BILL ANALYSIS
SENATE COMMITTEE ON Public Safety
Senator Bruce McPherson, Chair S
2003-2004 Regular Session B
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SB 1273 (Scott) 3
As Amended March 23, 2004
Hearing date: April 13, 2004
Insurance Code
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MISREPRESENTATION OF INSURANCE POLICY INFORMATION
ALTERNATE FELONY MISDEMEANOR WHERE VICTIM IS OVER 65 YEARS OLD
HISTORY
Source: California Department of Insurance
Prior Legislation: SB 618 (Scott) - Ch. 546, Stats. 2003
Support: American Federation of State, County, and Municipal
Employees; Congress of California Seniors; California
State Sheriffs' Association; California Association of
Health Underwriters (if amended); California Health
Advocates; California Advocates for Nursing Home
Reform; California District Attorneys Association;
Gray Panthers; California Association of Health
Underwriters
Opposition:Insurance Agents and Brokers Legislative Council;
Pro-Elite Senior Services; Nationwide Insurance
Company; California Association of Professional
Liability Insurers (unless amended)
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SEE COMMENT #7 FOR AUTHOR'S PROPOSED AMENDMENTS TO ELIMINATE
THE FELONY PROVISION AND PROVIDE FOR EITHER 1) A MAXIMUM
$50,000 FINE OR (MAXIMUM) FINE OF 3 TIMES VICTIM'S LOSS IF
LOSS EXCEEDS $20,000, OR 2) $25,000 MAXIMUM BASE FINE OR 3
TIMES VICTIM'S LOSS IF THAT EXCEEDS $10,000.
KEY ISSUES
WHERE THE VICTIM OF A CRIME INVOLVING MISREPRESENTATIONS ABOUT
INSURANCE POLICIES (CALLED "TWISTING OR TURNING") IS AT LEAST 65
YEARS OF AGE, SHOULD SUCH A CRIME BE AN ALTERNATE
FELONY-MISDEMEANOR, RATHER THAN THE MISDEMEANOR THAT APPLIES IN
OTHER CIRCUMSTANCES?
SHOULD THE MAXIMUM BASE FINE FOR A CHURNING OR TWISTING CONVICTION
(MISDEMEANOR OR FELONY) BE $100,000?
SHOULD THE MAXIMUM MISDEMEANOR JAIL TERM FOR TWISTING OR CHURNING BE
INCREASED FROM 6 MONTHS TO 1 YEAR AND SHOULD THE COURT HAVE THE
POWER TO IMPOSE A FINE AND A JAIL TERM?
PURPOSE
The purposes of this bill are to 1) increase the misdemeanor
jail term for misrepresentation involving insurance policies
from 6 months to 1 year; 2) allow a jail term and a fine for
misdemeanors; 3) raise the maximum base fine from $1,500 to
$100,000 for misdemeanor and felony churning or twisting
convictions; and 4) create a new felony (as part of an alternate
felony-misdemeanor) for insurance misrepresentations involving
persons of at least 65 years of age.
Existing law provides that an insurer or agent of an insurer
shall not misrepresent either a) the terms of a policy issued or
negotiated by the insurer or agent, or b) the benefits flowing
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from the policy, or c) the future dividends payable under the
policy. (Ins. Code 780.)
Existing law provides that a person shall not make any of the
following misrepresentations:
? Misrepresentation to induce another person to take out a
policy, or to reject one policy in favor of a policy by
another insurer.
? Misrepresentation to a policyholder to induce him or her to
lapse, forfeit or surrender his or her insurance.
? Misrepresentation in a comparison of insurers or policies for
the purpose of inducing the insured to lapse, forfeit, change
or surrender his or her insurance. (Ins. Code 781.)
Existing law provides that a violation of Section 780 or Section
781 is a misdemeanor, punishable by imprisonment in a county
jail for up to 6 months or by of a fine not exceeding $1,500.
(Ins. Code 782.)
Existing law provides that the insurance commissioner may
suspend for up to three years the license of any insurance
agent, broker, or solicitor who knowingly violates Section 780
or Section 781. Before ordering such suspension, the
commissioner shall hold a hearing, as specified. (Ins. Code
783.)
Existing law provides that if an insurer knowingly violates
Section 780 or Section 781 - or knowingly permits any officer,
agent, or employee to do so - the commissioner, after a
specified hearing, "may suspend the insurer's certificate of
authority to do the class of insurance in respect to which the
violation occurred." (Ins. Code 783.5.)
This bill increases the misdemeanor penalty for unlawful
twisting or churning insurance policies where the victim is
under the age of 65 years (Ins. Code 780 and 781) to a
maximum jail term of 1 year, or a fine of up to $100,000, or
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both.
This bill provides where the victim of a violation of Section
780 or 781 is a person at least 65 years of age, the crime is an
alternate felony misdemeanor, punishable by imprisonment in the
county jail for up to 1 year, or by imprisonment in state prison
for 16 months, 2 years or 3 years, and a fine of up to $100,000.
COMMENTS
1. Need for This Bill
According to the author:
While the vast majority of insurance agents are
honest, dishonest ones are targeting seniors. Between
1998 and 2003 the California Department of Insurance
received approximately 2500 complaints or inquiries
pertaining to annuity products. According to the
California Department of Corporations, three of the
top ten investment scams in the state involve the sale
of insurance. The second most prevalent scam in the
state, according to DOC, is "Senior Investment Fraud."
[C]on-artists think [seniors] are easy prey because
of their age and assets. The California Attorney
General's Office, the California Department of
Insurance and . . . consumer groups have warned that
financial abuse of elders, often in conjunction with
the sale of life insurance and annuities, is on the
rise. . . . Financial abuse may lead to diminished
health or even death, according to the Journal of the
American Medical Association. . .
The fraudulent acquisition of a victim's money can be
prosecuted a number of different ways: under general
criminal statutes such as those prohibiting theft
(Pen. Code 484, 487, or 666), the practice of law
without a license (Bus. & Prof. Code 6125 et seq.),
theft by false pretenses (Pen. Code 532), or even
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first degree residential burglary (Pen. Code 459).
Prosecutors can also file charges under more specific
criminal statutes, such as Penal Code Section 368(d),
which prohibits theft or embezzlement from seniors and
dependent adults.
If the defendant is a licensed insurance agent or
broker, prosecutors can file charges under Insurance
Code Sections 780 or 781, which makes it illegal to
misrepresent the terms or conditions of an insurance
policy with the intent to induce a person to take out
a policy of insurance, choose one policy over another,
lapse, forfeit, or surrender a policy (also called
"twisting," or "churning.") Under Insurance Code 782,
the offense is now a misdemeanor (punishable by up to
6 months in jail or a fine not exceeding fifteen
hundred dollars). While twisting and churning can
involve insurance policies that cost hundreds of
thousands of dollars (and result in the payment of . .
. commissions . . . up to 10% of the value of the
policy) the criminal penalties are relatively minor.
[T]wisting and churning can only be charged as a
misdemeanor, regardless of the amount of loss [to the
victim] . . . or profit [to the perpetrator]. If
prosecutors believe that a felony conviction is
appropriate, they have to file other charges. SB
1273 increases the penalty for twisting and churning.
SB 1273 allows prosecutors to charge insurance
agents with a felony in cases where the victim is a
senior. As a practical matter, increasing the
penalty for twisting and churning will not expand the
Three Strikes law, however. A felony conviction for
twisting or churning would not likely ever be a third
strike, because insurance agents cannot be licensed
if they have a prior felony conviction, and would not
be a first or second strike because twisting and
churning are not serious felonies.
2. Three Strikes Issues - New Felonies for Specified Insurance
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Crimes
Under the Three Strikes law, a defendant can receive a life
sentence, with a minimum term of 25 years, where he or she is
convicted of any felony after having been previously convicted
of at least two statutorily defined serious or violent felonies.
Where the defendant has a single prior qualifying conviction
and is convicted of any felony in the current case, the
defendant's sentence is doubled. There is no limit on the
remoteness in time of prior convictions subjecting the defendant
to a strike sentence.
According to the author's statement, this bill would not, as a
practical matter, expand the reach of the Three Strikes law
because it is targeted at licensed insurance agents. However,
persons who are not licensed agents can be charged with aiding
and abetting crimes committed through the "churning" or
"twisting" of insurance policies. For example, a person with
prior serious felony convictions could aid and abet the crime by
finding seniors who are to be targeted for illegal activities by
a licensed agent. An aider and abettor - one who intends that
the crime be committed and assists the perpetrator - is guilty
of the same crime as the actual perpetrator.
Further, while it appears that the defendant's status as an
insurer, officer or agent is an element of the crime described
in Insurance Code Section 780, such status does not appear to be
required under Section 781. Section 780 essentially refers to
misrepresentations made by an insurer or an agent as to the
policy issued by the insurer. Section 781 essentially forbids
misrepresentations by "a person" made so as to induce another to
take out a policy, reject one policy in favor of anther or to
cancel a policy. Thus, the defendant need not be licensed by
the Department of Insurance to directly violate Section 781.
The author may be correct that as a practical matter, a person
who has been convicted of felonies would not be licensed as an
insurer or insurance agent. The insurance commissioner has
broad discretion to deny or revoke a license for misconduct or
bad character. However, there is no state law prohibiting
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convicted felons from being licensed as insurance agents or
insurers. Federal law prohibits a person who has been convicted
of a felony involving fraud or dishonesty from obtaining an
insurance license without the prior written consent of the state
insurance commissioner.
WOULD THE NEW FELONY CREATED BY THIS BILL OF TWISTING OR
CHURNING AN INSURANCE POLICY IN A TRANSACTION INVOLVING A PERSON
WHO IS AT LEAST 65 YEARS OLD EXPAND THE REACH OF THE THREE
STRIKES LAW?
3. Misrepresentation - Intent and Knowledge Issues
There are very few reported appellate cases interpreting or
discussing Insurance Code Sections 780, 781 and 782. In
particular, there is very little decisional law discussing
what constitutes a "misrepresentation" under Section 780 or
782 so as to establish that the defendant committed a crime.
In a civil suit by a trade association against workers
compensation insurers for negligent failure to disclose past
dividend calculations, the court in Cal. Service Station and
Auto Repair Assoc. v. American Home Assurance (1998) 62
Cal.App.4th 1166, stated: "These statutes [Ins. Code 780,
790 and 790.10] do not create a negligence duty of care. They
prohibit misrepresentations, and are thus analogous to the
torts of fraud and deceit, not the tort of negligence."
In a case considering the validity of suspension of an agent's
license under Section 783 for knowing violations of Sections 780
and 781, the California Supreme Court in Collins v. Caminetti
(1944) 24 Cal.2d 766, 771, stated: "Implicit in these code
sections is the requirement that an agent, charged with
wrongdoing thereunder, must be shown to have intentionally made
the misrepresentations prohibited by the Legislature."
It appears that the reference to Insurance Code Section 780 in
Cal. Service Station was not on point as to the knowledge or
scienter issue in a crime under Insurance Code Section 782. The
holding of the court in Collins does not necessarily answer the
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question of whether a person can be convicted of a crime under
Insurance Code Section 782 for unintentional misrepresentations
as described in Sections 780 and 781. The Collins case
considered the suspension of an agent's license, not conviction
of a crime. The code section allowing suspension of license for
misrepresentations under Section 780 or 781 specifically
requires that the misrepresentation be made "knowingly."
Arguably, intent to misrepresent is only required for
suspension, not for a criminal conviction.
As this bill creates a new felony for misrepresentations, and
increases the maximum fine for a misdemeanor or felony from
$1,500 to $100,000, arguably it is appropriate to require that
the defendant intentionally made a misrepresentation prohibited
by the law.
IN PROVING THE CRIME OF MISREPRESENTATION OF AN INSURANCE
POLICY (AS DESCRIBED IN INSURANCE CODE SECTIONS 780 AND 781)
SHOULD IT BE NECESSARY TO ESTABLISH AN INTENTIONAL
MISREPRESENTATION?
4. Penalty Assessments and Surcharges Effectively Triple the Base
Fine
This bill provides for a maximum fine of $100,000 for a
misdemeanor or felony conviction for churning or twisting
insurance policies, as defined under Insurance Code Sections
780 and 781.
A defendant assessed the maximum fine of $100,000 under this
bill would actually be liable for a fine and "penalty
assessments" of between $290,020 and $340,020, depending on the
county of conviction.
? State Penalty Assessment:
Existing law provides for an additional "state penalty" of $10
for every $10 or fraction thereof, upon every fine, penalty or
forfeiture imposed and collected by the courts for criminal
offenses including all offenses, except parking offenses,
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involving the Vehicle Code. Of the money collected, 70 percent
is transmitted to the state and 30 percent remains with the
county. The state portion of the money collected from the
penalty is distributed in specified percentages among: the Fish
and Game Preservation Fund (0.33 percent); the Restitution Fund
(32.02 percent); the Peace Officers Training Fund (23.99
percent); the Driver Training Penalty Assessment Fund (25.70
percent); the Corrections Training Fund (7.88 percent); the
Local Public Prosecutors and Public Defenders Fund (0.78
percent, not to exceed $850,000 per year); the Victim-Witness
Assistance Fund (8.64 percent); and the Traumatic Brain Injury
Fund (0.66 percent). (Pen. Code 1464.)
? County Penalty Assessment:
Existing law provides for an additional county penalty
assessment of $7 for every $10 or fraction thereof, upon every
fine, penalty, or forfeiture imposed and collected by the
courts for criminal offenses, including all offenses involving
a violation of the Vehicle Code or any local ordinance adopted
pursuant to the Vehicle Code except parking offenses. The
money collected shall be placed in any of the following funds
if established by a County Board of Supervisors: Courthouse
Construction Fund; a Criminal Justice Facilities Construction
Fund; Automated Fingerprint Identification Fund; Emergency
Medical Services Fund; DNA Identification Fund. (Gov. Code
76000 et seq.)
? State Surcharge:
As a part of the 2002-03 Budget Act, the Legislature imposed a
temporary state surcharge of 20 percent on every base fine
collected by the court. The surcharge took effect on September
30, 2002 and all money collected shall be deposited in the
General Fund. (Pen. Code 1465.7.)
? State Court Facilities Construction:
Two years ago, as a part of the Trial Court Facilities Act of
2002 (AB 1732 - Escutia), the Legislature established the
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"State Court Facilities Construction Fund" and added a state
court construction penalty assessment in an amount up to $5
for every $10 or fraction thereof, upon every fine, penalty,
or forfeiture imposed and collected by the courts for criminal
offenses. The variation in the amount is dependant on the
amount collected by the county for deposit into the local
Courthouse Construction Fund established pursuant to
Government Code Section 76100. As a result, the penalty
assessment ranges from $0.00 for every $10 in two counties to
the full $5 for every $10 in nine counties. This provision
took effect on January 1, 2003. (Gov. Code 70372.)
? Court Security:
Finally, as part of the 2003-04 Budget, the Legislature approved
a flat fee of $20 on every conviction for a criminal offense to
ensure adequate funding for court security. This provision took
effect immediately. (Pen. Code 1465.8.)
SHOULD THE MAXIMUM BASE FINE FOR TWISTING OR CHURNING INSURANCE
POLICIES BE $100,000, WHETHER THE CRIME IS A MISDEMEANOR OR A
FELONY?
5. Restitution Concerns
The law requires that courts determine the amount of loss
suffered by a victim and order the defendant to pay restitution.
Further, each convicted defendant - regardless of the crime he
or she committed - must pay a restitution fine that is deposited
in a fund for compensation of the victims of violent crime.
(Pen. Code 1202.4.)
Direct restitution orders are collectible as civil judgments.
However, as a practical matter, defendants who are not well
versed in the law may have difficulty collecting a restitution
order. It may be argued that imposition of very high fines -
especially considering penalty assessments - could limit the
ability of victims to fully recover their losses.
WOULD VERY HIGH FINES FOR INSURANCE CHURNING OR TWISTING -
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MISREPRESENTATIONS DESIGNED TO INDUCE A PERSON TO CHANGE
INSURANCE OR ALLOW INSURANCE TO LAPSE - INTERFERE WITH A
VICTIM'S ABILITY TO OBTAIN FULL RESTITUTION?
6. Related Civil Penalties and Provisions
Existing law sets out numerous rules concerning insurance
contracts with seniors and twisting/churning of insurance
policies. These provisions include administrative fines and
suspensions. Illustrations of these provisions follow:
Existing law requires all disability and life insurance policies
offered for sale to individuals age 65 or older in California to
provide an examination period of 30 days after the receipt of
the policy for purposes of review of the contract and allows the
individual to void the policy and receive a refund by returning
the contract. These provisions apply only as to the extent they
do not conflict with other laws as to cancellation of life
insurance and annuities. (Ins. Code 786.)
Existing law sets forth specified "administrative" monetary
penalties (ranging from $1,000 to $300,000) for violating
provisions relating to the sale and marketing of insurance to
seniors. (Ins. Code 789.3.)
Existing law provides that if the commissioner brings an action
against a licensee under these provisions and determines that
the licensee may reasonably be expected to cause significant
harm to seniors, the commissioner may suspend the license
pending the outcome of the action. The commissioner may require
the rescission of any contract marketed, offered, or issued in
violation of these provisions. (Ins. Code 789.3.)
Existing law authorizes the insurance commissioner to suspend or
revoke any permanent license issued if the licensee induces the
client to make a loan or gift to or investment with the
licensee, or to otherwise act in other specified ways that
benefit the licensee or other people acquainted with or related
to the licensee. (Ins. Code 1668.1.)
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Existing law requires that a disciplinary hearing involving
allegations of misconduct directed against a person age 65 or
over, the hearing shall be held within 90 days after the
Department of Insurance receives the notice of defense, unless a
continuance is granted. Burden of proof in a hearing shall be
by a preponderance of the evidence. (Ins. Code 1738.5.)
Existing law sets forth specified "administrative" monetary
penalties (ranging from $1,000 to $300,000) for violating
certain provisions relating to the replacement of life insurance
policies and annuities and specifically allows the commissioner
to suspend or revoke the license of any person who violates
these provisions. (Ins. Code 10509.9.)
Existing federal law prohibits anyone who has been convicted
of a felony involving dishonesty or a breach of trust from
conducting the business of insurance unless they have obtained
the written consent of the insurance commissioner. It is a
violation of this statute to conduct business of insurance
without the commissioner's written consent. (18 U.S.C. 1033,
subd. (e)(2).)
DO EXISTING CIVIL PENALTIES AND THE AVAILABLE MISDEMEANOR
CONVICTIONS ADEQUATELY ADDRESS TWISTING AND CHURNING VIOLATIONS,
INCLUDING THOSE INVOLVING PERSONS WHO ARE AT LEAST 65 YEARS OLD?
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SHOULD THE NON-STANDARD MISDEMEANOR FOR TWISTING OR CHURNING,
WHICH NOW ALLOWS THE COURT TO IMPOSE A FINE OR A JAIL TERM (OF
UP TO 6 MONTHS) BE AMENDED TO ALLOW THE COURT TO IMPOSE A JAIL
TERM, OR A FINE, OR BOTH, AS IS STANDARD FORM OF SUCH PENALTY
PROVISIONS?
7. Author's Proposed Amendments
Based on discussions in Committee on March 30, 2004, the author
will propose two alternative sets of amendments for the
consideration of the Committee on April 13, 2004.
Each set of amendments would eliminate the felony provision in
the bill and would raise the maximum misdemeanor jail term to
one year. Each version would require a defendant to knowingly
violate twisting and churning rules for criminal penalties to
apply. The differences in the amendments are as to the amount
of the fine the court may impose. One alternative proposes a
base fine of $50,000. Further, where the amount of loss
suffered by the victim is greater than $20,000, the court could
impose a fine of up to three times the amount of the loss.
? Alternative #1 - $25,000 base fine; if victim's loss exceeds
$10,000, court can impose a fine of up to 3 times the loss
Felony penalty removed
Defendant must knowingly violate twisting or churning
(misrepresentation to induce change in policy) prohibition
Maximum 1-year jail term for misdemeanor
Base fine of up to $25,000
Court can impose jail term, fine or both
Where victim's loss exceeds $10,000, court can impose a
fine of up to 3 times the loss (alone or in addition to a
jail term)
Fine collected only after restitution satisfied
? Alternative #2 - $50,000 base fine; if victim's loss exceeds
$20,000, court can impose a fine of up to 3 times the loss
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Felony penalty removed
Defendant must knowingly violate twisting or churning
(misrepresentation to induce change in policy) rules
Maximum 1-year jail term for misdemeanor
Base fine of up to $50,000
Court can impose jail term, fine or both
Where victim's loss exceeds $20,000, court can impose a
fine of up to 3 times the loss (alone or in addition to a
jail term)
Fine collected only after restitution satisfied
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