BILL ANALYSIS Ó SENATE COMMITTEE ON INSURANCE Senator Richard Roth, Chair 2015 - 2016 Regular Bill No: AB 2588 Hearing Date: June 22, 2016 ----------------------------------------------------------------- |Author: |Chu | |-----------+-----------------------------------------------------| |Version: |June 13, 2016 Amended | ----------------------------------------------------------------- ----------------------------------------------------------------- |Urgency: |No |Fiscal: |Yes | ----------------------------------------------------------------- ----------------------------------------------------------------- |Consultant:|Hugh Slayden | | | | ----------------------------------------------------------------- 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 AB 2588 (Chu) Page 2 of ? 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. AB 2588 (Chu) Page 3 of ? 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 AB 2588 (Chu) Page 4 of ? 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 AB 2588 (Chu) Page 5 of ? 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 AB 2588 (Chu) Page 6 of ? 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 AB 2588 (Chu) Page 7 of ? 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. AB 2588 (Chu) Page 8 of ? 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 -- END --