BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Ronald Calderon, Chair
AB 2404 (Hill) Hearing Date: June 30, 2010
As Amended: April 27, 2010
Fiscal: Yes
Urgency: No
VOTES: Asm. Floor(05/20/10)72-0/Pass
Asm. Appr.
(05/12/10)16-0/Pass
Asm. Ins. (04/21/10)12-0/Pass
SUMMARY Would require insurance policies that will refund
premiums on other than a pro rata basis to disclose that fact in
writing, and authorizes the Insurance Commissioner to forgo a
market conduct examination of an insurer up to an additional
three years if certain information is obtained.
DIGEST
Existing law
1.Provides that an insured person is entitled to a return of his
or her premium if the policy is canceled, rejected,
surrendered, or rescinded, unless the insurance contract
specifies otherwise.
2.Prohibits any contract for individual automobile liability or
homeowners' multi-peril insurance from containing a provision
which mandates that the premium for the policy shall be fully
earned upon the happening of any contingency except the
expiration of the policy itself.
3.Provides that the Insurance Commissioner, whenever he or she
deems it necessary, shall examine the business and affairs of
an insurer, or when requested by petition by 25 shareholders,
policyholders, or creditors.
4.Requires the Insurance Commissioner to conduct an examination
of every insurer admitted in this state at least once every
five years. In connection with this examination, the
Commissioner may examine or investigate any person or the
AB 2404 (Hill), Page 2
business of any person, insofar as the examination or
investigation is necessary or material to the examination of
the insurer.
This bill
1.Would require any insurance policy which provides for a refund
of premium on other than on a pro rata basis, including the
assessment of cancellation fees, to separately disclose that
fact in writing, with a description of the cancellation
process and the actual fees or penalties to be applied.
2.Would require this disclosure to be given prior to, or at the
same time as the application and prior to each renewal.
3.Would provide that when an application is made by telephone,
the disclosure must be mailed to the applicant or insured
person within three business days but would permit the
disclosure to be made electronically in lieu of mailing if
consented to by the recipient pursuant to existing law.
4.Would specify that the provisions of this bill do not apply to
cancellations of a financed insurance policy or when the
insured person stops payments to the lender.
5.Would authorize the Insurance Commissioner to forgo a market
conduct examination for a period of up to three years if
information from a market analysis indicates all of the
following:
a. prior examination results showed no significant
negative findings;
b. consumer complaint numbers for the insurer are in
the lowest quartile of complaints, for insurers in that
line of business; and
c. market analysis identifies no other issues of
significant concern.
COMMENTS
1.Purpose of the bill To require advance disclosure of any
cancellation assessments or fees prior to an insurance
policy's inception or renewal and to allow the Insurance
Commissioner to waive the requirement that all insurers be
examined every five years, if the insurer meets certain
AB 2404 (Hill), Page 3
criteria.
2.Background
Existing law requires cancellation fees to be disclosed in the
policy. It also requires the Insurance Commissioner to
conduct market examinations of licensed insurers at least once
every five years. Currently, this basic requirement does not
vary irregardless of a company's premium volume, record with
regard to consumer complaints, or the findings of previous
market conduct examinations.
3.Section 1 Issues: The author and this bill's sponsor and
supporters believe Section 1 of the bill addresses a basic
unfairness, the lack of advance notice of policy cancellation
fees and penalties. .
For the proponents, an insurer's ability to impose significant
fees and charges without advance notice, if a customer
terminates their policy early, is seen as unfair.
Against this unfairness concern, the magnitude of the ill can
reasonably be weighed against the business practicality that
individually generated notices, notices which must include
broad detail on matters the average consumer could not care
less about, notices which are required to be highly
customized, all add up to more than nominal operational
expense. Furthermore, as is obvious, if such a notice is
applied retroactively (not prospectively only) that is a
significant logistical nightmare as it requires the business
(here an insurer) to work backwards through one's entire
existing book of business to achieve compliance. Finally, if
such a notice is imposed without lead time to permit the
development and testing of systems to provide the notice,
including such mundane systems as envelope stuffers/mail
assembly equipment which can be in such demand that simply
"adding" one new element can raise significant logistical
obstacle each requires time and testing to resolve, the
"simple notice" can cast a long shadow.
4.Impact of Proposed Author's Amendments on Section 1 Issues:
While the notice provisions in AB 2404 as it is now in print
do in fact raise some of these logistical issues, the
amendments which the author will offer in committee appear to
meet virtually each of these objections save the last .
AB 2404 (Hill), Page 4
As proposed to be amended, if passed into law at session's
end, this bill will become effective as of January 1st 2011.
For the affected insurers, that may prove a demanding schedule
to meet, especially if their compliance strategy includes 1),
revision of their policy forms, as it very reasonably might,
in addition to 2) the systems design and testing to make sure
the right notices are reaching the right people and 3) the
people dimension of training key personnel in the new
processes and procedures so that whether in back offices or in
customer contact settings, all staff are informed of what the
new disclosure duty entails.
5.Section 2 Issues: The biggest practical concern with Section
2 is that it currently does not exclude its application to
very large insurers . Under current law, examinations are
required at least once every 5 years. This bill will permit
examinations to be deferred and additional 3 years. This
totals 8 years which is a long time for any company that has a
large share of the California marketplace to not be subject to
examination. Periodic examinations, beyond offering a time to
identify possible problems, also serve the function of
re-familiarizing people in the front-line customer service
units with what the law requires, what current trends in the
broad marketplace are concerning to the regulator and how to
make sure that practices remain in place that meet the letter
and spirit of California law. Given these effects, 8 years
seems a long gap for the companies whose business rerach is
very broad among Californians.
6.Author's Amendments to be Offered in Committee The author of
AB 2404 has advised the committee he will offer amendments in
committee which:
a. Would eliminate the requirement that the new
disclosure be made separately from the policy;
b. Would eliminate the requirement that the
disclosure include " a description of the cancellation
process ";
c. Would permit the disclosure, as an alternative
to stating the actual fees or penalties to be applied,
permit it to state the " maximum " such fees or
penalties and, furthermore, would permit those actual
fees or maximum fees to be " stated in the form of
percentages of the premium ";
d. Would relieve an insurer of the new disclosure
obligation if the policy permits but does not require
AB 2404 (Hill), Page 5
the insurer to refund premium other than on a pro rata
basis, and the insurer refunds premium on a pro rata
basis ;
e. Would require that the disclosure notice in
response to a telephonic application be mailed to the
applicant or insured within five business days rather
than in three business days;
f. Would apply the disclosure requirements of
this measure prospectively only to policies issued or
renewed after the effective date of this bill; and
g. Would provide that this section does not
require "any additional disclosure of a fee or penalty
for early cancellation if that disclosure is required
by any other provision of law"
These author's amendments appear in order to 1) reduce the
potential burden of compliance, both in terms of the volume
of disclosure notices but also by way of eliminating the
need to have extreme customization of these notices, and 2)
to ease implementation by making the changes prospective
only. The final proposed amendment appears tailored to
acknowledge some existing notice duty which is not
specified; potentially the verbiage in this provision might
be subject to further clarification.
7.Arguments in Support. The DOI, the bill's sponsor, states in
support for AB 2404 that:
"Current law requires that policy cancellation fees or
penalties be disclosed in the insurance policy. However,
based on numerous complaints that CDI has received from
consumers, it is clear that this method of disclosure is
not sufficient. This measure will require a clear
disclosure to be provided to the applicant or insured
before the insurer can impose a penalty for early
cancellation. We are continuing to refine the language to
ensure the disclosures are focused and appropriate.
Current law requires CDI to examine the market conduct of
insurers at least every five years. CDI may, and does,
conduct MCE more often than every five years for many
companies. However, we have discovered, over time that we
have many smaller companies that consistently follow the
law and provide a level of customer service that results in
no complaints to CDI.
AB 2404 (Hill), Page 6
Like the rest of state government, CDI's resources are
limited, and what we do have must be used as efficiently as
possible. This legislation will allow a single waiver of
the five-year requirement for small companies (** See
Committee Staff Note Immediately Following) Below that have
a demonstrated history at CDI lacking in consumer
complaints or violations of law. This approach will enable
the department to focus more resources on problematic
insurers and those that have the highest market share, and
thus affect the largest number of consumers. The bill would
not affect CDI's authority to conduct a MCE at any time if
we have reason to believe any insurer is engaging in
unlawful behavior."
8.According to the Insurance Brokers & Agents of the West (IBA
West), which supports this "important bill":
"AB 2404 ?permits insurers to adopt any short-rate penalty
provision they desire - as long as they provide advance
notice of that provision to the broker-agent and consumer
prior to policy inception.
Some insurers argue, in opposition to this bill, that it
would be impractical for them to make such disclosure in
advance of policy inception, given the extent to which the
insurance is frequently transacted over the phone or in
circumstances in which immediate binding is required.
In response, we believe the insurers' arguments actually
constitute a tacit admission of the need for this law. It
confirms the insurers do not adopt a single, consistent
policy; it's an implied admission that they make
inconsistent ad hoc decisions and do not want to relinquish
their ability to "punish" consumers who want to exercise
the freedom of contract to find a better deal in the
marketplace."
9.Opposition According to the Personal Insurance Federation of
California (PIFC) , which is opposed to this bill, the PIFC:
"strongly believes that the proposed changes to
Section 481,(c),1 would lead to increased costs,
inhibiting to the sales process, and is unworkable.
We also feel that the Department has failed to fully
demonstrate, specifically, the scope and breadth of
AB 2404 (Hill), Page 7
the problem that this bill would correct.
Specific objections to the bill enumerated by the PIFC
include:
Increased Costs
When an insurance company accepts a new applicant,
they incur administrative costs to process their
application. These costs are legitimate and can be
recouped over the life of a policy, but should be
recaptured if someone cancels prior to their
expiration date. Cancellation fees, whether pre-set
or pro rata, are the way in which companies can recoup
these expenses. AB 2404 would lead to the expensive
creation of new disclosure systems to accommodate the
new law.
AB 2404 (Hill), Page 8
(Continued - Personal Insurance Federation of
California Objections)
Inhibiting to the Sales Process
The auto and homeowners' insurance market is extremely
competitive in California. One only has to watch TV
or listen to the radio to get a sense of this
competition. The marketing tools used by insurance
companies are driven by one thing, price. It is our
belief that consumers are not purchasing insurance
based on which company has the lowest cancellation
fee, but instead purchase based on price, familiarity
or because they have a relationship with an agent.
Unworkable
AB 2404 proposes to change this paradigm by requiring
all companies to disclose their cancellation policies,
"prior to, or concurrent with, the application and
prior to each renewal." Forcing companies to discuss
cancellation fees at the point of sale creates a
negative environment for the transaction and puts the
customer in the position of having to shop for a
company based on something that may only happen in a
small number of instances - that the policy might be
cancelled before the term expires.
In addition, there are a number of documents that are
important to one's insurance policy, for example, the
list of coverage exclusions, endorsements, and the
insured's responsibilities under the policy. Why does
the Department of Insurance want to select the
cancellation policy to name up front instead of these?
Under current law, insurers provide cancellation
procedures when we send out the policy and other
related information."
While the Association of California Insurance Companies
(ACIC) indicates support for Section 2 of the bill (the
market exam waiver provision) ACIC is opposed to Section 1
and states:
"ACIC is ? opposed to the section which requires
disclosure of any cancellation policies, except
pro-rata penalties, prior to inception of the policy.
This provision is burdensome, unnecessary and could
result in unintended consequences. Under the
AB 2404 (Hill), Page 9
provisions of this section, insurers would have to
create an expensive disclosure system to notify
potential customers of the company's cancellation
policy which is already covered in the policy. In
addition, ACIC members note this would be the only
element of the insurance transaction that would
require this special "pre-notice" and wonder whether
cancellation fees are more important than other
critical items like policy exclusions, policyholder
responsibilities and insurer obligations."
10.Questions
a. Section 1 of the bill: Delayed Operative Date? -
Should the bill be given a delayed operative date to
allow insurers time to revise policy terms if needed, to
design, test and prepare to implement system processes,
and to work through any "back office" or customer-service
people training issues connected with the new law's
implementation?
b. Section 2 of the bill: Exam Waiver for Big
Companies? - As indicated in Comment paragraph # 5 and
also the text box above, AB 2404's market exam waiver
provision does not include language to limit the market
examination waiver provision to small companies only .
Since the largest companies can hold substantial market
share, potentially encompassing millions of individuals
and households, should a waiver policy which extends to
as many as 8 years the period during which such an
insurer would not be subject to examination apply to
large insurance companies?
11.Suggested Amendments
a. Delayed effective date: To facilitate the ability of
insurers to integrate the new Section 1 disclosure
requirement into their policies and procedures, a delayed
effective date of April 1st would make for a smoother
transition.
b. Scope of Exam Waiver: To limit application of the
new market conduct waiver authorization in Section 2 of
this bill so it only applies to smaller companies where
the potentially 8 year exam deferral (5 of current law +
additional 3 allowed by this bill) will only affect a
AB 2404 (Hill), Page 10
comparatively small part of the marketplace, the bill
should be amended on Page 5, line 8, after (3) by
inserting:
"The insurer's California written premium is less than
$10 million per annum.
(4)"
1. Prior and Related Legislation None
POSITIONS
Support
California Department of Insurance (Sponsor)
Insurance Brokers & Agents of the West (IBA West)
Oppose
Association of California Insurance Companies (ACIC)
Personal Insurance Federation of California (PIFC)
Consultant: Kenneth Cooley (916) 651-4102