BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Martha M. Escutia, Chair
2001-2002 Regular Session
SB 708 S
Senator Speier B
As Introduced
Hearing Date: April 24, 2001 7
Insurance Code 0
CJW:cjt 8
SUBJECT
Insurance Claims: Settlement and Practices
DESCRIPTION
This bill would increase fines for deceptive trade
practices, expand an earthquake mediation program, prohibit
the Department of Insurance from refusing to investigate
claims submitted by attorneys, and create new requirements
for insurance adjusters.
BACKGROUND
This bill is a follow-up to the Senate Insurance Committee
report of last year, and incorporates various proposals
made in the report. It passed the Senate Insurance
Committee on a 5-1 vote.
The bill has been referred to this Committee primarily to
review the proposed changes to the deceptive practice law
and the proposed expansion of the mediation program. These
provisions, like others in the bill, are referred to by the
author as "works in progress," as the author continues to
work with the Department of Insurance and industry
representatives on how best to implement reforms and
correct perceived abuses by the former commissioner.
CHANGES TO EXISTING LAW
1. Existing law provides that any person who engages in
any unfair method of competition or any unfair or
(more)
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deceptive act or practice, as specifically defined in the
law, is liable for a civil penalty to be fixed by the
commissioner, not to exceed $5,000 per act or, in cases
of willful violation, $10,000 per act. The commissioner
has the authority to determine what violation[s],
individually or collectively, constitute "an act" for
purposes of the imposition of a fine. [Ins. Code Sec.
790.035.]
This bill would increase the amounts of the specified
fines to reflect inflation, would delete the provision
permitting the commissioner to determine what constitutes
an act, would legislatively define "an act," and would
provide that the commissioner may order payment of a
claim in addition to levying a fine for a violation.
2. Existing law , SB 882 (Rosenthal) of 1995, established
a mediation program beginning in October of 1995 for
disputes between claimants and insurers arising out of
the Northridge Earthquake of 1994. The law sets forth
procedures for filing complaints, challenging referrals
to mediation, selecting and paying qualified mediators,
and disqualifying mediators with conflicts of interest,
and provides that the cost of mediation shall be borne by
the insurer.
Existing law further provides that no party is required
to accept any agreement proposed during mediation, but
that if such an agreement is accepted, it shall be
binding upon the parties. Existing law requires the
commissioner to collect statistics on the use of the
program and to issue periodic reports on its status.
Finally, existing law provides that the program will
expire by statute on January 1, 2005, unless extended by
further legislation. [Ins. Code Secs. 10089.70 -
10089.84.]
This bill would expand the mediation program to apply to
any property damage claim arising from personal
residential coverage, or from automobile coverage where
the claim exceeds $5,000, would make other minor changes
and updates in the law, and would retain the program's
current expiration date.
3. Existing law requires the commissioner to receive and
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investigate complaints, and to prosecute insurers where
appropriate.
This bill would provide that the commissioner shall not
decline to investigate complaints because the insured is
represented by an attorney or is pursuing a civil action
against the insurer.
4. Existing law provides for notices of violation to be
sent to insurers, but provides for only summaries of
violations in public documents. Existing law further
provides that insurers may invoke "extraordinary
circumstances" in certain instances to justify
noncompliance with the law.
This bill would require the Department's legal opinions
or letters discussing application of the law to be made
public, with any private information redacted. This bill
further would limit the circumstances in which
"extraordinary circumstances" may be raised to justify
noncompliance with the law.
5. Existing law makes no provision for training standards
for insurance adjusters in the area of earthquake damage.
This bill would require the Department of Insurance to
adopt regulations setting such standards by December 31,
2004, and after that date would require insurers using
adjusters for earthquake claims who have not received
such training to submit the names of those adjusters and
information about earthquake claims they have adjusted to
the Department.
COMMENT
1. Stated need for legislation
The author, the sponsor of this bill, states that many of
its provisions arise from legislative recommendations
made in last year's Senate Insurance Committee Report
entitled Department of Insurance in Rubble After
Northridge . In its general findings, the report noted
that the former commissioner's ability to abuse the power
of his office was aided by "numerous ambiguities in
California law" and the "immense regulatory power"
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granted to the commissioner. The report further noted
that written rules and regulations, "a first line of
defense against abuse of government power," were largely
nonexistent in the Department of Insurance.
The report's legislative recommendations included
expansion of the earthquake insurance mediation program
established in 1995 to encompass other types of claims.
Although the earthquake program had received "mixed
reviews," according to the report, "the concept of
mediation of claims after a catastrophe would appear to
be sound."
2. Expansion of mediation program
The report recommended that the Legislature establish and
fund an ongoing catastrophe mediation program. Noting
that California experiences catastrophes other than
earthquakes, such as floods and wildfires, and that these
events cause millions of dollars in property damage, the
report stated that a well-managed mediation program could
speed up settlements and reduce lawsuits.
After consultations with the current commissioner, Harry
Low, and after meeting with many elderly and poorly
educated consumers who were unable to find legal
representation when insurers denied their claims, the
author proposes in this bill to expand the earthquake
mediation program to include claims for residential real
and personal property damage (for properties consisting
of not more than four dwelling units), and claims for
automobile damage where the claim exceeds $5,000, and the
amount in dispute exceeds $1,000.
The proposed bill makes other minor amendments to the
expanded program, but provides no funding. Finally, the
bill retains the current program's required collection of
statistical information and reports on the status of the
program, as well as its expiration date of January 1,
2005, essentially treating it as a pilot program.
3. Opponents' concerns
Several of the insurance organizations opposing this bill
express concerns about its proposed expansion of the
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earthquake insurance mediation program, arguing that it
arbitrarily displaces the arbitration provisions included
in most insurance contracts and the court-administered
mediation program provided for in Title 11.6 of the Code
of Civil Procedure.
Opponents also note that unlike catastrophes, which tend
to result in "high severity, low frequency" claims, most
of the homeowner and particularly the automobile claims
that would be included in the proposed expansion of the
program are "low severity, high frequency" claims, which
are better suited to small claims court and which would
overwhelm a mediation program without a vastly increased
bureaucracy to support it, and would further burden and
delay the claims process. Requiring the insurer to bear
the costs of mediation, and the increased bureaucracy
that would result, would result in higher premiums to
consumers.
Opponents suggest that, to narrow the amounts of claims
in mediation, the proposed threshold for automobile
claims be "raised significantly" and a similar threshhold
be applied to residential claims.
The author responds that this bill is a work in progress,
and that consultations and negotiations on the proposed
program expansion are continuing.
4. Unfair trade practice provision a work in progress
Another "work in progress" is the bill's deletion of the
code provision allowing the commissioner to determine
what constitutes "an act" for the purposes of levying a
fine, and attempting to replace that unlimited discretion
with a defined statutory and/or regulatory process. The
author notes that such a determination is complex,
involving how individual violations should be weighed,
and whether they should be considered individually or
collectively, in assessing a fine. The author is engaged
in continued consultations with the Department and
insurance regulators in other states, as well as with
industry representatives, to craft a statutory and
regulatory scheme addressing this issue. The author
expects further input in this area from the Assembly
Insurance Committee.
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Support: Consumer Attorneys of California; Consumers Union
Opposition: Alliance of American Insurers; American
Insurance Association; Association of California
Insurance Companies; Personal Insurance
Federation of California; National Association of
Independent Insurers
HISTORY
Source: Author
Related Pending Legislation: AB 1181 (Calderon); requires
Insurance Commissioner to make specified findings of
law and fact in any final settlement agreement and to
consider, among other things, whether violations of
the law by an insurer were inadvertent, intentional,
or known to senior management of company (passed
Assembly Insurance Committee, 13-0; pending in
Assembly Judiciary Committee).
Prior Legislation: SB 1355 (Torres) 1994; vetoed
Prior Vote: Passed Senate Insurance Committee, 5-1
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