BILL ANALYSIS
SB 708
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Date of Hearing: June 27, 2001
ASSEMBLY COMMITTEE ON INSURANCE
Thomas M. Calderon, Chair
SB 708 (Speier) - As Amended: June 25, 2001
SENATE VOTE : 24-12
SUBJECT : Insurance
SUMMARY : Changes civil fines in the Insurance Code, requires
the Insurance Commissioner (IC) to adopt regulations relating to
what constitutes an unfair method of competition or deceptive
business practice, creates new requirements for insurance
adjusters and insurers who adjust earthquake claims, expands the
earthquake mediation program to include automotive and
residential insurance claims and any other insured loss the IC
determines would be best served by the mediation process,
prohibits the Department of Insurance (DOI) from refusing to
investigate complaints under specified circumstances, requires
DOI to make certain information public, and limits the authority
of DOI to enter into settlement agreements referencing the
existence of extraordinary circumstances for a period of more
than six months. Specifically, this bill :
1)Provides for a $7,500 civil penalty for engaging in an unfair
method of competition or an unfair or deceptive act or
practice and provides for a $15,000 civil penalty if the act
or practice is willful.
2)Specifies that the IC has the discretion to determine what
constitutes an unfair method of competition or deceptive act
or practice, and that the IC must adopt regulations setting
forth the criteria used to make that determination and the
penalty to be imposed. At a minimum, the criteria should
include the following: factors used to determine that an act
is willful, consideration of the detrimental severity to the
public caused by the act, the relative number of claims
involving deceptive acts compared to the total number of
claims reviewed by DOI for the relevant time period, and
previous violations, if any, by the insurer.
3)Authorizes the IC, in addition to levying a civil penalty, to
reasonably exercise discretion in ordering the payment of
restitution to individual or designated classes of insureds or
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claimants.
4)Requires DOI to adopt regulations relating to the training of
insurance adjusters in evaluating earthquake damage. Requires
insurers to train and accredit adjusters on or before December
31, 2004, and requires insurers using unaccredited adjusters
to submit the names of those adjusters to DOI, along with
information regarding earthquake claims adjusted by those
individuals. Defines "insurance adjuster" to include
specified persons.
5)Makes the following changes to the DOI earthquake mediation
program:
a) Expands the mediation program to include automotive and
residential insurance claims and any other insured loss the
IC determines would be best served by the mediation
process;
b) Provides that upon the filing of a written complaint
against an insurer, DOI must notify the insurer against
whom a complaint is made of the nature of the complaint.
Authorizes DOI to request appropriate relief for the
complainant and to meet and confer with the complainant and
insurer in an attempt to resolve the dispute.
a) Prohibits DOI from referring a claim to mediation unless
the amount claimed exceeds $7,500 and the amount in dispute
exceeds $2,000.
a) Increases the cap on fees paid for mediations from $400
to $700.
a) Makes other minor changes to the mediation program.
b) Extends the sunset date on the mediation program to
January 1, 2006.
1)Prohibits the IC from declining to investigate a complaint for
any of the following reasons:
a) The insured is represented by an attorney in a dispute
with an insurer, or is in mediation or arbitration.
b) The insured has a civil action against an insurer.
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c) The complaint is from an attorney, if the complaint is
based upon evidence or reasonable beliefs about violations
of law known to an attorney because of a civil action.
2)Allows the IC to defer investigation of a complaint until the
finality of a dispute, mediation, arbitration, or civil action
involving the claim is known.
3)Requires DOI to release to the public specified information
regarding justified complaints against insurers and any
response by the insurers.
4)Requires that a letter or legal opinion signed by the IC or
DOI's chief counsel that is prepared in response to an inquiry
from an insured and that discusses the application of the
Insurance Code or the IC's regulations in general or in
connection with specific facts be made public. Provides that
such letter or legal opinion shall not be construed as
establishing an agency guideline, criterion, bulletin, manual,
instruction, order, standard of general application, rule, or
regulation.
5)Defines "extraordinary circumstances" to mean circumstances
outside the control of a licensee that severely and materially
affect the licensee's ability to conduct normal business
operations.
6)Authorizes the IC to consider the existence of extraordinary
circumstances in determining noncompliance with the Insurance
Code and appropriate penalties.
7)Prohibits a settlement agreement between the IC and an insurer
from referencing the existence of extraordinary circumstances,
unless the agreement specifies the precise period of time
during which the extraordinary circumstances existed. If
extraordinary circumstances are properly referenced in the
agreement, they may not be stated to exist for longer than six
months, unless the IC includes a written justification in the
agreement supporting the finding that extraordinary
circumstances existed for more than six months, identifies the
public purpose justifying the extension, and identifies the
precise duration of the existence of extraordinary
circumstances.
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EXISTING LAW :
1)Provides for a $5,000 civil penalty for engaging in an unfair
method of competition or an unfair or deceptive act or
practice and provides for a $10,000 civil penalty if the act
or practice is willful.
2)Authorizes the IC to exercise discretion in establishing what
constitutes an unfair or deceptive act.
3)Does not provide for training standards for insurance
adjusters in the area of earthquake damage.
4)Requires DOI to establish a mediation program for disputes
between claimants and insurers arising out of the 1994
Northridge earthquake. Provides procedures for filing
complaints, challenging referrals to mediation, selecting and
paying qualified mediators, and disqualifying mediators with
conflicts of interest. Provides that the cost of mediation
shall be borne by the insurer. Specifies that no party is
required to accept any agreement proposed during mediation,
but if such agreement is accepted, it shall be binding upon
the parties. Requires the IC to collect statistics on the use
of the program and to issue periodic reports on its status.
Authorizes the program to continue until January 1, 2005.
5)Requires the IC to receive and investigate complaints and to
prosecute insurers when appropriate.
6)Requires the IC to provide an insurer with a description of
any complaint deemed justified and allows the IC to provide
summaries of violations to the public. Requires the
description to the insurer to include the following
information: the name of the complainant, the date the
complaint was filed, a description of the facts of the
complaint, and a statement of DOI's rationale for determining
that the complaint was justified.
7)Permits the IC to consider the existence of "extraordinary
circumstances" when determining if violations of fair claims
settlement practices occurred.
FISCAL EFFECT : According to the Senate Appropriations
Committee, this bill will result in administrative costs to DOI
amounting to $886,000 in 2001-02, $1.4 million in 2002-03, and
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$1.4 million in 2003-04.
COMMENTS :
The author introduced this bill to address the legislative
recommendations made in the August 28, 2000, Senate Insurance
Committee report entitled Department of Insurance in Rubble
After Northridge (report). One of the legislative
recommendations that this bill proposes to enact is to increase
fines for unfair claims practices to account for inflation and,
as stated in the report, to further deter insurers from engaging
in unfair and prohibited acts relating to claims settlements.
The report also recommended that the earthquake mediation
program be expanded to encompass other types of claims. The
author believes that mediation can be a low cost alternative to
costly litigation and has proposed that DOI's mediation program
be made available to auto and homeowner policyholders if the
amount claimed by the insured exceeds $7,500 and the amount in
dispute exceeds $2,000. While the report does state that
"[a]ssuming that it is managed well, mediation can reduce the
number of lawsuits filed over claims disputes, and help
consumers by speeding up settlements," the report limits its
recommendation of expanding the mediation program to only
include other types of catastrophic claims, such as wildfires.
Indeed, the report finds that the Legislature should establish
an ongoing "catastrophe claims mediation program."
In response to a finding in the report that Northridge
earthquake victims had not been paid restitution monies for
their claims, this bill proposes that the IC be authorized to
order the payment of restitution to claimants. Last session, AB
481 (Scott) allowed, among other things, the IC to provide for
remediation or payment to policyholders in a settlement
agreement. AB 481 was vetoed by the Governor on the grounds
that it "confer[red] on the Department of Insurance a power
previously reserved to the judiciary, namely to mediate and
resolve disputes arising from claims by individual policy
holders." The veto message also stated that, "The Department of
Insurance under both Commissioners Kelso and Low has expressed
reservations about this new power."
The author states that the Senate Insurance Committee has heard
from hundreds of Northridge earthquake victims about the poor
quality of adjustments performed after the quake. Therefore, in
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the interest of balancing the need for prompt and fair
settlement with the need to cope with a natural disaster, this
bill proposes that a company's existing adjusters be trained in
earthquake damage adjustment and that any adjusters who are not
so trained be reported along with information regarding the
claim to DOI.
This bill also addresses the perceived problem of DOI routinely
declining to investigate a claims settlement complaint when the
complaint is submitted by an attorney. The author believes that
attorneys can provide DOI with credible evidence of insurer
violations of the law, and that DOI has a duty to investigate
valid complaints. This bill does not require the IC to
investigate complaints filed by attorneys, but it only prohibits
the IC from refusing to investigate complaints because the
complaint is made by an attorney. The author notes that the IC
may decline to investigate a complaint on grounds unrelated to
occupational category, such as the complaint being deemed
frivolous.
Lastly, this bill provides that two categories of information be
made public. First, the author believes that the exact same
information provided to an insurer when a complaint is filed
against it should also be made available to the public, rather
than in a summary form. DOI has expressed concern with this
provision of the bill as justified complaints number in the
thousands per year (2,866 in 1999 and 2,591 in 2000). DOI
believes that if this information is made public, insurers would
be more likely to dispute DOI's findings, which would result in
supervisory level and staff counsel review of justified
findings. It would also result in individual complaints being
brought to administrative hearing in order to determine whether
it was justified. Further, additional staffing would be needed
to set up and maintain a database for the collection of this
information and to post the information on DOI's website or
otherwise make the information available to the public. DOI has
suggested issuing a more detailed annual Consumer Complaint
Study in lieu of making this information public.
Secondly, the author also feels that letters or legal opinions
signed by the IC or DOI's chief counsel be made public so that
they can be used by consumers looking for guidance in their
claims.
SUPPORT:
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Supporters of this bill state that it contains many provisions
to protect California insurance consumers. Supporters believe
that expanding the earthquake mediation program to include
homeowner and auto liability claims would give consumers,
particularly those with smaller claims, a way to informally
resolve disputes with insurers. Currently, many consumers with
smaller claims are unrepresented by counsel and have a difficult
time in addressing claims with insurance companies. In
addition, supporters agree with the bill's proposal to prohibit
the IC from declining to investigate a complaint submitted by an
attorney. Supporters contend that DOI should protect all
consumers from breaches by an insurer, not merely those who lack
legal representation. Supporters also feel that making public
letters and legal opinions signed by the IC or DOI's chief
counsel would be useful in helping the public understand how
insurance laws and regulations are applied and provide for
consistency in the application of such laws and regulations.
Finally, supporters state that training and accrediting
insurance adjusters will guard against undervaluation of claims
for damages sustained in an earthquake.
OPPOSITION:
This bill is strongly opposed by the insurance industry. In
particular, great concern has been expressed regarding the
bill's provision authorizing the IC to order the payment of
restitution to insured or claimants. Insurers argue that this
grant of power to the IC raises questions of due process and
separation of powers. Bestowing this power on the IC also
creates a policy concern with respect to an elected commissioner
acting as prosecutor, judge and jury in a claim. As a
regulator, the IC should not have the duty of adjudicating
disputes and claims.
Mercury Insurance also argues that restitution is not an
appropriate remedy in this context:
"Restitution is an equitable remedy. It has no bearing on
a relationship
which is defined completely by contract. To fall within
the definition of
restitution, "the victim must have given up something which
he or she was
entitled to keep." Day v. AT&T Corp. , (1998) 63 Cal. App.
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4th 325, 340.
Applied to a contract theory, therefore, restitution would
put an individual
in as good a position as he or she was before entering into
the contract. It
would restore to such person the consideration he or she
proffered in entering
into the contract. In the context of an insurance
contract, this would be the
premium which the insured paid for his or her policy,
however, what an insured
wants in an insurance claim dispute is not the repayment of
premium, but the
payment of a claim. Consequently, this remedy has no
appropriate application
and should be deleted from this bill."
The Personal Insurance Federation of California (PIF) also
contends that the use of the term "claimant" in the provision
authorizing the IC to order payment of restitution is
inappropriate. PIF states that insurers have contractual
obligations to insureds that do not exist in the case of third
party claimants.
Opponents to this bill also dispute the need to expand the
earthquake mediation program to include automotive and
residential insurance claims. While insurers generally support
voluntary mediation, which can be an effective method of
alternative dispute resolution, opponents state that mediation
is not appropriate for every claim. The mediation program has
been fairly successful in dealing with earthquake claims, which
tend to be high severity, low frequency claims. However,
insurers argue that auto and homeowner's claims tend to be high
frequency, low severity claims. Thus, expansion of the program
will require the creation of a large and costly bureaucracy
within DOI. PIF has estimated that, based on claims data from
the year 2000, as many as 207,000 claims per year could be
eligible. If only 10% of those requested mediation, that would
still mean 20,700 claims per year, or as many as 57 claims per
day. Moreover, the National Association of Independent Insurers
(NAII) asserts that expanding the earthquake mediation program
would turn DOI into a judicial forum. NAII states that the
Legislature has already created a mediation program in Section
1775 et seq. of the Code of Civil Procedure, which is
administered by the courts as a proper function of the judicial
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branch.
Another concern raised by insurers is that this bill
unnecessarily increases the fines for engaging in unfair
practices. PIF and State Farm Insurance state that the existing
fines are based on a country-wide standard, and that as the
fines are assessed on a "per act" basis, DOI already has
authority to assess significant fines that, in some cases, may
even exceed the net worth of a company.
State Farm Insurance also contends that the bill's requirement
that insurers train and accredit earthquake insurance adjusters
would be costly and redundant as State Farm, a participating
company in the California Earthquake Authority (CEA), already
trains its adjusters according to CEA requirements. In
addition, opponents claim that the bill's requirement that
insurers submit to DOI the names of unaccredited adjusters and
information relating to claims they have adjusted will result in
DOI being inundated with the filing of information, especially
following a disaster when thousands of adjusters, who have not
been trained in accordance with DOI's regulations, may be flown
in to process claims.
PIF additionally opposes the bill's prohibiting the IC from
declining to investigate complaints submitted by an attorney.
PIF believes that allowing an insured to "litigate" their
complaint in the courts and with DOI encourages forum shopping
between the executive and judicial branches and requires the
insurer to divide its resources between the two processes.
Finally, opponents dispute the bill's proposal to make public
letters or legal opinions signed by the IC or DOI's chief
counsel. State Farm states that the authority to issue such an
opinion lies with the Attorney General. Moreover, PIF argues
that this proposal creates the inference that these opinions
carry the weight of law or otherwise have the force and effect
of law, which is not the case. PIF believes that this provision
of the bill should be stricken, or, if the provision is not
stricken, to add language to the bill clarifying that legal
opinions issued by DOI do not have any legal effect and cannot
be enforced by DOI. PIF cites 21st Century v. Quackenbush ,
(1998) 64 Cal. App. 4th 135, for the proposition that, although
DOI has authority to issue a legal opinion, a legal opinion
issued by DOI has no legal effect and cannot be enforced by DOI.
The court in 21st Century implied that if the IC had attempted
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to enforce a legal opinion issued by DOI, this could constitute
a violation of the separation of powers doctrine since the IC
does not have judicial authority.
COMMITTEE RECOMMENDATIONS:
In response to the opponents' numerous concerns, the committee
suggests that the following amendments be made to this bill:
1)Delete the provision authorizing the IC to order the payment
of restitution to insureds or claimants. Granting this power
to the IC raises serious constitutional concerns relating to
due process and separation of powers. Specifically, this
provision allows an elected commissioner, whose role is to act
as regulator, to serve as prosecutor, judge and jury in
adjudicating a claim, thereby establishing an inherent
conflict of interest that could lead to an abuse of the entire
process. Moreover, as noted above, AB 481 (Scott) of 2000,
which allowed the IC to provide remediation or payment to
policyholders in a settlement agreement, was vetoed by the
Governor because it "confer[red] on the Department of
Insurance a power previously reserved to the judiciary, namely
to mediate and resolve disputes arising from claims by
individual policy holders."
Notwithstanding valid due process and separation of powers
arguments raised against authorizing the IC to order payment
of restitution, the payment of restitution, if ordered, should
be limited to the repayment of the premium. This limitation
is consistent with the court's statement in Day v. AT&T Corp.
that "the victim must have given up something which he or she
was entitled to keep" in order for restitution to be available
as a remedy. Further, in accordance with Section 12940 of the
Insurance Code, an order by the IC to pay restitution is
subject to review by a court of competent jurisdiction.
2)If the provision authorizing the IC to order payment of
restitution remains in this bill, the use of the term
"claimants" should be deleted from this provision. Insurers
have contractual obligations to insureds that do not exist in
the case of third party claimants.
3)Require that the regulations adopted by DOI regarding the
training of earthquake insurance adjusters be made consistent
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with the existing CEA requirements. Some insurers, such as
State Farm, already train their adjusters according to CEA
requirements. Thus, this amendment would reduce redundancy in
training earthquake adjusters.
4)Clarify that the information that an insurer is required to
submit to DOI with respect to unaccredited earthquake
insurance adjusters is the name of the unaccredited adjuster
and the claim number of the claim adjusted by that adjuster.
Limiting the information to these two facts will reduce the
burden on both DOI and insurers to process and submit this
information and will still accomplish the author's goal of
creating an "audit trail" with respect to insurers and their
settlement practices.
5)Limit the expansion of the mediation program to an ongoing
"catastrophe claims mediation program" as recommended in the
Senate Insurance Committee Report, Department of Insurance in
Rubble After Northridge .
However, if the committee desires to expand the mediation
program beyond the report's recommendation, then expansion of
the program should be limited to homeowner's policies.
Opening up the mediation program to also include automotive
policies, as proposed by this bill, would result in a
tremendous amount of potential claims requiring DOI mediation.
By restricting the mediation program's expansion to
homeowner's policies, the administrative and budgetary impact
of processing thousands of automobile claims will be
minimized. Moreover, this limited expansion will allow
insurers, insureds, and DOI to monitor the program's
effectiveness outside the catastrophe context until the
program sunsets in 2006, as amended by this bill.
6)Provide that DOI must issue a more detailed annual Consumer
Complaint Study in lieu of making public specific information
regarding justified complaints against insurers. As noted
above, justified complaints number in the thousands per year,
and if this information is made public, insurers would be more
likely to dispute DOI's findings, which would result in
supervisory level and staff counsel review of justified
findings. Additional staffing would also be needed to set up
and maintain a database for the collection of this information
and to post the information on DOI's website or otherwise make
the information available to the public.
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7)The committee also suggests that the penalty increase
provision be tied to the provision allowing the IC to
determine what constitutes an unfair or deceptive act and the
adoption of regulations in that regard. The committee
believes that in order to avoid the potential for abuse by the
IC and to achieve fairness for insurers who are subject to the
increased penalties, the imposition of these penalties should
be contingent upon the IC's determination of what constitutes
an unfair or deceptive act. These two provisions are
necessarily dependent on each other, and this bill should not
be passed with only one of these provisions remaining in the
bill.
RELATED LEGISLATION:
This bill is related to AB 1181 (Calderon) of this session,
which was held in the Assembly Judiciary Committee, and which
required the IC to make specific written findings of fact and
conclusions of law when imposing a civil penalty upon a person
for engaging in unfair methods of competition or unfair or
deceptive acts or practices; SB 658 (Escutia) of this session,
pending in this committee, which amends the standard form fire
policy and earthquake insurance policies by setting forth new
requirements regarding examination under oath, appraisal, and
adjusters; SB 2107 (Speier), Chapter 1091, Statutes of 2000,
which specified the IC's scope of authority for settlement of
administrative actions with insurers; SB 1524 (Figueroa),
Chapter 1089, Statutes of 2000, which limited the use of
settlement funds in outreach activities; SB 1899 (Burton),
Chapter 1090, Statutes of 2000, which granted Northridge
earthquake victims an additional year in which to make claims
that were otherwise time-barred; and AB 481 (Scott) of 2000,
which allowed the IC to provide for remediation or payment to
policyholders in a settlement agreement and which was vetoed by
the Governor.
REGISTERED SUPPORT / OPPOSITION :
Support
Consumer Attorneys of California
Consumers Union
Opposition
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Alliance of American Insurers
American Insurance Association
Association of California Insurance Companies
Insurance Agents and Brokers Legislative Council
Mercury Insurance
National Association of Independent Insurers
Nation Wide Insurance Corporation
Personal Insurance Federation of California
State Farm Insurance
Analysis Prepared by : M. Christine Iway / INS. / (916)
319-2086