BILL ANALYSIS �
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|SENATE RULES COMMITTEE | SB 1451|
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THIRD READING
Bill No: SB 1451
Author: Calderon (D)
Amended: 5/10/12
Vote: 21
SENATE INSURANCE COMMITTEE : 5-0, 5/9/12
AYES: Calderon, Gaines, Corbett, Lieu, Price
NO VOTE RECORDED: Anderson, Correa, Lowenthal, Wyland
SUBJECT : Insurance: fraternal benefit societies
SOURCE : American Fraternal Alliance
DIGEST : This bill explicitly exempts policy loans from
existing law that prohibits a fraternal benefits society's
officers, directors, agents, employees from loaning,
borrowing, or making arrangements for the loan of funds of
the society. In addition, this bill allows a society to
lend funds to an agent for the specific purpose of starting
a business that sells the society's insurance products.
ANALYSIS :
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
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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
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 excepts from these prohibitions:
1. Loans made by a fraternal benefit society to a member of
the society under certain conditions; and
2. Loans made to a life licensee, as defined, appointed by
the fraternal benefit society, under specified
conditions, including:
A. That the loan is not made to an officer or
director of the society;
B. That the loan is secured and contains a repayment
provision in accordance with the industry custom and
practice of life insurers for that loan; and
C. 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
Purpose of this bill . According to this bill's sponsor,
the American Fraternal Alliance (AFA), this bill allows
fraternal life insurers to provide loans to the agents who
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sell their products and provide customer service to their
members.
Background
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 United States Code Section 501(c)(8).)
These societies work together, to aid and assist one
another, and to promote the common cause. (Insurance Code
(INS) Section 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 Section 11013(a).)
Fraternal insurance has been available in the U.S. 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.
Additionally, certain terms may differ slightly from those
that apply to commercial policies:
1. Policy Loans . Existing law permits owners of certain
types of life insurance policies to borrow against the
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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."
2. Life Licensees . "Life licensees" are agents authorized
to sell life and/or accident and health insurance. (INS
Sections 1633 and 1626.) For the purposes of this bill,
life licensees would only sell products by the
sponsoring society.
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 Section 1104)
INS 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 from the trust funds of, or funds belonging to, a
fraternal benefit society.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
SUPPORT : (Verified 5/9/12)
American Fraternal Alliance (source)
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JJA:kc 5/10/12 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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