BILL ANALYSIS
SB 708
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Date of Hearing: July 10, 2001
ASSEMBLY COMMITTEE ON JUDICIARY
Darrell Steinberg, Chair
SB 708 (Speier) - As Amended: July 9, 2001
SENATE VOTE : 24-12
SUBJECT : INSURANCE
KEY ISSUES :
1)SHOULD THE SUCCESSFUL MEDIATION PROGRAM BEGUN BY THE
DEPARTMENT OF INSURANCE (DOI) TO RESOLVE DISPUTES REGARDING
CLAIMS ARISING OUT OF THE NORTHRIDGE EARTHQUAKE BE EXPANDED TO
DISPUTES REGARDING PERSONAL AUTOMOTIVE COVERAGE?
2)SHOULD DOI BE PROHIBITED FROM DECLINING TO INVESTIGATE A
COMPLAINT BECAUSE THE INSURED IS REPRESENTED BY AN ATTORNEY OR
BECAUSE THE COMPLAINT IS ALSO THE SUBJECT OF LITIGATION?
3)SHOULD INSURERS BE REQUIRED TO TRAIN AND ACCREDIT INSURANCE
ADJUSTERS IN EVALUATING EARTHQUAKE DAMAGE, AND SHOULD INSURERS
USING UNACCREDITED ADJUSTERS FOR SUCH CLAIMS BE REQUIRED TO
SUBMIT THE NAME OF THE ADJUSTER AND THE CLAIM NUMBER FOR EACH
SUCH CLAIM TO DOI?
4)SHOULD DOI BE REQUIRED TO MAKE PUBLIC ANY LETTER OR LEGAL
OPINION SIGNED BY THE INSURANCE COMMISSIONER OR DOI'S CHIEF
COUNSEL, WHEN THE LETTER OR OPINION IS WRITTEN IN RESPONSE TO
AN INQUIRY FROM AN INSURED AND DISCUSSES THE APPLICATION OF
THE INSURANCE CODE OR DOI REGULATIONS?
SYNOPSIS
This bill seeks to implement several of the recommendations of
the Senate Insurance Committee arising out of that Committee's
hearings regarding the wrongdoing at DOI surrounding the
handling of complaints arising out of the 1994 Northridge
earthquake. The bill imposes new requirements regarding the
training of insurance adjusters to evaluate earthquake damage.
It expands a successful mediation program to claims on personal
automotive policies. It bars DOI from refusing to investigate
complaints simply because the complaint is also the subject of
litigation or because the policyholder is represented by
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counsel. Finally, it requires that when DOI issues a letter or
legal opinion interpreting the law or DOI regulations, that
opinion must be made public. The bill should make it easier for
policyholders to resolve disputes over claims, help to ensure
competent assessment of earthquake damage, and assist the public
in understanding the application of insurance law and regulation
to specific factual situations.
SUMMARY : Imposes 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.
2)Makes the following changes to the DOI earthquake mediation
program:
a) Expands the mediation program to include automobile
collision and physical damage 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;
c) Prohibits DOI from referring a claim to mediation unless
the amount claimed exceeds $7,500 and the amount in dispute
exceeds $2,000;
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d) Increases the cap on fees paid for mediations from $400
to $700;
e) Extends the sunset date on the mediation program to
January 1, 2006.
3)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.
4)Prohibits the Insurance Commissioner (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.
5)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.
6)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.
7)Authorizes the IC to consider the existence of extraordinary
circumstances, as defined, in determining noncompliance with
the Insurance Code and appropriate penalties.
8)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.
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Extraordinary circumstances may not be stated to exist for
longer than six months, unless the IC includes a finding in
the agreement that extraordinary circumstances existed for
more than six months and documents facts supporting that
conclusion, identifies the public purpose justifying the
extension, and identifies the precise duration of the
existence of extraordinary circumstances.
EXISTING LAW :
1)Provides for the licensure of insurance adjusters. (Insurance
Code section 14000 et seq .)
2)Requires DOI to establish a mediation program for disputes
between claimants and insurers arising out of the 1994
Northridge earthquake and subsequent earthquakes. 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. (Insurance Code section
10089.70 et seq .)
3)Authorizes the mediation program to continue until January 1,
2005. (Insurance Code section 10089.84.)
4)Requires the IC to receive and investigate complaints and to
prosecute insurers when appropriate. (Insurance Code section
12921 et seq .)
5)Permits the IC to consider the existence of extraordinary
circumstances in determining if violations of fair claims
settlement practices have occurred. (California Code of
Regulations, Title 10, section 2695.2.)
FISCAL EFFECT : The bill as currently in print is keyed fiscal.
COMMENTS : This bill seeks to implement several of the
recommendations made in the August 28, 2000 Senate Insurance
Committee report entitled Department of Insurance: In Rubble
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After Northridge . The bill requires DOI to adopt regulations
for the training of insurance adjusters in evaluating earthquake
damage, and insurers using adjusters who have not received such
training to submit the name of the adjuster and the claim number
of the claim for each claim adjusted by an untrained adjuster.
The bill expands the successful DOI program for mediation of
disputes on claims arising out of the Northridge earthquake to
disputes regarding claims under personal automotive collision
and physical damage coverage, and makes other changes regarding
that program. The bill bars DOI from refusing to investigate a
claim because the insured is represented by an attorney, has a
civil action against the insurer, or is an attorney who learned
of the alleged violations of law because of a civil action. The
bill requires that a letter or legal opinion of DOI, issued in
response to an inquiry from an insured and discussing
application of the Insurance Code or DOI regulations, be made
public (with certain information allowed to be redacted).
Finally, the bill limits the IC's ability to base a settlement
with an insurer on the existence of extraordinary circumstances
stated to be in duration for over six months.
Training of Adjusters in Evaluation of Earthquake Damage. The
author states, with regard to the bill's requirements for
training of adjusters in the evaluation of earthquake damage:
The Senate Insurance Committee has heard from hundreds of
Northridge earthquake victims?about the poor quality of
adjustments done after the Northridge quake. In some
cases, the committee heard about persons from the East
Coast who typically did hurricane damage, and who were in a
hurry to get back home, doing cursory evaluations of damage
and drastically underestimating the damage to property.
In order to balance the need for prompt and fair settlement
against the need to cope with a natural disaster, the bill does
not require that all insurance adjusters used to evaluate
earthquake damage receive training in such evaluation. Instead,
it requires that an insurer using an adjuster who has not
received such training submit the name of that adjuster and the
claim number of any claim adjusted by that adjuster to DOI.
This, the author asserts, will allow DOI to discover whether a
particular adjuster is a problem or if there is a more
fundamental flaw in the settlement practices of an insurer.
Consumers Union, in support of this provision, states "Adjusters
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must be qualified to be able to fully assess obvious patent
damage, and be able to detect the existence of latent damage
which is nonetheless related even though it may not become
obvious until some future time."
The author has agreed to amend the bill to clarify that an
adjuster need only receive the required training once. An
adjuster trained and accredited by one insurer could then
perform work for any insurer without having to be re-accredited
(or having his or her name submitted as an untrained adjuster).
Expansion of Earthquake Mediation Program. The author believes
that DOI's earthquake mediation program has been a success,
offering policyholders an effective, low-cost alternative to
litigation for settling claims. She would like to see DOI build
upon this success by offering consumers the same type of
assistance in disputes regarding claims under personal
automotive policies. The bill extends the mediation program to
disputes regarding automobile collision or automobile physical
damage coverage. The author has agreed to amend the bill to
clarify that this expansion of the mediation program shall only
be to coverage under personal lines of automotive insurance.
The bill limits the use of the mediation program to cases in
which the amount claimed by the insured exceeds $7500 and the
amount in dispute exceeds $2000. It also raises the cap on fees
paid for mediation from $400 to $700, and extends the sunset
date of this program by one year, to January 1, 2006.
Consumer Attorneys of California states, in support of the
expansion of the mediation program:
The process is voluntary, at the election of the insured,
and does not preclude any subsequent civil action, should
such action be necessary. Importantly, SB 708 would give
consumers, particularly those with smaller claims, a way to
informally resolve disputes with insurers. Right now, many
consumers with smaller claims are unrepresented by counsel
and have a very difficult time in addressing claims with
insurance companies.
Opponents of the bill argue that this expansion is unnecessary
and duplicative, potentially displacing existing arbitration
procedures available under many automotive policies. They
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further argue that the expansion of mediation from low
frequency, high severity earthquake claims to high frequency,
low severity auto claims will result in the need for creation of
a costly bureaucracy within DOI. Moreover, the National
Association of Independent Insurers (NAII) asserts that
expanding the mediation program will 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, administered by the courts as a proper function of
the judicial branch.
While tens of thousands of auto claims could be placed into
mediation by this expansion, DOI believes that the overall
impact on the Department will be manageable. They note that of
the potential hundreds of thousands or millions of claims
processed by insurers in 2000, DOI received only 1,406 first
party private passenger automobile written complaints. Of
these, DOI was able to resolve about 40% (562 cases) through
their own intervention with insurers. DOI estimates that
another 20% (281) of these complaints might not qualify for
mediation for various reasons. Thus, about 40%, or 562 cases,
of the complaints might have been eligible for mediation under
the expanded program proposed. DOI believes that it will be
able to absorb the increased staffing requirement from current
staff.
DOI Barred From Refusing to Investigate Complaints For Specified
Reasons . This bill bars DOI from refusing to investigate a
complaint, where the refusal is because the insured is
represented by an attorney in a dispute with an insurer, or is
in mediation or arbitration, because the insured has a civil
action against an insurer, or because the complaint is from an
attorney if the complaint is based upon violations the attorney
knows of due to a civil action. The bill further provides that
the IC may defer investigation until the finality of a dispute,
mediation, arbitration or civil action involving the claim is
known.
The author states that DOI routinely refuses to investigate a
complaint given by an attorney. She argues that this conflicts
with the duty of the Department to investigate valid complaints,
as attorneys can be an excellent source of information regarding
violations of law. The bill does not require DOI to investigate
any complaint, regardless of the source; it merely prohibits a
refusal to investigate when the refusal is based solely on any
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of the reasons listed.
The Personal Insurance Federation of California (PIF) opposes
this provision, arguing that investigation of a complaint in a
matter already in litigation, mediation, or arbitration forces
the insurer to engage in negotiations and dispute resolution in
two forums simultaneously. PIF argues that it also might allow
an attorney to use the DOI complaint process to conduct
discovery outside the judicial process.
In many cases where a matter is being disputed in another forum,
deferral of the investigation, as allowed under the bill, may be
the best course of action, and the insurer could certainly argue
for such deferral. This would allow the DOI to investigate and
take action on matters not resolved in any other forum, without
having the investigation interfere in the other proceedings.
Making Opinions and Responses Public. SB 708 requires that a
letter or legal opinion signed by the IC or the chief counsel of
DOI, prepared in response to an inquiry and discussing the
application of the Insurance Code or DOI regulations must be
made public. Particular identifying information as to the
insured or other person making the inquiry would be redacted
from the letter or opinion, and not made public. The bill
further states that such a letter or opinion shall not be
construed as establishing an agency guideline, criterion,
bulletin, manual, instruction, order, standard of general
application, rule or regulation.
The In Rubble After Northridge report cites an example where DOI
offered a legal opinion to a Northridge claimant on the issue of
delayed discovery of damages. It appears that DOI then tried to
limit the use of the opinion to insulate companies from further
claims based on that opinion. ( Department of Insurance: In
Rubble After Northridge , page 16.) The author argues that the
opinions of DOI should be made available to everyone on an equal
basis, in order to promote fair application of DOI's
interpretation of the law.
Consumers Union, in support of this provision, states, "This
will be very useful to help the public understand how insurance
laws and regulations apply generally or in specific fact
situations, and provides for consistency in the application of
insurance laws and regulations."
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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. PIF cites 20th Century v. Quackenbush (1998)
64 Cal App. 4th 135, for the proposition that a legal opinion
issued by DOI has no legal effect and cannot be enforced by DOI.
PIF asks that at a minimum, language be added to the bill to
clarify that legal opinions issued by DOI have no legal effect
and cannot be enforced by DOI.
In 20th Century , the 20th Century Insurance Company and 21st
Century Casualty Company (together, 20th Century) sued to
challenge the IC's dissemination of a letter he had written
responding to a policyholder's inquiry regarding the applicable
limitations period for submitting earthquake damage claims. The
IC issued the letter interpreting the law and also issued a
press release stating that the IC had "ruled in favor of
homeowners." (64 Cal. App. 4th at 138.) 20th Century sought a
writ ordering the IC to rescind the letter and to stop
disseminating it, arguing that the dissemination was equivalent
to the adjudication of a claim, which is beyond the statutory
power of the IC. (64 Cal.App.4th at 140.) 20th Century further
argued that the dissemination amounted to a violation of
separation of powers, in that the IC was invading the power of
the judiciary to apply the law in a particular case. (64
Cal.App. 4th at 141.)
The court ruled that the issuance and dissemination of the
letter were within the powers expressly granted to the IC by
statute, stating:
Section 12921.3 expressly grants the Commissioner the
authority to "respond to complaints and inquiries by
members of the public concerning the handling of insurance
claims?." The second sentence further grants the
Commissioner broad discretionary power to disseminate
information to the public concerning insurance matters.
(64 Cal.App.4th at 140.)
The court went on to note that there was no separation of powers
violation because the IC had no power to enforce his
interpretation of the law, and thus his interpretation in no way
invaded the power of the judiciary to apply the law in question.
The court's opinion in 20th Century provides an excellent
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explanation of DOI's statutory authority to offer assistance to
individuals in interpreting the law, and the limits of that
authority. SB 708's requirement that such opinions be made
public in no way suggests an expansion of the authority or an
intent to make such opinions enforceable. It simply would
create consistency in the information made available to the
public and thus make it easier for members of the public to
understand the IC's interpretation of the law. Adding language
stating that such opinions are not enforceable would not only be
unnecessary, but could prove confusing, as it might suggest that
the IC's power to offer interpretation of the law and
regulations is somehow more limited than that of other state
agencies, which perform similar functions in responding to
public inquiries regarding other areas of law.
Limiting Use of Extraordinary Circumstances . By regulation, DOI
may consider the existence of "extraordinary circumstances" in
determining if violations of fair claims settlement practices
have occurred. (California Code of Regulations, Title 10,
section 2695.12.) "Extraordinary circumstances" are defined as
"circumstances outside of the control of the licensee which
severely and materially affect the licensee's ability to conduct
normal business operations." (California Code of Regulations,
Title 10, section 2695.2(e).) No limit is placed on the amount
of time for which "extraordinary circumstances" can be claimed
to apply.
Under the agreements signed with insurers by the former IC, DOI
found that "extraordinary circumstances" existed after the
Northridge quake, and this finding meant violations of claims
settlement law might be excused - even when such violations
occurred months or even years after the earthquake. SB 708
limits the ability of DOI and insurers to use extraordinary
circumstances to excuse violations. The bill requires that any
settlement agreement referencing the existence of extraordinary
circumstances must state the period of time for which such
circumstances were in existence, and that in general the period
may not be over six months. In order for an agreement to
reference the existence of extraordinary circumstances in effect
for over six months, the IC would have to document in the
agreement facts supporting the conclusion that the extraordinary
circumstances were in existence for over six months, identify
the public purpose justifying the extension of the period, and
state the exact commencement and termination dates of the
extraordinary circumstances identified. These changes limit the
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discretion of the IC to use extraordinary circumstances to
excuse violations while still allowing such circumstances to be
taken into account where appropriate.
Proposed Amendments : The author proposes to make the following
amendments.
1)Adding language in Section 2 of the bill (Insurance Code
section 10089.3) providing that an adjuster who has been
trained and accredited in the evaluation of earthquake damage
need only receive such training and accreditation once, with
the accreditation valid for work performed for any insurer.
2)Clarifying that the expansion of the mediation program is only
to disputes arising with regard to personal lines of
automotive insurance, as follows:
Amend the language on page 5, lines 1 to 5, to read:
program for the mediation of the disputes between insured
complainants and insurers arising out of the Northridge
Earthquake of 1994 or any subsequent earthquake, and disputes
arising under a policy providing automobile collision coverage
or and automobile physical damage coverage, as defined in
subdivisions (c) and (d) of section 660.
3)Page 14, delete lines 31 through 40. This is a technical
amendment deleting duplicative language.
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 : Kathy Sher / JUD. / (916) 319-2334