ABL Mid-Year Report

I. LEGISLATIVE PERSPECTIVE

This was a difficult year to be pro-active legislatively. In most cases, insurers and the business community were forced to play defense in a volatile and uncertain political environment. Virtually everything that happened in the Capitol has been overshadowed by three events: (1) the recall of Governor Gray Davis; (2) the $38 billion state budget deficit; and (3) the workers' compensation insurance crisis.

The state budget crisis was one of the events that helped to foment the recall movement. Given the extraordinary impact of the recall election and budget crisis, partisan politics became even sharper than usual. The effect of term limits and "safe" legislative districts that tend to punish moderate candidates from either party created a dysfunctional legislature that made it virtually impossible to accomplish anything worthwhile.

Given this backdrop, it is most impressive that insurers and the business community were successful in dealing with the third major crisis by supporting a workers' compensation insurance reform package. The Governor signed two bills, AB 227 and SB 228, that are expected to stabilize the worker' compensation insurance market and create a platform for consideration of additional reform next session.

The Governor, faced with the recall, abandoned most of his moderate tendencies and moved left in an attempt to shore up his base with labor, trial lawyer and consumer groups. Thus, the Governor signed anti-business legislation such as SB 2 (Burton), which requires employers to provide health insurance for their employees.

While insurers and the business community did suffer some losses, the amount of anti-business bills that were killed or neutralized was exceptional. Rate regulation of health insurance failed, as did a prior approval requirement for insurance advertising. An effort to prohibit the sale of annuities, life settlements and corporate owned life insurance products were narrowed in scope so that these products can continue to be available, although under some new restrictions. Efforts to expand unfair competition lawsuits also failed, as did efforts to regulate underwriting standards in the homeowners insurance market.

II. WORKERS' COMPENSATION INSURANCE REFORM

In the final week of the legislative session, four Democrats on the workers' compensation insurance conference committee inked their names to a conference report made up of two key bills: AB 227 (Vargas) and SB 228 (Alarcon). The two Republicans on the committee abstained, signaling the view of the Republican caucus and many in the business community the deal hashed out by various Democratic factions was a half-loaf and better than nothing. The Governor signed the bills. The legislation is almost old news already, with most parties preparing to work on the "sacred cows" that were not touched this year.

Summary of the Conference Committee Report

The highlights of the reform bill are as follows:

· Establishes a fee schedule for outpatient surgery centers at 120% of Medi-Cal.

· Reduces medical provider rates by 5% unless at or below Medi-Cal rates.

· Pharmacy services limited to 100% of Medi-Cal.

· Limits chiropractic and physical therapy visits to 24 visits per claim.

· Replaces the existing vocational rehabilitation program which provided benefits ranging from $10,000-16,000 with and educational voucher worth $4,000-$10,000 depending on the level of disability and whether modified work is offered. No more than 10% of the voucher can be used for vocational or return to work counseling.

· Establishes utilization review, independent review and second opinion processes to reduce the cost and delay of medical care disputes.

· Eliminates the treating physician's presumption for injuries which occurred between 1994 and 2003 (the presumption was eliminated for all future claims as part of last year's $3.5 billion benefit increase bill.) The presumption still applies to pre-designated physicians, a significant loophole.

· Requires employers, who funded 20% of the administration of the workers' compensation insurance system, to fund 100% of the system. This is an additional $80 million employers will have to pay, but will allow implementation of administrative reforms that were stalled because of lack of funding.

· Exempts CIGA from paying penalties assessed against insurers that later became insolvent.

· Authorizes up to $1.5 billion in bonds to be issued on behalf of CIGA to resolve expected short-term cash flow problems due to the high number of insolvencies.

· Exempts the State Compensation Insurance Fund from hiring freezes.

· Limits litigation by allowing labor unions and management to agree on alternative dispute resolution procedures.

· Reduces the time for insurers to pay medical bills from 60 days to 45 days and increases penalties for late payments.

· Requires the Insurance Commissioner to take into account the bill's reforms when approving advisory pure premium rates and requires the WCIRB to determine the cost savings of the reforms. Insurers would be required to certify their rates reflect those cost savings.

· Requires CHSWC to study the feasibility of imposing a minimum rate law to be phased in over five years.

Estimated Cost Savings

Depends who you talk to. Insurance Commissioner John Garamendi said he believed the bill, once fully implemented would achieve between $5-6 billion in annual savings and one time savings of $5.3 billion. He said his actuaries were conservative in developing the estimates, and he believes the ultimate savings will be closer to $6 billion.

These numbers are about what Assembly Insurance Committee Chairman Juan Vargas all along said was his goal. The savings are more than the $2-3 billion some liberal Democrats wanted, and far short of the $11 billion set by Republicans.

The Commissioner estimated the bill's reforms would eliminate the need for the proposed 12.7% increase in the advisory pure premium rate effective January 1, 2026. He said he was "comfortable" the reforms would also roll back the 7% increase that was effective July 1, 2026, and held out hope for further cutbacks once the hard to "score" reforms such as utilization review and alternative dispute resolution kicked in.

The Commissioner said the one time savings of $5.3 billion would not be immediately reflected in premiums, but would shore up the health of insurers, especially the State Fund. He did note, however, that as insurers restored their health, that would have an impact on premiums. It would also help bring stability to the marketplace and encourage other insurers to come to California.

Republicans, however, immediately questioned the numbers. They have always cautioned that avoiding major changes would result in piece-meal reforms that were little more than window dressing. They noted the WCIRB has only identified $3.5 billion of savings. The WCIRB says that many of the cost savings will be difficult, if not impossible, to score because their impact is unknown.

Winners and Losers

The workers' compensation insurance crisis became one of the most hotly contested issues this year. California's workers' compensation insurance system is the most expensive in the nation, and yet provides some of the lowest benefits, a clear indication that lots of money is going to third parties. These various interest groups spent enormous amounts of time and effort protecting their piece of the pie and trying to shift the focus of cost-cutting efforts to others. Now that the deal is done, it's possible to tally up this year's winners and losers in the game of workers' compensation insurance reform.

1. Winners

· Insurance Agents & Brokers: A proposal to cap insurance agent broker commissions was taken off the table. Agents and brokers were the only major group that escaped a "haircut" in the bill. Agents and brokers, however, argued they were the first group to take a haircut when the Commissioner ordered the State Fund to lower commission rates, with the rest of the market following in driving commissions down.

· Insurers: Despite plenty of rhetoric, the committee ultimately rejected a statutory premium rollback, premium cap or rate regulation.

· Labor: Preserved the $3.5 billion benefit increase they won last year by sponsoring the strict fee schedule on outpatient surgery centers that was ultimately adopted and is expected to save about $932 million annually.

· CIGA: Got the $1.5 billion bonding authority they needed to resolve their short-term cash flow problems caused by the latest rash of insolvencies without having to increase the 2% assessment. Were also exempted from outrageous penalties for technical violations made by insurers that later became the responsibility of CIGA. These penalties amount to millions of dollars.

· Attorneys: Insurers are assessed late penalties on the entire benefit award even though only one payment is late. A proposal to assess the penalty against just the late payment, and not the entire award, was changed at the last minute to apply only to CIGA, not all insurers. These penalties amount to millions of dollars and are a huge profit center for attorneys. Attorneys were also able to keep litigation alive and well in the system by keeping a loophole that provides a treating physician a presumption of correctness if the physician is predesignated. The attorney's win, however, was mitigated buy a follow-up bill pushed through by Assemblyman Vargas that provided insurers a safe-harbor from the late penalties if they are complying with utilization review procedures provided for in the bill.

· Insurance Commissioner John Garamendi: The conference committee appeared deadlocked in the last few days of the session. By all accounts, the Insurance Commissioner was the one who kept legislators' feet to the fire and helped broker the final deal. He reportedly was calling members as the deal was falling apart from a hospital hallway while attending to an ill family member. He personally drafted language, and promised to put his credibility on the line by vouching for the $5-6 billion in savings. In return, the committee nixed a proposal to transfer the DOI's workers' compensation insurance fraud money and staff to the Attorney General.

2. Losers

· Outpatient Surgery Centers: These centers are the only providers not subject to a fee schedule, and costs naturally have been going through the roof. The original proposal was to establish a fee schedule at 120% of Medi-Cal, but everyone expected that was just an opening negotiating number. The surgery centers were pushing for 165% of Medi-Cal, and it appeared a compromise was in the works to settle at 150%. The surgery centers, however, over-played their hand by involving Assembly Speaker Herb Wesson. In the end, he couldn't protect them, and they got stuck with 120%.

· Speaker Herb Wesson: The Speaker is termed out next year, and has wanted to stay on as Speaker instead of allowing for a transition ahead of next year's elections. There is a succession battle underway among the majority Democrats who have enough votes to elect the Speaker. Many moderate Democrats, members of the Latino caucus, have been unhappy with the Speaker's leadership and are angling to replace him with one of their own. When the Speaker tried to stop a drastic fee schedule from being imposed on the outpatient surgery centers, several members of the conference committee refused to go along and were willing to close down the conference committee without a reform bill. The Speaker, faced with panicking members who would have faced angry voters, caved rather than be ousted by members of his caucus who wanted a reform bill at any cost.

· Vocational Rehabilitation Providers: The vocational rehabilitation mandate has been eliminated in favor of providing $4,000-$10,000, depending on the level of disability, for education. Counseling fees are limited to 10% of this amount.

· SCIF: While the State Fund received an exemption from the hiring freeze, they were unable to dump the Risk Based Capital standards imposed last year and weren't able to get out from under the Commissioner's regulatory thumb.

3. Draw

· Chiropractors: An injured worker who is treated by a chiropractor receives an average of 34 treatments, more than twice the national average. The original proposal was to cap visits at 15. The deal caps visits at 24. The cap, however, is not "hard." A physician can approve additional visits. In addition, there is a fear that chiropractors will now routinely increase the number of treatments to the cap of 24. Thus, the ceiling could become the floor. It could have been much worse for the chiros.

· Employers: They win to the extent rates won't go up much next year, and in the best case scenario may drop to last summer's levels. However, reform that merely produces last summer's rates can hardly be called a "win." Those rates lock in the huge increases of the last couple of years.

2004 Landscape

The old saw is that workers' compensation insurance "reform" only happens once a decade. However, no one is crowing this reform package solves the crisis. The most optimistic estimates have these reforms returning rates to the super-inflated levels of last summer, a still deplorable situation. Even the bill's most ardent supporters indicated that further reforms would be necessary in the years to come.

Insurance Commissioner John Garamendi said it took many years of inattention to get to where we are today, and it will take many more years to get the system back in shape. Assemblyman Juan Vargas said this bill was only a first, while significant, step. He noted that after the 1993 reforms, everyone let their guard down thinking they had fixed the system.

Senator Poochigian, who did not vote for the conference report, issued a list of reforms that still needed to be acted on:

· Mandated objective medical findings to determine permanent disability.

· Rationalize the permanent disability rating system by infusing fairness, consistency and objectivity.

· Provide the employer the right to choose the medical provider for 365 days, rather than 30 days.

· Correct the definition of what it means to "cure and relieve" injured employees so that it is evidence-based.

· Suspend the COLA growth included in temporary disability, beginning in 2006.

· Curtail the abuse of stress claims.

· Eliminate non-work related injuries from the system (establish a predominate cause standard.)

· Curb litigation costs.

· Require apportionment when injury is to the same part of the body.

· Prohibit prisoners from receiving workers' compensation.

In addition to further legislation, all eyes will be on how insurers respond to the reforms. In the words of the Insurance Commissioner, a "bright light" will be focused on insurers next year. While insurers escaped rate regulation and re-imposition of the minimum rate law, the Legislature is definitely headed that direction unless premiums start to fall.

E. Workers' Compensation Insurance Broker Fee Cap Proposal Challenged

Broker commissions very nearly became one of the "cost savings" in the workers' compensation insurance reform package. The six members of the conference committee were clearly feeling the pressure to cut costs in the system. This set off a round of interest groups trying to protect their turf and characterize others in the system as having plenty of fat to cut. For example, an estimated 1,000 chiropractors descended on the Capitol to try and stop a proposal to limit chiropractor visits to 15 unless another physician concludes further treatments are necessary.

Various interest groups also distributed a chart showing agent and broker fees at 11.9% of the total costs in the workers' compensation insurance system. This prompted some conference committee members to suggest that insurance agents and brokers needed to take a "haircut" just like everybody else in the system. They proposed capping broker fees to bring premium costs down.

The Insurance Agents and Brokers Legislative Council ("ABL") quickly discredited the misinformation that broker fees are 11.9% in the workers' compensation insurance system. Upon further investigation, it was discovered that the source of the chart, the California Workers' Compensation Institute (CWCI), erred by lumping "Other Acquisition Expenses" of 3.4% in the "Agent & Broker Fees" category when these "Other Acquisition Expenses" are insurer marketing and sales expenses. They are not paid to agents or brokers. Upon notification of the error, CWCI immediately issued a corrected chart showing "Agent & Broker Fees" representing 8.5% instead of 11.9%.

ABL, however, pointed out to conference committee members that even the revised CWCI chart substantially overstated "Agent & Broker Fees." The CWCI did not include categories of data from the Workers' Compensation Insurance Rating Bureau (WCIRB). Including this data further reduced the commission level to 7.1% of 2002 earned premium. Additionally, when commissions are more appropriately placed in the context of what insurers actually paid out in losses and expenses in 2002, which was 121.6% of premium, the WCIRB concluded that "Agent & Broker Fees" represented 5.8%.

The conference committee members were also told that “Agent & Broker Fees” have dropped well below 5.8% this year. The State Compensation Insurance Fund, which writes 50-60% of the market, according to the Insurance Commissioner, has reduced commissions to a scale with a maximum of 5.5% that drops to 0% (zero) for 78 employer classifications with the highest premiums. Private insurers are similarly driving commission rates down.

Thus, ABL argued the proposal to cap commissions will provide only illusory savings since the market has already driven commission rates below a fair level of compensation for the value that brokers and agents provide their clients and insurers. ABL again pointed out that agents and brokers provide services for insurers and employers that save hundreds of millions in losses and help employees return to work more quickly and productively. These services include risk assessment, underwriting, risk control, claims management, loss prevention and loss control, and mediating disputes involving payroll, classifications and audits.

The issue came up publicly when Senator Alarcon, the Co-Chair of the Conference Committee, asked a representative of the State Fund during a hearing if it was possible to save $120 million by eliminating broker commissions. State Fund defended the commissions by saying that brokers provide better business and provide services they could not replace at current staffing levels. Thus, State Fund concluded eliminating brokers commissions would not result in any meaningful savings.

III. PRIVACY RULES

A. Landmark Compromise on Privacy Restrictions Achieved

After four years of intense struggle and negotiation, California has adopted the toughest privacy law in the nation. The Legislature acted with urgency after finally coming to a compromise with most of the financial services industry and to meet a deadline to stop an even more draconian privacy initiative that would have brought many financial transactions to a standstill.

Privacy advocates successfully gathered almost 600,000 signatures to place a severe privacy initiative on the March 2004 ballot. However, Chris Larsen, the founder of E-Loan who funded the initiative drive, said he would not submit the signatures if a legislative solution were reached.

While the compromise addresses many of the concerns of insurers, insurers continue to work for a national standard. In summary, SB 1 now requires a financial institution to obtain the consent of a consumer before it may share personal information with any nonaffiliated third party (opt-in). While consent is not required to share information with an affiliate or joint marketing partners, the consumer must be provided with the opportunity to direct that personal information not be disclosed (opt-out). The bill provides for unrestricted sharing of information between a financial institution and its wholly owned financial subsidiaries in the same line of business defined as one of the following: insurance, banking or securities. (no-opt).

The bill contains several transactional exemptions. In addition, exemptions are provided for transactions covered by the federal Real Estate Settlement Procedures Act, financial planning services provided pursuant to agreement, sharing of information between insurers and exclusive agents, and insurance producers and securities brokers acting within the scope of their license. The bill also provides an exemption for insurance agents and brokers shopping for quotes.

SB 1 is currently in danger of being preempted by federal legislation pending in Congress. The Fair Credit Reporting Act, as passed by the U.S. House of Representatives, would gut the state's law. Governor Davis recently sent a letter to Congress urging them to adopt SB 1 as a model for the nation rather than gut it. In addition, Senator Speier and California privacy advocates are actively lobbying Congress on this issue.

B. Department Privacy Regulations Conflict With SB 1

On March 24, 2003, the Department of Insurance adopted regulations regulating the information practices of insurers and agents and brokers. Now that SB 1 has been enacted, several provisions of the regulations conflict with the new law. The Department of Insurance is beginning the review process to make any necessary revisions so the regulations will be consistent with SB 1.

One of the most important conflicts in the regulations involve shopping insurance quotes. SB 1 authorizes insurance agents and brokers to seek competitive insurance quotes for clients and prospective clients without having to comply with opt-in procedures. The Department's regulations, however, conflict with SB 1 by requiring a formal opt-in procedure.

The conflicting regulations do not provide additional consumer protection because consumers expect and intend an independent insurance agent or broker to shop for a more competitive insurance rate, better coverage and better service. Requiring a costly and duplicative opt-in procedure for shopping quotes is burdensome for both agents and consumers since the whole point of the relationship is to shop for quotes and obtain better service.

IV. RESTRICTIONS ON UNDERWRITING

A. Homeowner's Insurance Focus of Legislators and Regulators

Underwriting practices in the homeowners insurance market became a high profile issue this year, and will be sure to garner further attention next year. Prior to the beginning of this year's legislative session, the Senate Insurance Committee held a hearing entitled "Haunted Houses: Does making a claim make a home uninsurable?" Soon after, Insurance Commissioner John Garamendi decried in his inaugural speech the practice of non-renewing homeowners' policyholders after filing a claim, the so-called "use it and lose it" syndrome. A rash of bills was promptly introduced addressing underwriting issues.

Senator Jackie Speier, Chair of the Senate Insurance Committee, authored the most important bill on the issue, SB 64. The bill would have prohibited insurers and agents from refusing to offer or renew homeowners' policy because of an inquiry about coverage or the possibility of filing a claim. The Senator's informational hearing was replete with examples of consumers who contacted their agent or insurer to inquire about their deductibles and whether it would be worth it to file a claim. These consumers were later nonrenewed or denied coverage with another company, even though they ultimately did not file a claim, because their informal inquiry was deemed a "notice of claim."

More importantly, the bill would have imposed a "take all comers" provision for homeowners insurance and ceded to the Insurance Commissioner the ability to regulate underwriting standards. The Insurance Commissioner would define, through regulation, which physical characteristics make a home uninsurable. In addition, an insurer's underwriting standards would be provided to the Insurance Commissioner and available to the public.

SB 64 (Speier) was narrowly defeated in the Assembly Insurance Committee after easily passing out of the State Senate. As a result, the subject is sure to be reincarnated next year in the form of a new bill.

The Legislature, however, did act in this area despite the failure of SB 64:

· AB 1049 (Calderon & Wyland): Prohibits insurers or agents from basing an adverse underwriting decisions on the fact that an individual has previously inquired about the scope of homeowners insurance coverage and the inquiry was logged in an insurer database, and no claim was ultimately filed. Chapter 442.

· AB 1191 (Wiggins): Requires insurers to provide policyholders with the reasons for the nonrenewal of their homeowner's insurance policies and requires insurers to provide policyholders, upon request, with the reasons for the change in their annual premium. Chapter 571.

Regarding AB 1049, the bill is an example of bi-partisan efforts to negate extreme legislation such as SB 64. Assemblyman Wyland, a Republican, and Assemblyman Calderon, a Democrat, jointly authored AB 1049. The bill passed with bi-partisan support and without a negative vote despite concerns expressed by some legislators that inquiries about coverage and no-pay claims indicate some event occurred, and an insurer should be able to consider that information when projecting future risk of loss. The bill passed, however, as part of a larger strategy to have a moderate response to SB 64 (Speier), discussed above.

Another hard-fought issue this year involving underwriting centered on the use of credit scoring. A bill banning the use of credit scoring in underwriting, SB 691 (Escutia), followed a path similar to SB 64 (Speier). SB 691 sailed out of the Senate, but was stopped in the Assembly Insurance Committee because moderate legislators were frustrated at the author's unwillingness to negotiate. Many of the opponents said they could live with limitations on the use of credit information, but not a complete ban. They endorsed a model law developed by the National Conference of Insurance Legislators (NCOIL) to ensure credit scores are used fairly and in a nondiscriminatory manner. Senator Escutia refused to budge, and the bill fell three votes short of the amount needed to pass.

B. Regulatory Restrictions

Insurance Commissioner John Garamendi attempted this year to circumvent the legislative process. He issued an "Advisory Notice" earlier this year limiting the use of claims information in underwriting. Senator Speier in SB 64 adopted much of the language in the advisory notice.

Insurers filed suit against the Commissioner on the grounds the "Advisory Notice" was an underground regulation with no statutory authority. The court granted a preliminary injunction, and the Commissioner responded by filing emergency regulations on the subject. The court refused to enjoin the implementation of the emergency regulations, reasoning an "emergency" existed at the discretion of the Commissioner. However, a month later, the court concluded that while an emergency may have existed, the Commissioner still did not have the authority to regulate underwriting practices. Interestingly, the court relied on the fact that SB 64 failed, an indication the Commissioner needed statutory authority to move forward with his regulations.

The Commissioner has indicated he will work with Senator Speier next year in obtaining statutory authority to regulate underwriting practices. His hopes to be able to prevent insurers from using prior claims history in making underwriting decisions unless each prior claim is reviewed and a determination is made if it continues to have a substantial relationship to a future loss. The Commissioner essentially wants insurers to make underwriting decisions without the benefit of data from claim reporting services such as CLUE and APLUS.

C. Mold Insurance Coverage Mandate Still Subject of Legislative Interest

Mandating insurance coverage for "toxic" mold became a dormant issue this year, but could explode again next year. The trial lawyer champion on this particular issue, Senator Deborah Ortiz, quietly dropped her mandate bill, SB 850, after it passed the Senate and faced a hostile hearing in the Assembly Insurance Committee.

There could be several reasons why the mold coverage issue is being pushed back to next year. First, faced with a tightening homeowners' insurance market, the trial lawyers may have made the strategic decision to wait until next year when the market is better before they start squeezing again.

Secondly, insurers successfully stopped mold mandate legislation in the Assembly Insurance Committee last year by convincing moderate Democrats that mold mandate legislation should only be considered after an unbiased, independent scientific study was conducted. Insurers even generously offered to fund such a study by the Department of Health Services. Now that some of the pressure is off, insurers have lost their temporary streak of generosity, and the DHS study isn't even close to getting funded.

Trial lawyers will most likely come back to the Legislature next year with a big "I told you so." They will say that insurers simply used the promise of funding an independent scientific study as a stalling tactic, and now that two years have passed with no progress, the legislature should jump in and act.

Ironically, the fact that the mold issue has gone dormant while insurers have gotten a handle on mold claims may also play into the trial lawyers' hands next year. Trial lawyers will be able to push a mandate as a way of narrowly targeting only the bad actors, and that it will not have widespread economic repercussions as insurers so vociferously argued two years ago.

Insurers such as State Farm and Safeco that were limiting their business in California are loosening the new business spigots once again. One of the reasons being cited for getting back into the market is that insurers are learning how to handle mold claims and reduce costs. Similarly, builders are putting more effort into designing and building homes to limit water intrusion and mold problems. The public panic also appears to be easing a bit. For example, Erin Brockovich, who campaigned with Insurance Commissioner John Garamendi on the mold mandate issue during the last election, just settled a "toxic" mold case involving her home for $130,000. For someone like Brockovich, this is most likely a "nuisance" value settlement and an indication the case was in trouble had it gone to trial.

V. MORE OPTIONS FOR SMALL COMPETITIVE AUTO INSURERS

Legislation was finally enacted this year after two years of bitter and politically charged debate that makes it easier for auto insurers with a relatively small share of the California market to grow their business. After vetoing a similar bill last year, the Governor this year signed SB 841 (Perata), which lets drivers keep their discount for being previously insured even if they change companies. Existing law has always allowed a consumer's persistency, or loyalty discount, to be transferred to a new insurer. However, recent Department of Insurance regulations now provide that a persistency discount can only be provided to an existing customer.

The Department's new regulations essentially lock customers into their current insurer because changing companies means they lose their persistency discount. This is an advantage to the few companies with a lock on most of the California market, but a disadvantage to smaller insurers that are aggressively trying to grow their marketshare by competing on the basis of service and price.

Progressive Democrats opposed the bill because they believe it harms low-income drivers who were previously uninsured. They argue insurance is a "zero-sum" game in which any discount given to one group means the rates of other groups must go up, since insurers will "squeeze out every ounce of profit they can."

Bi-partisan supporters challenged the view insurance is a "zero-sum" game. They argued it is cheaper to provide insurance to customers who continuously maintain their insurance as opposed to those who let coverage lapse frequently. They also point out it benefits the poor by allowing them to take their persistency discounts with them if a competitor offers a cheaper product instead of locking them into the same insurer.

The Department of Insurance and the Foundation for Taxpayer and Consumer Rights opposed the bill, arguing it violates the provisions of Proposition 103 prohibiting penalties for lack of prior insurance. The Governor vetoed a similar bill last year just before the election after it was caught up in the controversy surrounding his fundraising practices. The bill now provides an exception for gaps in coverage not exceeding 90 days and a two-year exception for military personnel. The Foundation has filed a lawsuit over the matter.

VI. HEALTH INSURANCE REGULATION

A. Employers Required to Offer Health Insurance

The Governor has signed legislation that will for the first time require California employers to purchase health insurance for their employees, or in the alternative pay premiums to state agency that would purchase insurance on behalf of uninsured employees. The Legislature took a decidedly "in your face" approach to making law when they passed this mandate. They short-circuited the normal legislative process of holding substantive hearings to let all the interested parties make their case, and then fashioning a bill based on the testimony. The Legislature instead formed a conference committee near the end of the legislative session that held only two pro forma hearings before issuing a pre-determined report.

The bill, SB 2 (Burton), has been dubbed "pay or play." It would require almost all employers to either provide health insurance coverage to their employees and dependents or pay a fee to a state insurance pool.

The Legislature's aggressive approach is based on the politics surrounding the issue. Labor and consumer groups are miles apart from employers and insurers. Accordingly, supporters of a health insurance mandate concluded holding lengthy hearings and trying to negotiate a compromise would be a waste of time. Instead, their tactic was to use an overwhelming Democratic majority in the Assembly and the Senate to squash any dissent and send the bill to the Governor. The bill's supporters apparently concluded the once moderate Governor Davis will tack left and sign the bill to shore up his base in the face of the October 7 recall election. The same tactic worked last year when the Governor, facing an unexpectedly difficult reelection campaign, signed a $3.5 billion workers' compensation insurance benefit increase bill after three previous vetoes.

SB 2 will require employers with more than 20 or more employees to provide coverage for hospital, surgical, medical care and prescription drugs to employees and their dependents or pay a fee into the State Health Purchasing Fund. The Fund would then pay for coverage for the uninsured employees. The bill would become operative on January 1, 2026 for employers with 200 or more employees, and January 1, 2026 for employers with 20-199 employees.

As a concession to small employers, those employers with 20 to 49 employees would be exempt from the bill's requirements unless a 20% tax credit is enacted to help pay for the cost of insurance. This provision, however, exemplifies how quickly the bill was thrown together and the unintended consequences that may occur. If a tax credit is enacted for employers with 20-49 employees to buy health insurance, those employers with 19 or fewer employees who now pay full freight will argue they should also receive the credit.

The Fund will be administered by the Managed Risk Medical Insurance Board (MRMIB), which currently manages the Healthy Families Program which provides low-cost health insurance to the children of the working poor. MRMIB will establish the fee to be paid by employers who do not provide health insurance coverage. It will also negotiate with health insurers and health plans on the coverage to be provided, the cost of coverage, and the amount of co-payments, deductibles and co-insurance. Employers must pay 80% of any fees. For employees who make less than 200% of the federal poverty level, their co-pay would be capped at 5%.

The Employee Development Department (EDD) will collect the fee in the same manner it collects payroll taxes. An employee will still be covered under the program even if an employer fails to pay the fee. Employers who fail to pay the fee or pay late will be assessed double the amount of the fee.

The fee is waived for employers who provide evidence to EDD that they have provided health insurance coverage to their employees. Proof of coverage is acceptable from health plans and insurers that meet the requirements of existing law, multiple employer welfare arrangements and ERISA plans.

Employers are prohibited from designating employees as independent contractors to avoid the requirements of the law. Employees eligible for other federally subsidized state programs such as Medi-Cal and Health Families may continue to stay in those programs. However, the State's "share of cost" would be funded out of the employer fee account.

The bill also extends the small group reforms enacted in 1993 restricting rate differentials to mid-size employers with up to 200 employees. To address the problem of adverse selection, the bill was amended to apply a +/-15% rate band for employers with 50-200 employees. Existing law applies a +/- 10% rate band to employers with 2-50 employees. Even so, mid-size employers with good underwriting experience may end up paying higher rates under the subsidized rate bands, forcing many out of the insurance pool by self-insuring. Thus, only employers with the sickest employees would remain in the insurance pool. Many of these employers would stop providing coverage, and simply pay the MRMIB fee to cover their employees. The ensuing "death spiral" would then place the solvency of the MRMIB pool at risk. Several health plans had asked for a +/-20 % rate band.

There is a huge difference of opinion as to what the mandate will cost employers. No costs are specified in the bill as the task of negotiating pool insurance is left to MRMIB. A study by the Institute for Labor and Employment at UC Berkeley estimates the cost of each newly insured employee at $1,343 annually. The author of the study estimates that because most employers already provide health insurance coverage, only 2.7% will see operating costs increase by 1% or more. The author also concludes that only 8% of the state's workers will become insured as a result of the bill.

The California Chamber of Commerce, however, has placed a much higher cost on the bill. They estimate the bill will cost employers $5.7 billion per year, about the same amount employers will save as a result of this year's workers' compensation insurance reforms. The Chamber is now making preparations to sponsor a referendum to stop the bill from going into effect.

B. Health Care Rate Regulation Temporarily Stalled

Senator Liz Figueroa, a potential contender for Lieutenant Governor in 2004, has been forced to postpone consideration of her Proposition 103-style rate regulation proposal for health insurance. SB 26 requires the Insurance Commissioner or the Director of the Department of Managed Care to regulate health care premiums, deductibles and co-pays. Consumer advocates would be allowed to intervene in the rate hearings on behalf of the public, and collect an intervenor fee for their trouble. The Foundation for Consumer and Taxpayer Rights (once known as the Proposition 103 Enforcement Project) and affiliated with Harvey Rosenfield is behind the effort.

SB 26 did not make the deadline for passing out of the Senate Insurance Committee this year. The bill, however, is eligible for consideration next year. Most employers and health plans oppose the bill. It also helped that the California Medical Association was quietly opposed to the bill. Learning the lessons of history, CMA correctly concluded that if health plan rates were regulated, it would increase pressure on its members' fees, and perhaps even lead to regulation of physician fees.

The Foundation for Taxpayer and Consumer Rights is now making noise about running an initiative. They proudly point to their success with Proposition 103, and argue they could do it again with health insurance rates. It may be more difficult, however, to run an initiative proposing health insurance rate regulation. This is not necessarily a populist issue. Unlike auto insurance, the true cost of health insurance is masked for most consumers because it is by and large an employer provided benefit. In addition, the Foundation would have to come up with some serious money to get any attention. Odds are they will try to move SB 26 next year in the Legislature. Now that health insurance is a required commodity, they may have better luck making their case that the cost should be regulated.

VII. Trial Lawyers Kill Shake-down Lawsuit Reforms

The Assembly and Senate Judiciary Committees, infamously sympathetic to the cause of trial lawyers, have squashed all efforts to reform the wildly abused "unfair competition" lawsuits. The Committee actions dashed the hopes and dreams of large and small businesses alike that have been at the receiving end of these shakedown lawsuits. After a decade of reform efforts, this seemed the year some reform might get out of the Legislature's two Judiciary Committees.

Business & Professions Code §17200, the "Unfair Competition Act, allows trial lawyers to file lawsuits for anything they deem "unfair," even if they don't have a client and are instead representing the "public interest." Large businesses have been complaining for years the law acts as a tax on the economic system without providing any consumer benefit. They argue trial lawyers file a single lawsuit naming thousands of businesses, hoping to extort a "nuisance value" settlement. Previous efforts at reform have fallen on deaf ears in a democratically controlled legislature fiercely protective of trial lawyers.

This year, however, even the trial lawyers' lobbyists had to blush. The abuses have become so widespread and blatant they garnered the attention of the media. In some highly publicized cases, thousands of nail salons and small restaurants have been sued for minor infractions. The lawyers in the cases have offered to settle with each defendant for $1,000. Controversy has erupted over the lawsuits, with legislators of both parties and the media charging the lawsuits unfairly target unsophisticated small businesses operated by immigrants.

Tort reform, which is typically a Republican issue, suddenly garnered bi-partisan support. Republicans and moderate Democrats introduced several bills on the issue. However, the trial lawyers and their protectors mounted a vigorous defense. They have resisted calls for wholesale reform of the system, arguing the abuses of §17200 are not widespread, and are limited to a few bad actors.

To lend further credence to the argument wholesale reform is not necessary, the Attorney General and the State Bar have sought to deflect attention to one of the allegedly more egregious law firms, the Trevor Law Group based in Beverly Hills. The Attorney General is suing the Law Group, and the State Bar has disbarred the lawyers. The firm is reported to have filed more than 3,000 frivolous lawsuits based on §17200 last year.

Faced with all the bad press, and real reform measures authored by a group of bi-partisan legislators, the trial lawyers sponsored some weak reform bills to provide additional cover. The bills, AB 95 (Corbett) and SB 122 (Escutia), are authored by the Chairs of the Assembly and Senate Judiciary Committees. The trial lawyers, however, had the shameless audacity to include in the "reform" bills language that would actually increase the amount of damages they can collect in a §17200 lawsuit. The bills allow "disgorgement" of profits from a company regardless of whether a consumer or other business is harmed by an alleged unfair business practice

This provision was inserted to overturn a limitation placed on the trial lawyers by the California Supreme Court in Kraus v. Trinity Management Services. The Court concluded disgorgement should only be permitted in class-action lawsuits. The net effect of the new disgorgement remedy in §17200 lawsuits is to increase the settlement value of the lawsuits

The Assembly and Senate Judiciary Committees killed all the Republican authored reform bills. In addition, the Assembly Judiciary Committee killed AB 69 (Correa), authored by a moderate Democrat whose immigrant constituents have been particularly hard hit by the abuse of §17200. The trial lawyer sponsored legislation, naturally, passed out of committee. However, the bills failed on the floor in the Assembly when moderate Democrats joined with Republicans in calling for substantive tort reform. Having failed yet again to obtain relief from the Legislature, a group of businesses is moving forward with an initiative to reign in the abuse.

The trial lawyers also made a last minute attempt to change the law regarding health provider liens. SB 494 (Escutia) was amended a few days before the end of session to circumvent attempts to control medical costs, thus inflating costs for workers' compensation insurance and auto insurance. The bill failed in the Assembly Health Insurance Committee in part because of increasing criticism of the "gut and amend" process which some view as a short-circuit to the normal legislative process.

VIII. REGULATING SENIOR LIFE INSURANCE AND ANNUITIES SALES

Early this year, the Senate Insurance Committee held a hearing entitled "Financial Planning or Fleecing of Seniors?: Insurance Products and Investments." The inflammatory title of the hearing was seemingly validated by a long list of witnesses who provided a litany of examples of insurers and agents taking advantage of senior citizens through coercive and fraudulent sales tactics.

Shortly after the hearing, Senator Jack Scott, a member of the Senate Insurance Committee and advocate for seniors, introduced legislation sponsored by a coalition of consumer groups to "reform" the law regarding the sale of insurance and annuities to senior citizens. The bill, SB 620, did not deal with simply one topic. Instead, it was a lengthy and comprehensive piece of legislation that dealt with virtually every anecdotal abuse that had been presented in the "Fleecing Seniors" hearing.

SB 620 took a sweeping approach to "reform." Instead of targeting criminal or fraudulent conduct, it essentially banned the sale of annuities and imposed unrealistic restrictions on the sale of life settlements and other insurance products. The bill established suitability standards that would create an entirely new duty for insurers - the "special duty of suitability."

In addition to banning annuities, the bill mounted several attacks on agents. It set up a new regulatory system for holding investment and insurance meetings, seminars and sales presentations. It also set up a regulatory structure for obtaining and using titles and designations issued by professional groups. Agents would also have been required to disclose their commission when selling annuities.

The bill passed out of the Senate in its most offensive form and virtually untouched. However, insurers, agents and the sponsors began serious negotiations searching for a compromise once the bill reached the Assembly. After numerous negotiating sessions and technical re-writes, a compromise was achieved.

All the anti-agent provisions were deleted. However, agents are required to provide a 24 hours written notice before visiting a senior for the first time in their homes. Meetings in an office or other location, and subsequent meetings, are not subject to the restrictions. In addition, annuities and the sale of insurance products to seniors will be one of the topics to be included within existing training requirements for agents.

The compromise bill deleted Sections 2 and 3 of the bill imposing suitability standards, the de facto ban on the sale of annuities and new legal standards. Instead, the author and sponsor agreed to wait for recommendations from the National Association of Insurance Commissioners before reintroducing these provisions in another bill next year. The bill also provides some new disclosures and improvements to the existing "free look" provisions regarding sales of insurance products to seniors.

The compromise also removed the regulation of insurance settlements from the bill. Instead, the author and sponsors agreed to work with the Department of Insurance and interested parties in negotiating a comprehensive scheme to regulate insurance settlements next year. The vehicle for this new effort will be AB 1103 (Laird).

SB 620, as enacted, ensures fair, honest conduct when selling annuities to seniors without burdening the vast majority of legitimate transactions and preserving choice for seniors in making important financial decisions. We expect, however, that many of the offensive provisions that were stricken this year will surface again next year. We are certain legislation will be introduced imposing new suitability standards. If the NAIC does not issue a draft soon, consumer groups are likely to fill the void with anti-industry standards that will be difficult to push back without an early and vigorous lobbying effort.

In related matters, insurers and agents and brokers supported companion legislation, SB 618 (Scott), which increased penalties for insurance fraud and misrepresentation. The insurance industry was also able to stop hostile legislation regarding life settlements, AB 1103 (Laird), and instead obtained agreement from the author and the Department of Insurance to work in a collaborative manner next year on a constructive reform effort. AB 412 (Chan), an effort to require prior approval for life insurance and annuity advertising was also killed. Finally, an effort to broadly prohibit the issuance of corporate-owned life insurance policies was blunted. AB 226 (Vargas) was narrowed to only prohibit COLI policies on non-exempt employees. In addition, it is likely the employers who want to continue to insure non-exempt employees can use a trust mechanism to avoid the direct prohibition.

IX. AGENT DISCIPLINARY RECORD BILL SIGNED

AB 794 (Frommer), which would establish guidelines for how long information regarding minor infractions against insurance agents and brokers remains posted on the Department of Insurance website, has been signed by the Govenor. The Department routinely posts enforcement actions on its website. However, there is no statute or regulation governing this practice. As a result, the Department's practice has been to permanently post even the most minor infractions.

For example, an insurance agent paid a $250 fine in 1977, and that information continues to be posted on the Department's website 26 years later. The fine notation is displayed whenever a customer does an address search for the agent. As a result, this minor violation tarnishes the agent's reputation even though 26 years have gone by without any further regulatory or enforcement action.

The bill provides that minor violations will remain posted for ten years. However, the violations will only "age-off" if the agent maintains a clean record during that 10-year period. Any enforcement action relating to a suspended or revoked license continues to be permanently posted on the website.

The Department of Insurance supports the bill because it continues to provide consumers with easy access to information about insurance agents and brokers while at the same time cleaning the website of minor items long after they have become irrelevant. The bill also mirrors policies established by other agencies in managing postings regarding their licensees.

X. BILL SUMMARY

Following is a compilation of some of the significant insurance and financial services related bills signed by the Governor this year. Most of these bills will become effective January 1, 2004. This year the Legislature sent Governor Davis 967 bills. He signed 909 of those bills and vetoed 58.

Auto Insurance Bills

· AB 1181 (Ridley-Thomas): Requires that a policy of automobile insurance contain, at policy issuance and in each renewal notice sent prior to the renewal of the policy, a rating information disclosure regarding the information that was applied in determining the premium that was charged for the policy. Chapter 360.

· AB 1274 (Chavez): This bill clarifies current law to distinguish between risk-based motor clubs, such as the American Automobile Association and non-risk-based motor clubs that provide only maps and discount coupons. This bill specifies that the latter category of motor clubs is not subject to regulation by the Insurance Commissioner. Chapter 88.

· SB 60 (Cedillo): This bill makes changes regarding the eligibility requirements for an original driver's license or ID card. It (1) allows persons who do not have legal presence in the United States to be eligible to apply for a driver's license or ID card, (2) permits license applicants to submit a federal taxpayer ID number or other identifier number deemed appropriate by DMV, rather than a social security number, (3) provides for a signed affidavit procedure if the applicant does not have a social security account, and (4) increases fees for specified driver's licenses and deletes fees of senior ID cards. Chapter 326.

· SB 333 (Escutia): Increases from one year to two years the permitted time for an insured with uninsured motorist coverage to file a cause of action against an uninsured motorist or to commence arbitration proceedings under his or her uninsured motorist policy. Chapter 56.

· SB 551 (Speier): Codifies existing regulatory law and prohibits an insurer from requiring that an automobile be repaired at a specific automotive repair dealer. Also prohibits an insurer from suggesting or recommending that an automobile be repaired at a specific automotive repair dealer unless the claimant requested the referral or the claimant is informed, in writing, of his or her rights. Chapter 791.

· SB 841 (Perata): Allows insurers to offer a persistency discount to existing as well as new auto insurance policyholders. Chapter 169. Consumer groups filed a lawsuit in Los Angeles Superior Court challenging the validity of the law. The first hearing is scheduled for November 25, 2003.

Homeowners' Insurance

· AB 996 (Wiggins): Extends to reproductive health services facilities the prohibition on insurers from canceling or refusing to renew a property insurance policy because the facility has been the victim of a hate crime. Expands this existing prohibition to also include anti-reproductive-rights crimes committed against reproductive health services facilities. Chapter 647.

· AB 1727 (Assembly Insurance Committee): This bill requires homeowners and residential property or liability insurers to give a 20-day written advance notice of cancellation, except in the case of non-payment of premiums, or for fraud, for which a 10-day advance written notice of cancellation is required. Chapter 148.

Earthquake Insurance

· AB 1048 (Calderon): This bill changes the California Earthquake Authority (CEA) statute by revising the definition of available capital. Excludes unearned premiums and the proceeds of bonds issued by or in the name of the CEA from the definition of available capital. Creates a definition of "unearned premium reserve" and requires assets equal to the unearned premium reserve to be retained until the policyholder claims and liabilities have been paid. Chapter 144.

· AB 1598 (Corbett): This bill extends the sunset date for the Earthquake Grant and Loan Program operated by the Department of Insurance to July 1, 2007. The bill also appropriates an additional $2.9 million to the Program from the now defunct California Residential Earthquake Recovery. Chapter 448.

Business of Insurance

· AB 378 (Steinberg): Incorporates unclaimed demutualization insurance proceeds into the Unclaimed Property Law. Unclaimed distributions from the demutualization of an insurance corporation are presumed abandoned after three years. The proceeds are then reported to the State Controller. Chapter 304.

· AB 794 (Frommer): Requires that records regarding minor disciplinary actions against agents and broker posted on the Department of Insurance's website "age-off" after 10 years. Chapter 310.

· AB 984 (Vargas): This bill defines a vehicle service contract and provides that contracts meeting the definition do not qualify as automobile insurance. This bill also adds various regulatory provisions relating to the service contracts. Chapter 439.

Workers' Compensation Insurance

· AB 149 (Cohn): Extends the statute of limitations for claims for workers' compensation death benefits in the case of firefighters whose death results from asbestosis. Chapter 831.

· AB 227 (Vargas): Part of the workers' compensation insurance reform conference committee report. Chapter 328.

· SB 176 (Johnson): Requires the WCIRB to provide written notification to policyholders when it imposes a change in the policyholder's classification assignment. Chapter 121.

· SB 228 (Alarcon): Part of the workers' compensation insurance reform conference committee report. Chapter 639.

· SB 359 (Figueroa): The bill makes health care professionals subject to license suspension or revocation for committing worker's compensation insurance fraud. Chapter 595.

· SB 1007 (Speier): Expands the definition of "common trade or business" for the purposes of association or trade group workers' compensation insurance policies to include manufacturing facilities as identified in the North American Industry Classification System. Chapter 641.

Health, Life & Disability Insurance

· AB 226 (Vargas): Prohibits the issuance of corporate-owned life insurance policies on non-exempt employees. Chapter 328.

· AB 284 (Chavez): This bill requires annuity contracts (1) provide for paid-up annuity benefits upon written request of the contract owner, (2) eliminates the requirement that a company reserve the right to defer cash surrender benefit for six months, but allows the company to reserve that right after receiving written approval of the Insurance Commissioner, (3) allows payment of the cash surrender benefit to be deferred for a period not to exceed six months, (4) provides for a uniform method of calculating minimum non-forfeiture amounts under these contracts, (5) modifies the interest rate applicable to accumulations under these contracts, the amounts by which the accumulations may be decreased, and the minimum amount of consideration used to determine the minimum non-forfeiture amount, (6) allows the Commissioner to adopt regulations to implement these provisions and to adjust the calculation of minimum non-forfeiture amounts for certain other contracts, and (7) specifies that this bill shall become operative on January 1, 2006, but that a company may elect to apply them any time between the bill's effective date and its operative date. Sets a flat annual fee of $50 for all deferred annuities in today's low interest rate environment. Chapter 381.

· AB 444 (Vargas): This bill authorizes the Insurance Commissioner to issue bulletins, providing for approval on one or more expedited bases, of policies, contracts, or agreements, guaranteed by an admitted life insurer, and filed with the Department. Also authorizes expedited approval of an insurer's policy, contract, or agreement, upon certain other conditions. Chapter 352.

· AB 1083 (Cogdill): This bill prohibits an insurer from issuing a policy to an applicant that insures the life of the applicant's spouse unless the spouse has signed the policy application or has otherwise been notified in advance of the issuance of the policy. Applies to life insurance policies with face amounts exceeding $50,000 that are issued on or after 7/1/04. Chapter 115.

· AB 1252 (Jackson): This bill makes several technical changes to conform state law to the federal Gramm-Leach-Bliley Act. Specifically, this bill (1) renames various continuing education requirements for long-term care insurance agents, (2) adds "territory of the United States" to the list of non-resident jurisdictions, and (3) repeals a provision of current law regarding reinsurance intermediaries not allowed under federal law. Chapter 217.

· AB 1600 (Nakano): This bill extends the period of time that life and disability insurers must maintain records from two to five years and authorizes the Insurance Commissioner to collect and report data relating to life and disability insurance. Chapter 166.

· SB 2 (Burton): This bill requires employers to provide health insurance coverage for employees, or pay a fee into a state fund to pay for coverage. The bill is phased in over several years depending on employer size and exempts employers with 50 or fewer employees. Chapter 673.

· SB 200 (Murray): This bill prohibits, until 1/1/08, long-term care insurers from using genetic testing to determine insurability or for underwriting purposes. Chapter 408.

· SB 212 (Machado): Updates investment rules for Multiple Employer Welfare Arrangements. Chapter 320.

· SB 618 (Scott): Increases fines and penalties for insurers and agent and brokers that violate the Insurance Code. Chapter 546.

· SB 620 (Scott): This bill increases the restrictions on the marketing of life insurance and annuities to senior citizens. Specifically, this bill (1) creates new training requirements for insurance agents and brokers, (2) requires additional disclosures for life insurance and annuity products, and (3) imposes restrictions on the sale of life insurance and annuities in the home of a senior. Chapter 547.

· SB 686 (Ortiz): This bill requires an insurer issuing liability policies to long-term health care facilities, residential care facilities for the elderly, or physicians who provide services to residents in those facilities to notify the Department of Insurance at least 90 days canceling those policies. Allows the Department to collect data regarding those policies and authorizes the formation of a market assistance program to assist in securing liability insurance and to order the creation of a joint underwriting association. Chapter 899.

Tort Reform & Litigation

· AB 634 (Steinberg): Creates a statewide policy against confidential settlement agreements and disclosure of information obtained during discovery proceedings in cases brought under the Elder Abuse and Dependent Adult Civil Protection Act. This is the camel's nose under the tent. Trial lawyers have been trying to apply this standard to all litigation for several years. Chapter 242.

· AB 903 (Steinberg): This bill corrects various technical errors and issues in the construction defect law, SB 800 (Burton), enacted last year. Chapter 762.

· SB 434 (Escutia): This bill provides the Attorney General with the duplicative authority to enforce the corporate securities and commodities laws. It also creates a new misdemeanor for knowingly and willfully making false statements in connection with an investigation into corporate misconduct. Chapter 876.

· SB 515 (Kuehl): The purposes of this bill are to: (1) provide the Attorney General with the authority to enforce the states corporate securities and commodities laws to be accomplished on existing financial resources, (2) make various clarifications to the laws regarding a department head's ability to share and seek information, and (3) create a new misdemeanor for knowingly and willfully making false statements in connection with an investigating into corporate misconduct. Chapter 338.

Title Insurance & Real Estate Services

· AB 479 (Maldanado): This bill revises licensing, penalty and surety fund requirements for escrow companies. Chapter 382.

· AB 943 (Chavez): This bill makes technical changes to conform statutory mortgage insurance company accounting practices to other states. Chapter 392.

· AB 1005 (Dutra): This bill allows title insurers to lower prices for title insurance within a given county immediately after filing the rates with the Department of Insurance. Chapter 440.

· AB 1553 (Wesson): Expands the scope of what a consumer goods "service contract" may cover, and gives service contract sellers a new means to fulfill existing financial reserve requirements. Chapter 775.

Privacy & Identity Theft

· AB 68 (Simitian): Enacts the Online Privacy Protection Act of 2003, requiring disclosure of online privacy policies. Chapter 829.

· AB 763 (Liu): Provides that a social security number that is allowed to be mailed to an individual under existing law, may not be printed, in whole or in part, on a postcard or other mailer not requiring an envelope, or visible on the envelope or without the envelope having been opened. Chapter 532.

· AB 1105 (Jackson): Adds the crimes of identity theft and filing false documents to the list of offenses for which the statute of limitations does not begin to run until discovery of the offense. Chapter 73.

· AB 1294 (Wiggins): Requires debt collectors to cease collection efforts until they review and make a determination of the validity of specified information indicating that the debts they are trying to collect are the result of identity theft. Chapter 287.

· AB 1610 (Pavley): This bill requires the user of a consumer credit report to take reasonable steps to verify the accuracy of a name or social security number supplied in a credit application if that name or social security number does not match the information contained in the credit report. Chapter 41.

· SB 1 (Speier): This bill requires a financial institution to obtain the consent of a consumer before it may share personal information with any nonaffiliated third party (opt-in). While consent is not required to share information with an affiliate or joint marketing partners, the consumer must be provided with the opportunity to direct that personal information not be disclosed (opt-out). The bill provides for unrestricted sharing of information between a financial institution and its wholly owned financial subsidiaries in the same line of business defined as one of the following: insurance, banking or securities. (no-opt). Chapter 241.

· SB 25 (Bowen): This bill would require any person who uses a credit report to extend credit to take reasonable steps to verify the consumer's identity if the credit report contains a security alert. This bill would also prohibit entities from making public an individual's social security number or using social security numbers as passwords or on an identification card. Chapter 907.

· SB 27 (Figueroa): This bill would require businesses to either: 1) disclose to customers, upon request, what categories of personal information the business shares with third parties for marketing purposes, or 2) provide customers with the ability to opt-out of having their information shared for marketing purposes. Chapter 505.

· SB 33 (Figueroa): Revises California's "Do Not Call" telemarketing restriction law to coordinate with the recently adopted federal law on the same issue. Allows the federal list to become the "master list" and spares California the cost of managing its own separate list. Chapter 779.

· SB 186 (Murray): This bill would allow consumers, the Attorney General and internet service providers to sue businesses that send "spam," or unsolicited email. Penalties could go as high as $1 million per incident. The bill contains an existing business relationship exemption. Chapter 487.

· SB 602 (Figueroa): Establishes the Identity Theft Prevention and Assistance Act that provides various protections and support for victims of identity theft. The bill also increases law enforcement tools and caps the fee for a consumer to freeze his or her credit filed at $10. Businesses would also be prohibited from collecting information for marketing purposes by swiping a driver's license. Chapter 533.

· SB 684 (Alpert): This bill would help identity theft victims get the documents they need to clear their name from the companies that opened new accounts or extended credit to a thief. Chapter 534.

· SB 752 (Alpert): Assists victims of "criminal identity theft" clear their names through the comparison of the thumbprints of the thief and victim. Chapter 467.

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