Stop Insurance Company Abuses Act

February 2, 2006

Here is a description of the key reforms contained in FTCR’s proposed ballot measure: [Download a draft of the proposal.]

1. Protection Against Unfair Cancellations, Non-Renewals and Surcharges for Home & Property Insurance (Ins Code §1861.17)

In recent years, insurance companies selling homeowners coverage have surcharged, or refused to renew, homeowners insurance policies simply because the homeowner filed a claim under their policy. This practice has become known as “Use It And Lose It.” Some companies have been refusing to renew even if the consumer called her insurance company just to find out whether a loss was covered, but ultimately never filed a claim at all. As a result, many consumers are afraid to make a claim. Others cannot buy the insurance they need because they have filed a claim in the past.

People pay for insurance to protect their most valuable assets. They should not be penalized for using the product they pay for.

Under Proposition 103 and other state insurance laws, the Insurance Commissioner has the authority to regulate the practices of insurance companies, including both the price insurers charge for insurance and the circumstances under which insurers decide whether to offer consumers a policy at all. The Commissioner has issued regulations that protect consumers against these abusive practices by homeowners insurers.

The proposal expands the protections afforded by current law and regulations by specifying exactly when insurers can consider a person or a property’s claims history. It will stop insurance companies from surcharging customers or non-renewing or refusing to sell homeowners policies simply because the consumer filed a claim, unless the consumer has filed more than three qualifying claims in three years.

The initiative prohibits insurance companies from counting the following as qualifying claims:

• Claims resulting from weather-related events or fires that started off the property do not count as qualifying claims.
• Legitimate claims that are not due to gross negligence do not count as qualifying claims, if the homeowner repairs the damage or if the hazard no longer exists.
• Claims that do not exceed the policy deductible, are not covered by the insurer, or are paid by another party (such as another insurer) do not count.
• Policyholder inquiries that do not result in qualifying claims.
• Claims on a previously owned property, a property other than the one being insured or related to a hazard or item that would no longer be covered do not count as qualifying claims.
• Claims on a property made by a previous owner, as long as the hazard no longer exists do not count.

These kinds of claims can never be held against the consumer. Insurance companies would be required to provide customers with advance warning that they might face non-renewal if they are in danger of exceeding the three “qualifying claims” — and the proposal gives consumers the right to review and dispute whether the claims can be counted.

2. Prohibition on Use of Credit Data in Sale of Insurance (Ins Code §1861.18)

Presently, under Proposition 103, insurance companies are not allowed to use personal credit information in the sale of auto or home policies. After all, a person’s private credit standing has nothing to do with whether that person is likely to get into a car accident or experience a burglary at their home. But some insurers have been aggressively trying to whittle down the protections of current law. This proposal confirms the policy adopted by the Insurance Commissioner pursuant to state laws: it bans insurance companies from using customers’ private financial data and credit history in any way related to the marketing, selling or pricing of insurance. This proposal would apply to auto, homeowners and earthquake insurance.

3. Prohibition on Double-Charging by Insurance Brokers (Ins Code §1861.19)

Some insurers have been deceiving customers by advertising a low premium, for which the salesperson (broker-agent) is getting paid a commission. But the advertising does not disclose that the broker-agent tacks on a broker fee as well, substantially increasing the price of the policy above the advertised price. The courts have held that this practice constitutes deceptive advertising. It also violates the rate controls established by Proposition 103. This proposal goes beyond the court decisions. It forbids an insurance broker from charging a “broker fee,” or any other charge, if the broker is also receiving a commission from the insurer.

4. Regulation of Improper Accounting Practices Used by Insurance Companies (Ins Code §1861.20)

Under Proposition 103, the Insurance Commissioner is responsible for regulating the rates of property-casualty insurance companies. Insurance companies must open their books and justify their rates, with full scrutiny of the public.

The Department of Insurance has issued regulations that establish a formula with which insurance companies’ rates must comply. The formula limits their profits and expenses to reasonable levels. Seventeen years of experience under Proposition 103 has revealed that insurance companies use devious accounting practices when complying with the formula, in order to justify charging higher premiums. This proposal puts some of the specific accounting controls contained in the regulations into law, and adds some new ones, in order to stop insurer price gouging and accounting trickery. In particular, the initiative:

• Sets restrictions on excessive profits by tying the allowable rate of return to national interest rates plus two to four percent. Under current interest rates, this section would allow an after tax rate of return of between 6.18% and 8.18%.
• Blocks insurers from charging customers extra because of company waste and inefficiency. This section limits — to 34% for homeowners insurance and 30% for auto insurance — the amount of general expenses, such as decorating corporate offices, construction, executive salaries, etc, an insurer can include in the premiums it charges policyholders.
• Limits the practice by some policyholder-owned insurers of funneling profits to private management companies in order to overcharge consumers.
• Caps the amount of executive salaries that can be passed through to policyholders at the lesser of $500,000 per year or a percentage of $500,000 based on the the percentage of business the insurance company does in California as opposed to other states. If insurance companies want to pay their executives exorbitant salaries, the shareholders should pay for it, not policyholders.
• Bars the use of accounting manipulations that insurers use to increase rates by making phony projections of future claims and inflated estimates of past claims. This section also prohibits other accounting schemes used by insurers to overcharge policyholders and blocks the bloated surplus that has become common among insurers.
• Blocks any rate hike until additional rules implementing this section are adopted by the Insurance Commissioner.
• Requires insurers to open their books and justify their rates any time they spend less than 70% of policyholder premium on paying claims. If a rate is then found to be excessive, the insurer must immediately lower rates and refund its customers for any overcharges plus interest.

5. Underwriting Systems (Ins Code §1861.21)

Presently, the Insurance Commissioner requires insurers to submit, as part of their rate applications, the standards they use for deciding to whom the company will sell insurance and how they calculate an individual person’s premium. Sometimes the companies try to keep these “underwriting systems” confidential, even though they are required to be publicly disclosed by Proposition 103 as part of the rate approval process. While the Commissioner clearly has the authority to require insurers to supply him with their underwriting systems, he has taken the position that he does not have the authority to approve them. This section requires that insurers receive the approval of the Insurance Commissioner prior to implementing any changes to their underwriting system. It confirms that insurers must disclose their underwriting systems to the public at the same time.

6. Internet Access to Filings (Ins Code §1861.22)

Proposition 103 requires insurers to open up their books to public scrutiny. This section requires that rate filings and other such materials be made available by the Commissioner to the public on the internet.

7. Lawsuits and Violation of Laws by Insurers (Ins Code §1861.23)

This section increases the punishments for insurers when they break the law.

• When insurers overcharge or otherwise violate California laws, they must repay policyholders the money they owe them, plus interest at a rate of 25% per year.
• Many insurance companies have tried to delay or evade the enforcement of consumer protection laws, including Proposition 103, through litigation in the courts. The cost of fighting these lawsuits is borne by taxpayers. The insurers’ lawsuits cost taxpayers a considerable amount of money. The proposal forces insurers to reimburse taxpayers if they challenge voter-approved initiatives and lose in court.
• The proposal makes it a felony for an insurer to violate this law (presently it’s a misdemeanor).
• The proposal confirms that the insurance commissioner has the authority to order an insurer to pay restitution of any money owed to a consumer.

8. Legislative Amendments to Voter Approved Laws (Ins Code §1861.23)

The California Constitution prohibits the Legislature from unauthorized amendments to voter-approved laws. However, at the behest of insurance industry lobbyists, the Legislature has attempted to repeal insurance reform laws previously enacted by the voters. The proposal ensures that politicians cannot easily amend this law. It requires that any legislative amendment to this initiative be passed with a two-thirds majority in both houses and furthers the purpose of the initiative. (The same conditions apply to Proposition 103.) It also requires that any amendments are finalized by the Legislature prior to July 31st of any year, to ensure that politicians and the insurance companies don’t attempt to sneak an amendment through the process during the hectic final days and hours of the legislative session.