BILL ANALYSIS                                                                                                                                                                                                    



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          GOVERNOR'S VETO


          AB  
          2588 (Chu)


          As Enrolled  September 7, 2016


          2/3 vote


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          |ASSEMBLY:  |50-29 |(June 2, 2016) |SENATE: |25-13 |(August 23,      |
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          Original Committee Reference:  INS.


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










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          The Senate amendments:


          1)Eliminate the requirement for adjusters to maintain a $2,000  
            performance bond if the adjuster is working for a licensed  
            firm that meets the bonding requirement.


          2)Establish an inactive license category for adjusters.


          3)Reduces the fee for issuing or renewing an adjuster license  
            from $120 to $80.


          4)Resolve chaptering out conflicts with SB 488 (Block), Chapter  
            833, Statutes of 2016.


          EXISTING LAW:  


          1)Requires business entities providing insurance adjusting  
            services to be licensed by the Department of Insurance (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:  According to the Senate Appropriations  
          Committee, the bill has estimated ongoing costs to the DOI of  
          $700,000 to $800,000 per year for the added licensing and  








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          enforcement costs for the new licensees.  The new program will  
          generate estimated revenue of $1.5-2.5 million per year from  
          fees from the new license requirements. Estimated costs to the  
          Department of Justice of $400,000 in fiscal year 2017-18,  
          $480,000 in fiscal year 2018-19, and $160,000 ongoing thereafter  
          for processing live scan fingerprints submitted with  
          applications. 


          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  








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            requirements for property/casualty adjusters.


          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.  This 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.  


          5)DOI Workload.  The DOI has a working estimate of 40,000 new  








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            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.  


          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 United States (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. 


             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%  
               lower wages than licensed workers with similar levels of  
               education, training, and experience. 


            "Licensing laws also lead to higher prices for goods and  
            services, with research showing effects on prices of between  
            3% and 16%.  Moreover, in a number of other studies, licensing  
            did not increase the quality of goods and services, suggesting  








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            that consumers are sometimes paying higher prices without  
            getting improved goods or services."


          GOVERNOR'S VETO MESSAGE:


          I am returning Assembly Bill 2588 without my signature.


          This bill requires unlicensed individuals employed by entities  
          with a "company license" to obtain their own separate  
          independent insurance adjuster licenses.


          I am not convinced that an overhaul of the current licensing  
          system is warranted. If a need can be demonstrated that  
          individual licensure of these individuals is necessary, I would  
          be willing to consider such an approach.




          Analysis Prepared by:                                             
          Paul Riches / INS. / (916) 319-2086  FN: 0005133