BILL ANALYSIS �
SENATE INSURANCE COMMITTEE
Senator Ronald Calderon, Chair
SB1451 (Calderon) Hearing Date: May 9, 2012
As Amended: May 2, 2012
Fiscal: No
Urgency: No
SUMMARY: Under existing law, officers, directors, agents, or
employees of any fraternal benefit society may not lend, borrow,
or make arrangements for the loan of funds of the society. This
bill would explicitly exempt policy loans. This bill would also
allow a society to lend funds to an agent for the specific
purpose of starting a business that sells the society's
insurance products.
DIGEST
Existing law
1. Governs the organization of fraternal benefit societies,
which, among other characteristics, are nonprofit,
incorporated societies, orders, or supreme lodges, without
capital stock, conducted solely for the benefit of members
and their beneficiaries, have a representative form of
government, and make provision for the payment of benefits;
2. Authorizes these entities to provide all forms of life and
disability insurance, except as specified;
3. Makes it a felony for any officer, director, agent, or
employee of any fraternal benefit society to borrow funds
of the society, to become endorser or surety for loans by
the society to others, or to be obligor for moneys borrowed
or loaned by the society;
4. Makes it a felony for an officer, trustee, agent, or
SB 1451 (Calderon), Page 2
employee of a fraternal benefit society to ask, receive, or
consent or agree to receive anything of value for procuring
or endeavoring to procure a loan to any person from the
trust funds of, or funds belonging to, a fraternal benefit
society.
This bill
1. Would except from these prohibitions:
a. Loans made by a fraternal benefit society to a
member of the society under certain conditions; and
b. Loans made to a life licensee, as defined, appointed
by the fraternal benefit society, under specified
conditions, including:
i. That the loan is not made to an officer
or director of the society;
ii. That the loan is secured in accordance
with insurance industry practices for that loan; and
iii. That no officer, director, agent, or
employee of the society, other than the life licensee,
receives consideration due to the making of the loan.
COMMENTS
1. Purpose of the bill : According to the bill's sponsor, the
American Fraternal Alliance (AFA), this bill would allow
fraternal life insurers to provide loans to the agents who
sell their products and provide customer service to their
members.
SB 1451 (Calderon), Page 3
2. Background and Discussion
a. Fraternal Benefit Societies and Insurance.
According to the AFA:
Fraternal benefit societies are not-for-profit life
insurers, that provide members access to financial
service products, primarily life insurance annuities, and
utilize the earnings from the sale of these products to
provide members a variety of direct benefits, make direct
financial contributions to organizations supported by its
members, and coordinate members' volunteer community
service activities. Members share a common bond, which
most often includes religion, ethnicity, occupation,
gender, or shared values.
Fraternal benefit societies ("societies"), as defined
under the Internal Revenue Code may qualify for federal
tax exemption. (26 USC � 501(c)(8).) These societies
work together, to aid and assist one another, and to
promote the common cause. (Ins. Code � 10990.) Familiar
examples include the Independent Order of Foresters,
Portuguese Fraternal Society of America, and Knights of
Columbus.
A fraternal benefit society may sell life and disability
insurance to its members and member's dependents if it
can meet certain qualifications. (Ins. Code � 11013(a).)
Fraternal insurance has been available in the United
States as far back as 1868 and was designed to make
insurance products available to those who could not
afford the limited and expensive policies available at
the time.
According to the sponsor, fraternal insurance operations
are subject to the same or similar regulatory parameters
as commercial insurers, except that they do not
participate in state guaranty funds.
SB 1451 (Calderon), Page 4
Additionally, certain terms may differ slightly from
those that apply to commercial policies:
i. Policy Loans. Existing law permits
owners of certain types of life insurance policies to
borrow against the cash value of the policy; this is
called a "policy loan." Technically, fraternal
benefit societies issue "certificates" rather than
"policies" but the same principal applies and these
loans are still often referred to as "policy loans."
ii. Life Licensees. "Life licensees" are
agents authorized to sell life and/or accident and
health insurance. (Ins. Code �� 1633 and 1626.) For
the purposes of SB 1451, life licensees would only
sell products by the sponsoring society.
b. Prohibition against "Self-Dealing". Generally, any
officer, director, or other person that holds a
management-type position (such as a business, club, or
nonprofit organization) owes a duty of loyalty to that
entity. The use of an entity's resources for self-gain,
unless otherwise authorized, may constitute a breach of
that duty and is commonly referred to as "self-dealing."
California law addresses self-dealing by prohibiting
insurers of any kind from making a loan, other than a
policy loan, to any person having authority in the
management of its funds. (Ins. Code � 1104.)
Insurance Code Sections 11162 and 11163 specifically
address fraternal benefit societies . Section 11162 makes
it a felony for any officer, director, agent, or employee
of any fraternal benefit society to borrow funds of the
society, to become an endorser or surety for loans by the
society to others, or to be an obligor for moneys
borrowed or loaned by the society. Section 11163 makes
it a felony for an officer, trustee, agent, or employee
of a fraternal benefit society to ask, receive, or
consent or agree to receive anything of value for
procuring or endeavoring to procure a loan to any person
SB 1451 (Calderon), Page 5
from the trust funds of, or funds belonging to, a
fraternal benefit society. SB 1451 would exempt policy
loans (discussed above) and startup loans from those
sections.
c. SB 1451 Would Allow Startup Loans to Agents. This
bill would provide an exception to Sections 11162 and
11163 by permitting a society to provide startup loans to
life licensees authorized to sell the society's products.
A startup loan could only be used to lease an office,
lease or purchase office equipment or supplies, or pay
for other expenses related to selling the society's
certificates. A loan must be repaid within six months.
3. Summary of Arguments in Support
a. The AFA supports this bill because it mirrors
legislative and regulatory requirements in every other
state and would allow fraternal life insurers to compete
on a level playing field with commercial insurance
carriers.
b. The AFA also explains that this bill would allow
these unique financial services and membership benefits
organizations to fulfill their business and social
missions.
4. Summary of Arguments in Opposition
None received (as of noon on May 4, 2012)
5. Suggested Amendments
SB 1451 (Calderon), Page 6
a. Amend Page 3, lines 11-12, to read
(2) The loan is secured in accordance with the industry
custom and practice of life insurers for loans to life
licensees insurance industry practices for these loans .
b. Amend Page 3, lines 16-19, to read:
(4) The loan is for the purpose of enabling the licensee
to lease an office, lease or purchase office equipment or
supplies, or pay for other expenses related to selling
the society's certificates for not more than six months
after the first disbursement of funds .
6. Prior and Related Legislation
AB 109 (Committee on Budget) (enacted as Chapter 15,
Statutes of 2011) provided that imprisonment based on
violations of Insurance Code Sections 11162 and 11163 be
punishable under Penal Code Section 1170(h) (relating to
the recent criminal justice realignment sentencing
modifications).
POSITIONS
Support
American Fraternal Alliance (Sponsor)
Oppose
None received (as of noon on May 4, 2012)
Consultant: Hugh Slayden, (916) 651-4773
SB 1451 (Calderon), Page 7