
              proponent justify the potentially negative impact on  
              consumers (in terms of higher insurance premium), employees  
              of IAs who will be subject to the licensing laws, and  
              potential exclusionary impact of disadvantaged applicants?
           
          6.  Prior and Related Legislation  

              AB 1636 (McAlister), Chapter 1202, Statutes of 1985,  
              established the licensing requirement for and regulation of  
              public insurance adjusters separate from the Insurance  
              Adjuster Act.

              AB 1190 (Moore), Chapter 1190, Statutes of 1980, transferred  
              the licensing of insurance adjusters from the Bureau of  
              Collection and Investigative Services to the CDI and  
              reenacted licensing regulations in the Insurance Code.
           

          POSITIONS
            
          Support
           
          California Department of Insurance (sponsor)
           
          Oppose
           
          American Association of Independent Claims Professionals 


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