BILL ANALYSIS �
SENATE INSURANCE COMMITTEE
Senator William W. Monning, Chair
AB 1804 (Perea) Hearing Date: June 25, 2014
As Amended:May 28, 2014
Fiscal: No
Urgency: No
VOTES: Asm. Floor (05/29/14)76-02/Pass
Asm. Ins. (04/23/14) 09-02/Pass
SUMMARY Would provide that policyholders of private passenger
automobile, owner-occupied homeowners', and individual
disability income insurance policies are entitled to designate a
third-party who will be sent a notice if the policy is about to
lapse for nonpayment of premium.
DIGEST
Existing law
1. Establishes, with various time frames depending on the type of
insurance policy, that a policy cannot be cancelled for
nonpayment of premium unless the named insured is provided a
notice so many days before the effective date of cancelation,
including:
a. Auto Insurance: 10 days. (Ins. Code � 662.)
b. Homeowners Insurance: 20 days. (Ins. Code � 677.4.)
1. Requires disability income insurance policies to contain a
provision providing a specified grace period depending on how
frequently premiums are due. Grace periods must be at least 7
days for premiums paid on a weekly basis, 10 days for premiums
paid monthly, and 31 days for all other policies. (Ins. Code �
10350.3.)
AB 1804 (Perea), Page 2
This bill
1. Would provide that an insurer must maintain a process that
allows an insured to designate in writing one additional
person to receive notice of lapse, termination, expiration,
nonrenewal, or cancelation of a policy for nonpayment of
premium.
2. Would require the insurer to notify the insured of that
right at the time of application and at least every two
years thereafter.
3. Would require the insurer to follow a prescribed process
described below, if it fails to maintain the process
described above:
a. Within 30 days of the effective date of the policy,
notify the policyholder of the right to designate one
third-party to receive a notice of lapse, termination,
expiration, cancellation or nonrenewal of the policy for
nonpayment of premium.
b. The insurer may conclusively presume that the
policyholder has waived the right to designate a third
party if no response is received within 30 days.
c. Insurers must maintain records of the designee
information for the life of the policy, and allow the
policyholder to update the information upon the
policyholder's request.
d. The insurer must notify the policyholder every two
years of the right to either update designee
information, or the right to make a designation.
1. Would not apply to insurance policies paid for through a
payroll or pension deduction until 60 days after the insured
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is no longer on that payment plan.
2. Would prohibit a policy subject to the bill's requirements
from beinge cancelled for nonpayment of premium, unless the
designated third party has been notified by first-class mail
at least 10 days prior to the cancellation date.
3. Would provide that the bill's requirements apply to:
a. Policies covering owner-occupied homes;
b. Private passenger automobile insurance policies;
and
c. Individual disability income policies.
1. Would specify that a person designated to receive notices
pursuant to the bill does not acquire any substantive rights
under the policy.
2. Would provide that the bill does not apply to policies that
take effect prior to January 1, 2016.
COMMENTS
1. Purpose of the bill . According to the sponsor, the
California Department of Insurance (CDI), the bill is an
important consumer benefit for people who have difficulty
managing their insurance responsibilities either due to
health or residency issues. CDI notes that policyholders of
all ages can find themselves in situations that might cause
important insurance protections to lapse due to a failure to
pay the premium. In addition to older policyholders who
might want a relative or close family friend to keep an eye
on their insurance protections, others who might have
prolonged separations from their primary residence, such as
college students, members of the military, or people who
work for extended periods away from home will find the
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bill's proposal a great benefit.
AB 1804 (Perea), Page 5
2. Background
a. History. This bill is based on AB 1747 (Feuer),
Chapter 315, Statutes of 2012, that prohibits a life
insurer from terminating a policy for nonpayment until 30
days after a notice of nonpayment has been mailed to the
insured and a designee (if named) and other person having
an interest in the policy (such as an assignee). The
insurer would have to notify the insured annually of the
right to designate or change the designation of the
additional recipient. (Ins. Code � 10113.71.)
That bill was is based on a long-term care insurance
statute originally added by SB 1052 (Vasconcellos),
Chapter 699, Statutes of 1997. (Ins. Code � 10235.40.)
That provision was based on Section 7 of the Long-term
Care Insurance Model Regulation (1993) adopted by the
National Association of Insurance Commissioners.
Life insurance and long-term care policies represent
life-long investments and estate management tool.
Getting a new policy after lapse places the consumer in
an extremely disadvantaged position because, in part, the
new policy may require additional underwriting and much
higher premiums - especially for seniors. Consumers that
suffer from poor health may have trouble getting a policy
at all. A lapse for a life or long-term care policy will
have immediate and permanent consequences (sometimes
drastic). Additionally, the very conditions covered
under a long-term care policy, such as incapacity or
cognitive impairment, may be the cause of the lapse.
b. Lapses Addressed in the Bill. This bill carries
forward the back-up contact idea but for auto, homeowner,
and individual disability income policies. Because of
the differences in each line, the bill would impact
consumers differently as well.
i. Auto and Homeowners Insurance. Unlike life
and long-term care insurance, cancelation of auto or
homeowners insurance can be immediately cured and
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might have significant or permanent results if a loss
occurred during a period of uninsurance. Nonetheless,
there may be reversible, but inconvenient
consequences. For example, a lienholder may "force
place" insurance according to the terms of loan, which
can be significantly more expensive. Without
liability coverage, consumers would not be able to
driver their vehicles legally and may have
difficulties with their registration since insurers
are required to notify the Department of Motor
Vehicles of the termination of any reported policy.
Still, most auto and homeowner's policies are easily
and immediately replaceable.
Auto insurance, in particular, may be susceptible to
notices sent for intentional lapse. Consumers that
switch auto insurers may simply lapse their policies
without notifying their current insurer without
realizing a notice will be sent to a third party.
ii. Disability Income or "Wage Loss" Insurance.
Disability income insurance provides partial income
replacement through periods of disability. Coverage
may end after a certain period or when the insured
reaches a specified age (65 is standard). This bill
only addresses individual disability income policies,
not the typical group policies funded through an
employer. The Association of California Life and
Health Insurance Companies (ACLHIC), who represents
disability insurers, believes that current law
provides sufficient notice and offers one example of
how an insurer handles nonpayment:
One of our members sends out a premium billing
notice to the insured 21 days before the
premium due date. Next, they send a past due
bill to the insured on the premium due date.
Third, they send a notice of lapse to the
insured on the 31st day after the grace period
and in that notice we state that the insured
has 15 additional days to make a payment of
premium to keep the policy in force. So the
insured will receive three separate notices
AB 1804 (Perea), Page 7
that premium is due or past due.
Rather than take a prescriptive approach, this bill has
allows the insurer to have the flexibility to implement
system that takes full advantage of technology and
procedural options, so long as insurer implements a
system designed to provide an alternate person adequate
notice of the potential for cancelation. It also
provides a "safe harbor" or preaaproved procedure.
c. Other Anti-lapse Measure. Insurers have implemented
a variety of options to assist the consumer avoid lapse.
The following are a few examples.
i. Automatic Payments. Most insurers offer
automatic payments through a variety of means,
including credit cards or automatic withdrawals.
However, it is critical that valid payment methods are
maintained on the account. Some insurers inform
consumers by email when card on file is no longer
valid well before the payment was due.
ii. Additional Notices to the Policyholder or
Designee in a Preferred Format. Many insurers offer
consumers a variety of methods by which to receive
notifications related to their policy or account,
including text messaging, email, and cell phone
application notification. These notices are not
limited to notices of cancellation and some types of
notices may be limited to whom they will be sent. For
example, a consumer might only be able to provide one
email address but several phone numbers for text
messaging. A consumer might have to share log-in
information to receive messages via smart-phone app.
1. Arguments in Support
a. The Insurance Commissioner supports the bill because
many policyholders of all ages are in situations that
could cause them to miss these nonpayment notices. For
AB 1804 (Perea), Page 8
example, they might have a prolonged separation from
their primary residences though military deployment, work
assignment, or college studies. The opportunity to
select a back-up contact would give affected
policyholders peace of mind knowing that they can depend
on a loved one or trusted friend to have the opportunity
to make sure their insurance bills are paid. Providing
the policyholder this option makes sound public policy
sense and also assists insurers by limiting the pool of
individuals whose coverage lapses.
b. One advocate for the bill believes that the bill has
possible benefits for the military personnel who are
forced to leave their homes with very short notice in
order to be deployed for long periods of time. The
opportunity to plan ahead with an opt-in provision
provides the clarity needed when putting personal
business in order, and allows our military to have faith
that a policy that is critical to their family well-being
is responsibly handled.
1. Arguments in Opposition
a. ACLHIC argues that the data available suggests that
unintentional lapses for individual disability income
insurance are virtually nonexistent. Disability income
or "wage loss" insurance is typically provided to highly
skilled professional and generally lapses when it is no
longer needed (such as when a person retires). The
average lapse rate is 6.5% with the highest portion
occurring in the latest policy years as a result of
policyholders nearing retirement age and deciding they
no longer need protection.
b. ACLHIC also writes that compliance with AB 1804
would cause insurers to incur significant expense in
system improvements to automatically generate new and
multiple notices to only California insureds, and
continuously track their designated individuals.
1. Suggested Amendments
a. The insured and the policy owner (or "policyholder")
AB 1804 (Perea), Page 9
is frequently, but not always, the same person. This
bill uses the term "insured" interchangeably with "policy
owner." The author may wish to amend the bill to use the
term policy owner to designate the person exercising
control over contract terms and selecting a designee to
receive the notice of cancelation.
b. The provisions of this bill are subject to the
Uniform Electronic Transactions Act which permits
electronic transactions to substitute for hardcopy
transactions so long as both parties agree. This allows
the policyholder to make the designation and choose a
hardcopy or electronic format (if offered by the insurer)
of the notice for the alternate designee. The author
may wish to consider amendments that provide additional
consumer protections related to specified insurance
documents provided under Insurance Code Section 38.5.
c. In order to give the notice required in subdivision
(a) of proposed Section 396 the same legal effect as the
alternative notice described in subdivision (h), the
author may wish to consider amendments that clearly
applies subdivision (g), (h), and (i) to subdivision (a)
and mark the alternative procedures as paragraphs of
subdivision (b).
POSITIONS
Support
California Department of Insurance (sponsor)
California Advocates for Nursing Home Reform
California Commission on Aging
California Retired County Employees Association
California Senior Legislature
Consumer Attorneys of California
Consumer Federation of California
Oppose
Association of California Life and Health Insurance Companies
American Council of Life Insurers
AB 1804 (Perea), Page 10
Consultant: Hugh Slayden (916) 651-4773