BILL ANALYSIS
SB 708
Page 1
Date of Hearing: July 5, 2001
ASSEMBLY COMMITTEE ON INSURANCE
Thomas M. Calderon, Chair
SB 708 (Speier) - As Proposed to be Amended: July 5, 2001
SENATE VOTE : 24-12
SUBJECT : Insurance
SUMMARY : Creates new requirements for insurance adjusters and
insurers who adjust earthquake claims, expands the earthquake
mediation program to include automotive claims, 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)Requires DOI to adopt regulations, consistent with the training
standards of the California Earthquake Authority, 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 the claim number of the claim adjusted by
that adjuster. Defines "insurance adjuster" to include
specified persons.
2)Makes the following changes to the DOI earthquake mediation
program:
a) Expands the mediation program to include automotive
claims;
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
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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)Specifies that information released to the public by DOI
regarding complaints against insurers include the number and
type of violations found by reference to the line of insurance
and the law violated.
2)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;
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.
3)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.
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.
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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.
EXISTING LAW :
1)Does not provide training standards for earthquake insurance
adjusters.
2)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.
3)Requires the IC to receive and investigate complaints and to
prosecute insurers when appropriate.
4)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
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amounting to $886,000 in 2001-02, $1.4 million in 2002-03, and
$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 report's recommendations included expanding the
earthquake mediation program 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 automotive claims if the amount
claimed by the insured exceeds $7,500 and the amount in dispute
exceeds $2,000. According to DOI, it is projected that an
expanded mediation program would place tens of thousands of auto
claims into mediation. However, DOI notes that, of the potential
hundreds of thousands or millions of claims processed by insurers
in 2000, DOI only received 1,406 first party private passenger
automobile written complaints. Of these complaints, DOI was able
to resolve about 40%, or about 562 cases, through their own
intervention with the insurers. DOI estimates that another 20%
(281) of these written complaints might not qualify for mediation
for various reasons, such as a major coverage issue. Thus, about
40% (562) of the complaints may have been eligible for mediation
under an expanded program. DOI believes that, if the mediation
program is expanded, it will be able to absorb the increased
staffing requirement from current staff.
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
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 the claim number of the claim adjusted by
that adjuster 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
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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, the author believes that letters or legal opinions signed
by the IC or DOI's chief counsel should be made public so that
they can be used by consumers looking for guidance in their
claims.
SUPPORT:
Supporters of this bill state that it contains many provisions to
protect California insurance consumers. Supporters believe that
expanding the earthquake mediation program 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:
Opponents to this bill dispute the need to expand the earthquake
mediation program to include automotive 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
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program has been fairly successful in dealing with earthquake
claims, which tend to be high severity, low frequency claims.
However, insurers argue that auto claims tend to be high
frequency, low severity claims. Thus, insurers believe expansion
of the program will require the creation of a large and costly
bureaucracy within DOI. The Personal Insurance Federation of
California (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
branch.
In addition, opponents state that the bill's requirement that
insurers submit to DOI the names of unaccredited adjusters and
the claim numbers of the 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 20th Century v. Quackenbush , (1998)
64 Cal. App. 4th 135, for the proposition that, although DOI has
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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
20th Century implied that if the IC had attempted 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.
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
California Department of Insurance
Consumer Attorneys of California
Consumers Union
Opposition
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
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Nation Wide Insurance Corporation
Personal Insurance Federation of California
State Farm Insurance
Analysis Prepared by : M. Christine Iway / INS. / (916)
319-2086