THIS WEEK IN
Prepared by Norwood & Associates
Commissioner
Lashes Out at Insurers After Appearing to Lose in Court
Sacramento Superior Court Judge Raymond M. Cadei appears poised to invalidate Department of Insurance regulations limiting the ability of insurers to use claims history for underwriting homeowners' insurance. The judge last month refused to grant a preliminary injunction requested by insurers, citing the Commissioner's authority to determine if an emergency existed warranting the regulations. The judge, however, left open the question whether the Commissioner had the authority to regulate underwriting rules and scheduled today's hearing to consider the matter.
The judge did not rule this morning, but said he would issue a ruling shortly. However, the judge was clearly unimpressed with the Department's argument it had authority to promulgate regulations regulating homeowners' insurance. The judge repeatedly asked the Department's lawyers to cite the statute that authorized underwriting regulations. The Department cited the Commissioner's authority to regulate rates and record retention policies, arguing that underwriting practices impact rates and record keeping.
The judge didn't seem to buy the Department's argument, saying he didn't see the connection. The judge told the Department's lawyers they were using the Commissioner's rate regulation and records authority to bootstrap in authority to regulate everything an insurer does. He concluded rate authority is not the same as underwriting authority.
The judge, relying on a California Supreme Court precedent, said he also found persuasive the fact that the Legislature rejected SB 64 (Speier). The regulations are virtually identical to SB 64. The judge noted the Legislature would not pass a bill granting the Insurance Commissioner authority he already had. Thus, the judge concluded, SB 64 was introduced to give the Commissioner authority he did not have to regulate underwriting practices, and then ultimately decided against the policy.
The judge asked the Department's lawyers if they supported SB 64 and had a hand in drafting its language. The lawyers arguing the case said they didn't know, so the judge called the Commissioner, who was sitting in the audience, to speak on the issue. The Commissioner said the Department did support SB 64 and helped write it. However, he argued that should not be persuasive as to whether or not he needed the bill to grant him authority to regulate underwriting guidelines. He said the Department supported the bill to provide clarity to existing law.
The Commissioner took the opportunity before the court to shift the direction of the questioning. He said he did not understand why insurers insisted on using inaccurate information contained in industry databases. Counsel for insurers responded there was no evidence in the record to indicate insurers rely on inaccurate information, and where there are inaccuracies, insurers comply with the requirements of federal law, the Fair Credit Reporting Act. With that, the judge said he would rule shortly.
After the hearing, the Commissioner held a press conference outside the court building at a podium his staff had prepared for him. A visibly angry Commissioner used strong language in accusing insurers of lying to the judge. He pointed to insurer representatives, the only audience other than a few news teams, and said, "I'm going to audit you."
After concluding the press conference, the Commissioner stormed past counsel for the insurers and told him to tell the truth the next time. Counsel responded, prompting an exchange between the two men.
Workers'
Compensation Insurance Conference Committee to Begin Hearings
Last week staff for legislators and interested committees met with stakeholders regarding the upcoming workers' compensation insurance conference committee hearings. Various groups have their own ideas on reform, and are trying to get a head start on having their language adopted.
All workers' compensation insurance related bills have been sent to a six-member conference committee to resolve the various bills and issues and release one report to be voted on by the Legislature. In a recent development, issues regarding borrowing authority for the California Insurance Guarantee Association will be included in the conference committee.
The conference committee is now scheduled to meet August 26 and 27. The agenda for these hearings is to allow all the various interest groups to speak to legislators directly. We expect the conference committee will then draft a bill and probably hold one more hearing to receive comment on the draft.
The Legislature must act by September 12. Employers and insurance agents and brokers are now fully engaged in a letter writing campaign individually and through their trade associations to increase the pressure on Legislators and the Governor to enact meaningful workers' compensation insurance reform in the next three weeks.
Legislature Sends
SB 1 to Governor
In a matter of two days the California Legislature sent Governor Gray Davis a privacy bill dubbed the toughest law of its kind in the nation. The Legislature acted with urgency after finally coming to a compromise with most of the financial services industry and to meet this week's deadline set by sponsors of an even more draconian privacy initiative.
The deal came together last week when Senator Speier and supporters of her bill, SB 1, finally reached an agreement after four years of bitter maneuvering over the issue. Governor Davis promptly announced he would sign the bill. The bill's supporters, however, had to cool their heels until the Legislature returned this week from their three-week summer vacation.
SB 1 became the sole focus of the State Assembly on their first day of business as six separate votes, including rule waivers, were held to clear the bill through three committees and the Assembly floor. The Assembly essentially shunted most other business in order to pass SB 1 out of the Assembly so the Senate, which has already approved an earlier version of the bill, could take one final vote approving the compromise achieved in the Assembly.
The normal legislative process was short-circuited by an unusual joint hearing of the Banking & Finance Committee and Judiciary Committee. Each Committee was called to order separately and took separate votes, but heard testimony jointly in order to save time. After the Banking & Finance Committee voted, the bill was immediately sent to the Assembly Desk for certification and then returned within minutes for a second vote by the Judiciary Committee. While that vote was being certified, the Appropriations Committee convened, and promptly voted the bill out of Committee and to the Assembly Floor, which passed it by a vote of 76-1. The entire process, culminating four years of work, took about three hours.
The next day the Senate convened to approve the Assembly changes. SB 1 passed by a vote of 31-6. The bill is now on its way to the Governor's desk. The Governor has 12 days to act on the bill once his office receives physical possession, or it will become law automatically. Normally, its takes a few days for the Legislature to certify a vote and physically transmit it to the Governor's Office. However, in this case transmittal is expected to be immediate and the Governor is expected to sign the bill quickly.
The Legislature acted with unusual speed and determination in order to forestall an even more severe privacy measure from being placed on the March 2004 ballot. Privacy advocates successfully gathered almost 600,000 signatures to place the measure on the ballot as a tactic to force a legislative compromise. 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 by Tuesday. Wednesday was the last day the privacy advocates determined they had to submit signatures in order to qualify the initiative.
Not everyone is happy with the compromise. Several insurers continue to voice muted opposition, but are making no serious attempts to undo the deal. Even those insurers, banks and other financial institutions that removed their opposition continued to voice their preference for a national standard, raising concern among privacy advocates they intend to try and preempt SB 1 at the federal level.
The compromise makes only relatively minor changes to the last version of SB 1 that was being discussed before negotiations broke down and the bill failed to pass out of the Assembly Banking and Finance Committee a couple of months ago. Senator Speier characterized the changes as making the bill more "workable."
The major changes in the compromise are:
·
Changing the effective date from
· Eliminating the catchall option in the statutory privacy notice.
· Authorizing a privacy notice approved by the functional regulator as an alternative to the statutory notice and meeting specified requirements.
· Eliminating the requirement for postage paid envelopes for consumers to provide a privacy choice as long as they can respond by email and a toll-free telephone number.
· Eliminating enforcement by district attorneys. Enforcement would be left to the functional regulator and the Attorney General.
· Affinity partners may also receive a consumer's telephone number in addition to the previously authorized name and address, provided the consumer has not opted-out.
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. Most importantly, the bill specifically provides an exemption for insurance agents and brokers shopping for quotes.
Department Privacy
Regulations Conflict With SB 1
On
One of the most important conflicts involves 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.
Insurance agents and brokers argue 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. 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.
Competing Privacy
Bill Fails
SB 27 (Figueroa), yet another bill regulating the information practices of businesses, failed yesterday on the Assembly floor by a vote of 36-12. Thirty-two legislators did not vote for the bill.
The bill would require a business that discloses a customer's personal information to a third party for direct marketing purposes to provide the customer, within 30 days after the customer's request, the names and addresses of the recipients of that information and specified details regarding the information disclosed. Unlike SB 1, the bill provides for a private cause of action and liquidated damages.
Businesses said SB 27 set up a
duplicative and competing regulatory system to SB 1. The bill's author said it was
complementary. She vowed to continue
lobbying the abstaining legislators and bring the bill up for another vote next
week.
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© Copyright 2003 by Norwood & Associates