BILL ANALYSIS
AB 1837
Page 1
ASSEMBLY THIRD READING
AB 1837 (Gaines)
As Amended April 26, 2010
Majority vote
INSURANCE 10-2
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|Ayes:|Solorio, Blakeslee, | | |
| |Anderson, Caballero, | | |
| |Carter, Hagman, Hayashi, | | |
| |Niello, Salas, Torres | | |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Charles Calderon, Feuer | | |
| | | | |
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SUMMARY : Authorizes a nonadmitted (unlicensed) insurer that is
affiliated with a domestic admitted insurer to receive services
performed in California by the domestic admitted affiliate.
Specifically, this bill :
1)Authorizes a nonadmitted insurer that is affiliated with a
California domestic insurer to have common directors, provided
that the directors do not perform management functio9ns for
the nonadmitted affiliate.
2)Authorizes a California domiciled insurer to provide the
following administrative services to its nonadmitted
affiliate:
a) Computer operations unrelated to the underwriting
process;
b) Clerical and administrative staffing support;
c) Human resources; and,
d) Claims adjusting, provided that the notices, decisions,
and payments are made directly by the nonadmitted insurer.
3)Specifies that nothing in the above provisions permits the
nonadmitted insurer to conduct activity that constitutes the
"transaction" of insurance, or a violation of specified
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sections of the Insurance Code.
EXISTING LAW :
1)Requires insurers that "transact" insurance in California to
be "admitted" to transact in the state. "Admitted" is the
Insurance Code terminology for being licensed to transact
insurance in this state.
2)Provides that "transact" as it applies to insurance includes
solicitation, negotiations preliminary to the execution of an
insurance contract, execution of the contract, and transaction
of matters subsequent to the execution of, and arising out of,
the insurance contract.
3)Authorizes "nonadmitted" insurers to sell insurance to
Californians on a limited basis, through specially licensed
"surplus lines brokers."
4)Provides broadly that nonadmitted insurers may sell insurance
to Californians when the insurance is needed by the
policyholder, but generally not available from admitted
insurers.
5)Requires that, before selling insurance on a nonadmitted basis
in California, the nonadmitted insurer must apply to be placed
on the list of eligible surplus lines insurers (LESLI list),
and the Insurance Commissioner (IC) must approve the
application based on statutory criteria before placing the
nonadmitted insurer on the list.
6)Prohibits in virtually all circumstances a nonadmitted insurer
from selling insurance in California except though a surplus
lines broker, who reaches out and places the California
insurance with the nonadmitted insurer outside of the state.
In this sense, the nonadmitted insurer is not "transacting"
insurance in California.
7)Places a series of duties on the surplus lines broker to
ensure that these requirements are met.
8)Recognizes the role of the Surplus Lines Association (SLA), a
nongovernmental entity, as an administrative agent of the IC
for carrying out certain functions, including a role in tax
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collection and a role in pre-screening applicants for
placement on the LESLI list.
9)Establishes the California Insurance Guarantee Association
(CIGA) as the guarantor for the payment of covered claims in
the event an admitted insurer becomes insolvent. There is no
comparable entity for nonadmitted insurers.
10)Defines a "domestic" insurer as one that is organized under
the laws of California.
11)Defines "nonadmitted" as an entity that is not entitled to
transact the insurance business in California.
FISCAL EFFECT : Undetermined.
COMMENTS :
1)According to the author and the sponsor, the Pacific
Association of Domestic Insurance Companies (PADIC),
California domestic insurers face a competitive disadvantage
in comparison to non-domestic admitted insurers with respect
to the operations of affiliated nonadmitted insurers.
Specifically, the author and PADIC argue that a non-domestic
admitted insurer can share a range of services and cost-saving
activities with a nonadmitted affiliate that is selling
insurance in California, but a domestic insurer cannot provide
those same services to its nonadmitted affiliate without
violating the laws that bar a nonadmitted insurer from
transacting insurance in the state. The bill is intended to
level this playing field among nonadmitted insurers.
2)The general rule in California, as in every state, is that an
insurance company must be licensed (admitted) in order to do
business in the state. There are sound reasons for this rule,
notably the ability of the IC to ensure the solvency of these
companies to ensure they can keep their promises to pay future
benefits to Californians, and to ensure that the insurers
treat policyholders and claimants in a fair and reasonable
manner. In addition, in California admitted property-casualty
insurers are subject to a rate regulation law that was enacted
by the voters (Proposition 103 of 1988).
However, despite these sound reasons to require all insurers to
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be admitted, the law recognizes that there are reasons to
allow the sale of insurance by nonadmitted insurers. If there
is an insurance need by a California resident, and that need
is not being filled by admitted insurers, it is logical that
the law allow that need to be filled. Thus, for unusual
risks, or for very large risks, the nonadmitted market plays a
crucial role in providing commercial insurance in California.
There is a small amount of personal homeowners insurance sold
by nonadmitted insurers in California, but virtually all
nonadmitted insurance is in the commercial lines.
3)In the 1980s and early 1990s, the surplus lines market was far
less regulated than it is today. As a result, extremely
poorly capitalized insurers would start writing business to
unsuspecting consumers, and all too frequently these insurers
would default on their obligations. The automobile insurance
crisis was at the point where hundreds of thousands of
Californians were purchasing basic automobile insurance from
nonadmitted insurers. At that time, the law did not require
nonadmitted insurers to apply for and be placed on an
eligibility list. Indeed, there were not even financial
filing requirements. The DOI attempted to deal with this
problem by adopting a regulation that mandated a
contemporaneous financial filing at the time when a
nonadmitted insurer first sold a policy to a Californian.
However, even this approach proved inadequate, as the courts
made it extremely difficult for DOI to shut down financially
unsound nonadmitted insurers, because these insurers had
established a "property right" in the business that they were
conducting.
The Legislature responded to this problem by enacting laws that
in most circumstances prohibit private passenger automobile
insurance to be sold by nonadmitted insurers, and by creating
the LESLI list to ensure no nonadmitted insurer could
establish the foothold "property interest" unless the IC had
affirmatively approved the nonadmitted insurer's status as
financially sound. These changes have improved the market,
but also highlight the fact that selling insurance on a
nonadmitted basis is a privilege granted by the state, to be
authorized only where there is a clear need to fill a void.
Without a need to fill a void, insurance should be sold by
licensed companies only.
4)PADIC writes in support that the bill recognizes that the
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nonadmitted regulatory process is fundamentally unfair to
small and medium sized domestic insurers due to the ability of
nonadmitted affiliates of nondomestic insurers to save costs
more effectively with respect to competing for California
business. PADIC also makes the case that California should be
encouraging insurers to locate their primary offices within
the state, and that this bill will enhance the ability of
insurers that do locate here to better compete.
5)Proponents suggest that nonadmitted affiliates of a domestic
insurer are at a competitive disadvantage with nonadmitted
affiliates of nondomestic insurers. In a certain sense, the
observation is valid. However, it misses the mark at two
levels. First, a nonadmitted affiliate of a United States
based insurer will always have one state where there is this
appearance of disadvantage - the state where its affiliate is
domesticated. Thus, just as a nonadmitted affiliate of a
California domestic faces issues when selling insurance in
California, a nonadmitted affiliate of a Nevada domestic faces
issues when selling insurance in Nevada, and the
California-affiliated nonadmitted has a competitive advantage
over that insurer in Nevada. Of course, the size of the
California market magnifies the disadvantage for a California
domestic. Second, the notion of level playing field
competition in the context of nonadmitted insurance in the
absence of any showing of a market void ignores the fact that,
under California law, if a company wants to compete and
exercise its rights under the law, it should become admitted.
6)A nonadmitted insurer that is selling insurance in California
should be a real company, with its own assets, offices,
management and staff. The current version of the bill is much
narrower than previous versions, but the DOI remains concerned
with blurring the lines between admitted and nonadmitted
insurers. As DOI testified in Committee, the bill is breaking
new ground that could render the distinction between admitted
and nonadmitted insurers virtually nonexistent, and encourage
other insurers to attempt to avoid the requirements in the law
that require obtaining a license to transact insurance in
California.
Analysis Prepared by : Mark Rakich / INS. / (916) 319-2086
AB 1837
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FN: 0004297