BILL ANALYSIS
SENATE COMMITTEE ON INSURANCE
Senator Jackie Speier, Chair
SB 708 (Speier) Hearing Date: April 4,
As Introduced: February 23, 2001
Fiscal: Yes
Urgency: No
SUMMARY
Would change civil fines in the insurance code, expand an
earthquake mediation program to include automotive and
residential insurance claims, prohibit the Department of
Insurance (DOI) from refusing to investigate complaints
under specified circumstances, and create new requirements
for insurance adjusters and insurers who adjust earthquake
claims
DIGEST
Existing law
1. Provides for regulation of the business of insurance
by the Insurance Commissioner (IC).
2. Prohibits trade practices defined as unfair methods of
competition or determined to be an unfair or deceptive
business practice;
3. Imposes a civil penalty upon an insurer of up to $5,000
for each act that is an unfair or deceptive trade
practice or up to $10,000 for each willful act;
4. Provides discretion to the IC to establish what
constitutes an act for these purposes;
5. Requires the DOI to establish a mediation program for
disputes arising from the 1994 Northridge earthquake,
and authorizes the program to continue until January 1,
2005;
6. Requires the IC to receive and investigate complaints
about the handling of insurance claims by insurers;
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7. Sets forth various other duties of the IC and the DOI;
This bill
1. Would provide for an unspecified civil penalty for an
act that is an unfair method of competition or an
unfair and deceptive trade practice;
2. Would provide for an unspecified but higher civil
penalty for a willful act that is an unfair method of
competition or an unfair and deceptive trade practice;
3. Would delete the discretion of the IC to define an act
and would define an act, in the current version of the
bill, in an unspecified manner;
4. Would allow the IC, in addition to levying civil
penalties, to order that a claim be paid by an insurer;
5. Would expand the DOI's earthquake mediation program to
disputes that arise out of residential and automotive
coverage, under specified circumstances, increase the
cap on fees paid to mediators, and would make other
changes to the mediation program;
6. Would provide that the IC may not decline to
investigate a complaint on various grounds, including
that the insured is represented by an attorney or that
an attorney is making a complaint;
7. Would require that information about justified
complaints against insurers be made public, as
specified;
8. Would require that legal opinions of the DOI given to
insureds be made public, under specified circumstances;
9. Would prohibit the IC from agreeing in a settlement
agreement related to unfair claims practices that
"extraordinary circumstances" existed for longer than
six months, unless the IC includes a written
justification and states the dates during which the
extraordinary circumstances existed;
10. Would require that the DOI adopt regulations relative
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to training and accrediting insurance adjusters in the
evaluation of earthquake damage;
11. Would require that any earthquake claim adjusted by an
unaccredited adjuster be reported, along with the
adjuster's name, to the DOI;
COMMENTS
1. Purpose of the bill . To update the fines levied for
violations of the law governing fair claims practices
and unfair competition to at least account for
inflation, to foreclose opportunities for abuse of
authority granted to the IC, and to further protect
consumers by prohibiting the DOI from declining to
investigate a complaint simply because an attorney is
reporting a violation of the law.
2. Support . The author introduced this bill in response
to the problems uncovered last year at the DOI.
Through several oversight hearings, the Senate
Insurance Committee uncovered a pattern of abuse of
power and discretion that seriously undermined the
intent of the Legislature and that was, at times,
unlawful. Several recommendations were made in an
August 28, 2000 committee report entitled Department of
Insurance: In Rubble After Northridge. This bill
seeks to implement some of the recommendations in the
report that were not already enacted into law (see
Similar Legislation, below). As far as it is known,
the DOI does not have a position on SB 708. However,
Insurance Commissioner Low has indicated his views on
several recommendations in the committee report through
a March 20, 2001 letter to the author. These views are
noted, below, where applicable.
Fines: The report recommended that fines for unfair
claims practices be updated to at least account for
inflation. A fine of up to $5,000 would be increased
to $7,000, and a fine of up to $10,000 would be
increased to $14,000, based upon the increase in the
Consumer Price Index since 1989, the date the current
fines were enacted. However, the amount of the fine
remains blank in the bill because the author also
proposes to define an "act" for purposes of levying the
fine. The author believes that existing law is so vague
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that it encourages illegal activities surrounding
settlements. The author therefore believes that it is
the duty of the Legislature to define an "act" in order
to limit the opportunity for abuse. In commenting
about fines, Commissioner Low has indicated, "I believe
that the Insurance Code should be amended to increase
fines and stiffen penalties. As indicated above [in
his letter], I have directed staff to review Florida's
regulations on this subject, and to provide their
assessment of the impact of implementing similar
regulations in California."
Expansion of mediation: The report recommended that
the earthquake mediation program be expanded and
improved. The author believes that mediation can be a
low cost alternative to costly litigation, and has
proposed that the DOI's mediation program be available
to auto and homeowner policyholders as well, under
specified circumstances. After noting that the DOI
proposed the mediation language in SB 708, Commissioner
Low indicated that he would prefer that the mediation
program remain a pilot after it is expanded, and that
additional changes be made to the program. The author
has indicated her willingness to work with the DOI and
other interested parties to modify the proposed
mediation expansion program.
Ordering that claims be paid: As currently drafted, it
is the intent of the author that the IC have the
explicit authority to order that claims must be paid if
the claims are part of a market conduct exam. Last
year, newspaper reports indicated that the DOI was able
to identify, through market conduct exams, that
payments should have been made to specific Northridge
Earthquake victims. Payments were never ordered by the
DOI and the victims never informed. The author believes
this is wrong and needs to be corrected.
Attorney Complaint Prohibition: In general, the DOI
presently declines to investigate complaints about
claims settlement practices when these complaints are
submitted by attorneys. In a letter to the author,
Commissioner Low has indicated his willingness to
review this policy. Contrary to the assertion of
critics, the author points out that the bill does not
require the IC to investigate complaints filed by
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attorneys. It prohibits the IC from refusing to
investigate complaints because the complaint is made by
an attorney or a client. The author believes that
attorneys can provide the DOI with credible evidence of
insurer violations of the law, and the author has
received numerous credible reports of insurer
violations of the law from attorneys. The author also
notes that, under the bill, it is clear that the IC may
decline, on grounds unrelated to occupational category,
to investigate a complaint. For example, the IC
presently declines to investigate complaints it
believes are frivolous. While one opponent of SB 708,
the Association of California Insurance Companies
(ACIC) labels investigations of complaints by attorneys
as a "palpable waste of resources" (see Opposition,
below), the author believes that the People of
California expect the DOI to protect consumers. There
may be other grounds for not investigating a complaint
by an attorney, but simply classifying all such
complaints as, per se, lacking merit (or a waste of
time) falls far short of protecting Californians.
Sunshine provision: The DOI presently collects
information about consumer complaints, provides
insurers with specified information when the complaint
is deemed justified, and then summarizes this
information for the public. The author believes that
the public deserves more than a summary. Specifically,
the author believes that consumers would be well-served
by knowing the following information about justified
complaints that is already given to an insurance
company: a) The date of a justified consumer
complaint filed against an insurer; b) A succinct
description of the facts of the justified complaint; c)
A statement of the department's rationale for
determining that the complaint was justified. The
insurer will have 30 days prior to the release of the
information on justified complaints to provide a
response to the DOI.
Other provisions: The author believes that the
Legislature must place limits on the term
"extraordinary circumstances." This term is used to
limit insurer responsibility for violations of the law
governing fair claims practices because of
extraordinary circumstances such as an earthquake. The
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author believes that the proposed new requirements are
modest and will help to avoid the type of blanket
concession that was granted in the Northridge
settlements. Commissioner Low has agreed that limits
should be placed on extraordinary circumstances, and
has directed his staff to analyze the proposal in SB
708.
Consumers Union: Consumers Union (CU) supports SB 708
for several reasons. First, it would expand the
mediation program to include other lines of insurance,
thus offering consumers easier resolution of disputes.
Second, it would prohibit the DOI from declining to
investigate complaints merely because the complaint was
submitted by an attorney. CU believes that the DOI
should protect all consumers from breaches by insurers,
not merely those who lack legal representation. Third,
CU believes that the public benefits from knowing about
consumer complaints against insurers. Fourth, CU
believes that legal opinions will be useful to the
public, and will improve the consistency with which the
law is applied. Accrediting and training adjusters
doing earthquake claims is also important to protect
consumers.
3. Opposition .
The Personal Insurance Federation of California (PIFC)
opposes the bill unless amended to provide greater
definition to the mediation component of the bill so
that it's not utilized in minor disputes. PIFC wants
to work with the author to determine how the fines and
"act" issues can be resolved. PIFC continues to object
to giving the IC the authority to order that a claim be
paid and believes that this authority should remain
with the judiciary.
ACIC opposes SB 708 because the penalties in current
law are adequate. Second, the bill would authorize the
IC to order that claims be paid without any requirement
of due process. The courts provide adequate remedies
for disputes. Third, mediation is already available to
parties without expanding the DOI's role in mediation.
Finally, ACIC characterizes the bill as requiring that
the DOI investigate complaints from attorneys, and
labels this a "palpable waste of resources."
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The Alliance of American Insurers (AAI) opposes SB 708
on several grounds. First, AIA states that the bill
renders meaningless the current arbitration provisions
agreed to between an insured and insurers. Second, AIA
objects to expansion of the IC's authority by allowing
the IC to order payment of a claim. Third, AIA states
that the bill "forces" the IC to "get involved" in
claims when the insured has an attorney. AIA believes
the bill will cause duplicative costs for insurers, and
AIA objects to eliminating the discretion of the IC to
define an "act" for purposes of sanctioning insurers.
The American Insurance Association (AIA) opposes SB 708
for at least two reasons: a) The IC may order that a
claim be paid. Among many concerns, AIA objects
believes the DOI is not competent to make judgments
about the amounts due claimants, believes that due
process will not exist, and expresses concerns about
possible conflicts of interest that may exist for
insurers defending litigated claims in two different
and unrelated forums- the court and the DOI; b) The
fine and definition of an "act" must be inserted into
the bill before AIA could evaluate these two issues to
determine if it could support the proposal.
The National Association of Independent Insurers (NAII)
opposes SB 708 because, "the bill would both
unjustifiably expand the power of the insurance
commissioner to include judicial functions and unwisely
limit the authority of the commissioner to make
appropriate regulatory determinations." More
specifically, NAII objects to expansion of the
mediation program, allowing the IC to order payment of
a claim, the issuance by the DOI of public opinions
with respect to specific fact situations, elimination
of the discretion of the IC to define an act, and what
the NAII characterizes as a mandate to investigate
complaints from attorneys.
SIMILAR LEGISLATION
1999/2000 Session: SB 2107 (Speier/Chapter 1091,
Statutes of 2000) required that all settlement funds be
deposited into the General Fund; SB 1524
(Figueroa/Chapter 1089, Statutes of 2000) limited the
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use of settlement funds in outreach activities; SB
1899 (Burton/Chapter 1090, Statutes of 2000) granted
Northridge earthquake victims an additional year in
which to make claims that were otherwise time barred;
AB 481 (Scott) required the IC to include restitution
to consumers as part of a settlement.
2000/2001 Session: None.
POSITIONS
Support
Consumers Union
Oppose
Alliance of American Insurers
Personal Insurance Federation of California
American Insurance Association
National Association of Independent Insurers
Association of California Insurance Companies
Consultant: Brian Perkins 445-0503