BILL ANALYSIS �
AB 125
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Date of Hearing: March 2, 2011
ASSEMBLY COMMITTEE ON INSURANCE
Jose Solorio, Chair
AB 125 (Committee on Insurance) - As Amended: February 22,
2011
SUBJECT : Guaranteed automobile protection ("GAP") insurance
SUMMARY : Clarifies that a deductible required by an automobile
insurance policy may be covered by GAP insurance and related
contracts. Specifically, this bill :
1)Changes the definition of "guaranteed automobile protection"
so that the deductible amount provided by a standard property
damage insurance policy may also be covered by GAP insurance.
2)Provides that a "waiver" clause in a vehicle conditional sales
contract or lease agreement, which is similar to GAP
insurance, but does not constitute insurance, and which can be
sold by people who are not licensed insurance agents, may
include the deductible amount provided by a standard property
damage insurance policy.
3)Authorizes waiver clauses to also include a discount or
incentive, above the amount required to satisfy the obligation
on the loan, lease or sales contract, for the vehicle owner to
purchase a replacement vehicle using the same seller, lender
or lessor.
EXISTING LAW :
1)Defines "guaranteed automobile protections insurance" to be
insurance that covers a vehicle purchaser or lessee for the
difference between the actual cash value of the insured's
vehicle at the time of a total loss or unrecovered theft and
the amount owed on the vehicle. The definition also includes
language allowing for up to $5,000 above the amount necessary
to cover the gap to purchase another vehicle.
2)Provides for "waiver" clauses in vehicle conditional sales
contracts or lease agreements allowing the seller, lender, or
lessor to waive the difference between the actual cash value
of a vehicle at the time of a total loss or unrecovered theft
and the amount owed on the vehicle.
AB 125
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FISCAL EFFECT : None anticipated. The bill is nonfiscal.
COMMENTS :
1)Background . AB 125 was introduced by the Insurance Committee
to rectify a drafting error in last year's AB 2782 (Committee
on Insurance), the Department of Insurance-sponsored Omnibus
Committee Bill. In the effort to recognize in statute, and
formalize the differences between true insurance products, and
waiver provisions in loans, leases and sales contracts, what
has long been marketed as "GAP" products, the drafters
inadvertently eliminated coverage for the deductible amounts
commonly provided for in automobile insurance policies. The
effect of that error is that virtually all contracts in the
market are non-compliant with the law, and consumers'
reasonable expectations about the scope of the protection they
are purchasing cannot be met under the current definitions.
2)Arguments in Support . GAP insurance and related waiver
products provide a sound consumer protection service because
it is common with respect to vehicle purchases that loan or
lease amounts exceed the "actual cash value" of the vehicle in
the early years of a loan or lease. Until these products came
into the market, consumers often found themselves owing a
lender more than the correct insurance settlement would
provide. The result for consumers was either out-of-pocket
losses to make up the difference, or damage to the consumer's
credit rating due to defaulting on the remainder of the loan
or lease balance.
3)Urgency Clause . The bill requires an urgency clause.
Initially, this issue was introduced as AB 436 (Committee on
Insurance). AB 436 included an urgency clause, because it is
appropriate to rectify last year's drafting error as soon as
possible to assure that consumers' reasonable expectations
will be met. In an effort to expedite enactment of these
changes, AB 125, which is past the 30-day "in print" rule, was
amended to address the problem in a more timely manner.
However, urgency clauses amended into bills after introduction
require Rules Committee approval.
The Committee should adopt an urgency clause into the bill as a
Committee amendment on March 2, pending Rules Committee
approval, which is expected to occur at the March 3 meeting of
AB 125
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the Rules Committee.
4)Other Assets . GAP for assets other than automobiles? The
same problem of being "underwater" with respect to automobiles
can be true of other big-ticket items that are commonly
financed, such as boats, motorcycles, motor homes, and
off-road vehicles. Accordingly, all of the interested
parties, including the Department of Insurance, have agreed
that replacing the word "automobile" with the word "asset" in
the definitions would be appropriate. The Committee should
adopt amendments to effectuate this clarification.
5)Technical Amendments . A couple of technical amendments should
be adopted as well. The word "promise" should be changed to
"debt cancellation agreement" in the waiver provisions, and a
clarification of the dealer's duty with respect to a discount
provision is needed.
REGISTERED SUPPORT / OPPOSITION :
Support
OwnerGUARD
American Federation of State, County and Municipal Employees
(AFSCME), AFL-CIO
Association of California Insurance Companies
California Financial Services Association
California New Car Dealers Association
Opposition
None received
Analysis Prepared by : Mark Rakich / INS. / (916) 319-2086