2003-2004 California Year-End Legislative Repo

A summary of the most important legislation affecting the industry in the New Year

The historic recall of Gray Davis and election of Arnold Schwarzenegger as governor of California set the tone for the 2004 legislative year. With Schwarzenegger in the corner office, Republicans gained a foothold in the political process after nearly five years of being shut out of both legislative and administrative control. Schwarzenegger brought more than merely position. His presence and priorities focused the political debate.

2004 marked a year of transition in the legislature as well. New leaders took the helm in each of the four legislative caucuses. In the Assembly, Fabian Nuñez (D-Los Angeles) won election as speaker of the Assembly while Kevin McCarthy (R-Bakersfield) took over as minority leader for the Republicans. In the Senate, term limits brought an end to the political careers of President Pro Tempore John Burton (D-San Francisco) and Republican Leader Jim Brulte (R-Rancho Cucamonga). Don Perata won a tight election in the Senate Democratic Caucus and will assume the responsibilities of President Pro Tempore. Republicans replaced Brulte in the minority leader post with Dick Ackermann back in May.

For the fourth year in a row, attempts to reform California’s troubled workers’ compensation system dominated the legislative agenda. Just as important, all interested parties–particularly insurers and agents and brokers who place business with the State Comp Insurance Fund–should understand that the Legislature reserves the right to propose further reforms on insurers and producers, particularly if premium reductions are not forthcoming in 2005.

The Southern California firestorms prompted a number of legislative proposals affecting homeowner’s insurance. Reform legislation generally touched on the types of coverage available to consumers, the responsibility that a consumer bears in choosing homeowner’s coverage, and the liability insurers face with regard to the repair, rebuilding or replacement of property and personal belongings.

No substantial automobile insurance reforms moved forward during the 2003-04 session, but a significant reform of Proposition 103 did find its way into law. AB 3088 developed through the sponsorship of several insurance companies–including Progressive Insurance Group and Nationwide Insurance Company–along with support from the Insurance Agents and Brokers Legislative Council (ABL). The measure codifies the so-called “super-group” exemption that allows separate insurers under common ownership to offer differing good-driver discounts if the companies have separate management and operate independently.

Key bills passed and signed into law by the governor include: SB 899 (Poochigian), which enacts a comprehensive reform of workers’ comp laws; AB 263 (Oropeza), which reestablishes the Dividends Received Deduction for corporations that own insurance companies; AB 1953 (Vargas), which imposes additional consumer protections on public insurance adjuster contracts; and AB 2520 (Vargas), which establishes a limited lines insurance license for sale of public storage insurance.

This 2003-2004 Year End Report identifies the key issues addressed by the Legislature during the 2003-2004 legislative session that affect insurance and provides a summary of the most significant legislation.

Automobile Insurance Legislation
AB 3088 (Horton) creates a statutory exception to Insurance Code Section 1861.16(b) that will allow separate insurers under common ownership to offer different good-driver discount rates provided that these insurers have separate management and operate independently. AB 3088 came in response to the Donabedian v. Mercury Insurance Company ruling. In Donabedian, a California Court of Appeal ruled that a third-party cause of action exists to enforce the provisions of Prop. 103. Prior to this holding, California courts had generally ruled that the Insurance Commissioner held exclusive jurisdiction to enforce the provisions of Prop. 103. The California Supreme Court declined to consider an appeal. The Donabedian ruling highlighted a conflict between a regulatory interpretation that the California Department of Insurance (CDI) had adopted and a strict reading of Insurance Code Section 1861.16(b). Left unresolved, that conflict would have adversely impacted the current operations of numerous insurance groups that own and operate competing insurance companies, the so-called “super-groups.” By its terms, the Donabedian holding exposed every super group operating under the CDI interpretation. AB 3088 shuts off this exposure by codifying the super-group exemption.

AB 2677 (Ridley-Thomas) requires automobile insurers or insurer groups licensed to sell personal automobile insurance in California to provide consumers with a cost estimate for its lowest priced automobile insurance policy at the limits the consumer has requested and are available to that consumer. Insurers are permitted to meet this requirement by either: (1) setting up a toll-free number in any geographical area where authorized that will provide a cost estimate or reference to an insurer representative or broker-agent as requested; or (2) maintaining an Internet web site that provides online cost estimates or references to an insurer representative or broker-agent. The author believes that AB 2677 will allow consumers to comparison shop for the personal automobile policy that suits them best.

SB 1500 (Speier) requires all insurers to report proof-of-insurance information electronically to the Department of Motor Vehicles by 2006. The bill also directs the DMV to suspend a registration if insurance is fraudulent or cancelled and requires the CDI to report on the effectiveness of the low-cost auto insurance program. In the letter issued accompanying his signature, Governor Schwarzenegger requested further legislative action next year to ensure that the SB 1500 reporting program operates in the most cost effective and efficient manner possible. The governor asked that the state Legislature properly appropriate the funds for the creation and operation of the program and grant him the authority to pursue private contracting if cost effective.

Business of Insurance/Broker-Agent Legislation
AB 2490 (Maddox), sponsored by ABL, permits surplus brokers placing personal lines insurance products, such as homeowners insurance and associated excess or umbrella coverages, immediately to bind coverage with an applicant in the same manner as non-admitted insurers and surplus brokers are currently authorized for commercial lines insurance products. This change in law recognizes the increasing role that the surplus-lines market plays in California personal lines. Often homeowners with higher priced residences or who live in high-risk areas cannot obtain coverage in the regular market and are forced into the surplus lines market. In certain instances, such as renewal, the homeowner may need to obtain coverage immediately. AB 2490 will allow individuals to obtain coverage quickly while maintaining the same consumer protections currently provided in the admitted market. The provisions of the bill will sunset on Jan. 1, 2008.

AB 2557 (Koretz), a CDI-sponsored bill, increases penalties on unlicensed insurers, augments background information reporting requirements for insurance license applicants and licensees, and allows the commissioner to penalize providers of continuing education that fail to meet CDI standards. Specifically, AB 2557: (a) increases the criminal penalty for unlicensed sales to one year in jail and up to a $50,000 fine, or both; (b) requires a licensee to notify the commissioner when any background information submitted for a license changes after the application has been submitted or renewed; (c) requires a licensee to notify officers, directors, and partners of business entities of any changes in his background information when the licensee is listed as an endorsee on the license of the business entity; and (d) requires a licensed business entity with an unlicensed person listed on the license of the business or its application for a license to give information to the commissioner when background information on the unlicensed person changes and the business entity is aware of the change.

SB 1273 (Scott), as introduced, would have given district attorneys the discretion to file either as a felony or as a misdemeanor against any insurance company or agent for misrepresenting the terms of an insurance policy or making any false statements to senior citizens for the purpose of inducing the sale, forfeiture or surrender of a policy. Current law bars these practices, but it restricts the charge to a misdemeanor. The CDI sponsored this measure. In creating a new felony charge for misrepresentation, SB 1273 implicated the three-strikes law. As a rule, Senate Democrats oppose the creation of any new felonies out of the belief that application of three-strikes needs to be restricted to violent crimes. Others voiced concern that the terms “knowing” and “intentional” misrepresentation of an insurance policy were legally vague and ambiguous. As a compromise, the author amended SB 1273 to prohibit insurers, agents or brokers from making or using a statement that is known, or should have been known, to be a misrepresentation of the terms, benefits, or dividends of an insurance policy. A similar prohibition against making a statement that is known, or should have been known, to be a misrepresentation for the purpose of inducing another person or policyholder to take certain actions was also included. As punishment, the legislation also increases the maximum penalty for such misrepresentations to up to one year in jail and/or a fine of up to $25,000. When the loss to the victim exceeds $10,000, the fine limits increase to three times the amount of that loss.

SB 1495 (Machado) requires an insurer to reimburse any fees and extra premium charged to the insured as a result of a late premium payment or a lapse in coverage if the late payment or lapse in coverage was the result of fraud committed by a licensed agent or broker, provided that either: (a) the agent or broker has been convicted of fraudulent activity in court; (b) an administrative penalty has been imposed on the agent or broker for fraudulent activity; or, (c) the agent or broker has been charged with fraud in court or in an administrative action and has agreed to plead guilty to a lesser charge for the fraudulent activity of which he or she is accused.

Homeowners Insurance Legislation
The San Diego wildfires that burned during October 2004 sparked a blaze of legislative proposals on homeowners insurance. As was the case with the Oakland wildfires more than a decade earlier, homeowners affected expressed confusion and frustration regarding the appropriate amount of coverage, differences in types of coverage, and the phenomenon of underinsurance. In response, various legislators introduced a number of proposals intended both to resolve the confusion and to avoid similar problems in the future.
Commissioner John Garamendi took center stage in this process, sponsoring a package of measures labeled the “Homeowner’s Bill of Rights.” Included were proposals to prohibit the use of credit information in the underwriting process, require additional disclosures on policies, and ban the cancellation of policies following a government-declared natural disaster.

Strong industry opposition–as well as practical defects–moved the department off most of its original proposals. By the end of the session, insurance industry representatives either negotiated compromises acceptable to most insurance companies and broker/agents or defeated the contentious bills in committee.

AB 2199 (Kehoe) offers a typical example of a CDI-sponsored bill where the department was willing to compromise. As negotiated, AB 2199 defines the measure of indemnity and places specified conditions on insurers in circumstances related to fire insurance. Specifically, the bill: requires payment of replacement cost to be the amount that it would cost the insured to repair, rebuild, or replace the property lost or damaged; specifies that if a policy requires the insured to repair, rebuild or replace the damaged property in order to collect the full replacement cost, the insurer must pay the actual cash value (ACV) of the damaged property until such time as the damaged property is repaired, rebuilt or replaced; and requires that once a property is repaired, rebuilt, or replaced the insurer shall pay the difference between the ACV payment made and the full replacement cost reasonably paid to replace the damaged property, up to the policy limits. The bill also: provides that from the date the ACV payment is made, no time limit of less than 12 months shall be placed on an insured in order to collect the full replacement cost of the loss; allows for additional extensions of six months for good cause; specifies that in the event of a total loss relating to a government declared “state of emergency,” no time limit of less than 24 months shall be placed on the insured in order to collect the full replacement cost of the loss; provides that insurers are not prohibited from allowing the insured additional time to collect the full replacement cost; declares that in a total loss of the insured’s structure, no policy issued may contain a provision that limits or denies payment of the replacement cost if the insured decides to rebuild or replace the property at a location other than the original insured premises; and provides that the measure of indemnity shall be based upon the replacement cost of the insured property and not based upon the cost to repair, rebuild or replace at a location other than the insured premises.

AB 2962 (Pavley), another CDI-sponsored bill, also changed dramatically during the legislative process in response to insurer concerns. In its final form, AB 2962: requires an insurer, when there has been a total loss to the primary insured structure under a residential policy and reconstruction has not been completed by the time of policy renewal, before or upon renewal to adjust the limits and coverages, write an additional policy, or attach an endorsement that reflects the change in the insured’s exposure to loss (prior to adjusting the limits and coverages, insurers would be required to consult with the insured as to what limits and coverages might or might not be needed); and requires an insurer to adjust the premium to reflect any changes in coverage to an existing homeowner’s insurance policy covering a residence that has been a total loss. It also: prohibits an insurer from canceling coverage while the structure is being rebuilt, except under certain circumstances; prohibits an insurer from canceling a policy solely on the basis that the structure is in damaged condition as a result of a total loss; and requires an insurer to offer to renew a policy at least once if the total loss to the structure was caused by a disaster and not the negligence of the insured.

SB 64 (Speier) initially proposed a “take-all-comers” requirement for insurers offering homeowners insurance coverage. This version failed passage in the Assembly Insurance Committee in June 2003. One year later, Senator Speier amended the bill to establish a mediation process for claims disputes arising out of the San Diego wildfires. Patterned after a mediation program established in 1995 following the Northridge earthquake, the SB 64 program is intended to resolve coverage and other policy disputes without litigation. SB 64 was passed as an urgency measure and was signed by the governor on Aug. 30, 2004.

SB 1855 (Alpert), as was the case with AB 2962 as described above, amounted to a “work in progress” throughout the legislative session. The CDI, sponsor of the bill, hosted several meetings with industry representatives that produced a compromise. In its final form, SB 1855 adds an additional disclosure to the California Residential Property Insurance Disclosure Act (a.k.a. the Petris Act). This new disclosure would appear on the Declarations Page of a homeowners’ insurance policy and state that the cost to rebuild a home may differ from the homeowner’s policy limits. The bill also requires insurers to distribute a new California Residential Insurance Bill of Rights to consumers every other year outlining consumer and insurer rights and responsibilities. SB 1855 alters the definitions of various types of homeowners insurance coverages provided in the annual disclosure to policyholders.

Workers’ Comp Legislation
The idea that “workers’ comp must be reformed” has been at the center of the political debate in California for the last four years. During his first term, Governor Gray Davis vetoed three different pieces of reform legislation before ultimately signing AB 749 (Calderon) in 2002. While AB 749 delivered significant benefit increases to injured workers, it fell short on delivering cost savings. Employers, now further stressed with higher benefit payments, continued to press for systemic changes. Democrats in the legislature responded during 2003 with a series of hearings that ultimately produced AB 227 (Vargas) and SB 228 (Alarcon), which brought moderate but real reforms.

Governor Davis signed both AB 227 and SB 228, but the ink on his signatures was barely dry before recall mania took hold. Candidate Schwarzenegger described AB 227 and SB 228 as inadequate and pledged to deliver true reform for business. Once in office, Schwarzenegger immediately convened a special session of the Legislature to address workers’ comp and set up a separate initiative effort to develop a sweeping reform proposal for the 2004 ballot. In the end, both the Legislature and the governor chose compromise, and a second reform package–SB 899 (Poochigian)–became law.

The enactment of SB 899 should quiet the comp debate, at least for a while. But recent history suggests that unless real and significant savings materialize–and the current rating bureau calculations of the reforms put that in serious question–workers’ comp could quickly reemerge as the central legislative issue. Expect more proposals to regulate insurance rates and cap agent commissions and broker fees. The industry dodged a bullet last year by limiting the SB 899 provisions in this area to a study of whether insurers are adequately passing savings from AB 227, SB 288 and SB 899 through to employers. That study will be released no later than Jan. 1, 2006.

Several important issues remain, including the long-overdue clean-up legislation to AB 227, SB 228 and SB 899; the adequacy of inpatient fee schedules, outpatient fee schedules and pharmacy fee schedules; drafting of regulations relating to medial networks, permanent disability, independent medical review and audits; another look at rate regulation in the form of a “rate band” or reinstatement of the minimum rate law; and, a number of possible legal challenges.

AB 2147 (Kehoe) requires insurers under a wrap-up insurance policy to report workers’ comp losses and payroll information for each contractor and subcontractor to its rating organization on a timely basis and in accordance with the uniform statistical plan. It requires insurers, within 10 days, upon request, to provide to each contractor and subcontractor copies of or access to the report covering workers’ comp losses and payroll information for that contractor or subcontractor participating in the wrap up insurance program.

AB 2866 (Frommer) requires the CDI to post on its web site information relating to any person convicted of a violation of any insurance fraud provisions involving workers’ compensation insurance, services, or benefits.

SBX4 2 (Speier) enacts a number of provisions relating to the payment of workers’ comp benefits and penalties for workers’ comp fraud. Specifically, this bill: prohibits an individual from making or causing to be made certain false or fraudulent statements regarding workers’ comp claims and provides for penalties and restitution for violations; provides that an insurer or self-insured employer may provide a notice to an injured worker on or with a check for temporary disability benefits warning of penalties for workers’ comp fraud; makes it a crime for any person liable for benefits to fail to secure the payment of workers’ comp if that person knew or should have known of the obligation to do so; provides that the director of the Department of Industrial Relations may, at any time, require an employer to furnish a written statement showing the name of his or her insurer or the manner in which the employer has complied with the requirements to provide coverage for workers’ comp; makes it a crime to aid, abet, solicit, or conspire with any person to knowingly submit false insurance claims; provides for a statute of limitations of one year after commission for misdemeanors during which a prosecution must be commenced and specifies crimes in which that time limit commences upon the discovery of an offense rather than the date of the offense itself.

Norwood & Mattoch is recognized as the lead-ing California advocacy firm in the areas of insurance and financial-services law. With over 30 years of combined governmental experience, the principals that make up Norwood and Mattoch are attorneys John A. Norwood and Michael S. Mattoch. For more information, visit www.nmlobby.net.

Topics California Carriers Fraud Agencies Profit Loss Legislation Workers' Compensation Wildfire Excess Surplus Property Homeowners