BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Michael J. Machado, Chair
B 1401 (Aghazarian) Hearing Date: July 9,
2007
As Amended June 27, 2007
Fiscal: Yes
Urgency: No
SUMMARY Would increase from $1,300 to no more than $5,100 the
assessment on insurers to fund the activities of the Fraud
Division of the Department of Insurance (DOI); would clarify and
rename various annual fees funding the activities of the Fraud
Division as special purpose assessments; would explicitly allow
insurers to recoup specified special purpose assessments from
insureds; and would require the DOI to report specified
information about the operations of the Fraud Division annually
on the DOI web site.
DIGEST
Existing law
1. Prohibits the submission of fraudulent claims to insurers, and
creates attendant criminal and civil penalties;
2. Prohibits insurers from committing insurance fraud against
claimants, and creates attendant criminal and civil penalties;
3. Establishes the Fraud Division within the DOI, and requires
insurers to submit suspected fraudulent claims to that division;
4. Establishes an annual assessment of up to $1,300, as determined
by the Insurance Commissioner (IC), paid equally by each insurer
admitted to transact insurance in this state, to fund the
operations of the Fraud Division, and specifies that the total
budget of the Fraud Division shall be determined annually in the
Budget Act;
5. Imposes a fee of $1 per auto insurance policy for purposes of
funding auto insurance fraud investigations by the DOI, District
AB 1401 (Aghazarian), Page 2
Attorneys, and the California Highway Patrol;
6. Imposes an additional fee of 50 cents per auto insurance
policy, through January 1, 2010, for purposes of funding an
Organized Automobile Fraud Activity Interdiction Program (urban
auto insurance fraud program) that, as described in statute and
generally speaking, focuses on organized crime rings and
sophisticated auto insurance fraud committed in urbanized areas
of the State;
7. Imposes a fee of 30 cents per auto insurance policy, through
January 1, 2010, for purposes of paying for, generally speaking,
the DOI's consumer services functions related to automobile
insurance (20 cents) and for improving those functions (10
cents), including improving the ability of specified bureaus of
the DOI to respond to consumer complaints and information
requests through the DOI's toll-free number, and to provide
information about auto insurance rates to the public;
8. Establishes an annual assessment on workers' compensation
insurers, as determined by the Fraud Assessment Commission, to
fund increased investigation and prosecution of workers'
compensation fraud, and of willful failure to secure payment of
workers' compensation;
9. Imposes a fee of 10 cents per disability insurance policy to
fund increased investigation and prosecution of fraudulent
disability claims;
10. Requires the DOI to prepare an annual report about the
receipts, expenditures and activities of the Fraud Division.
This bill
1. Would delete the current Insurance Code section that funds
the Fraud Division of the DOI through an assessment of
$1,300 on all insurers admitted to transact insurance in
this state;
2. Would rename all fees currently funding Fraud Division
activities "special purpose assessments;"
3. Would establish a new annual "special purpose assessment"
on all insurers doing business in this state, to be
determined by the IC but not to exceed $5,100, for the
AB 1401 (Aghazarian), Page 3
support of the Fraud Division;
4. Would require the Fraud Division to report specified
information annually on the DOI web site, including:
a. The number of suspected fraudulent claim
referrals made by insurers to the Fraud Division by
line of insurance;
b. The number of investigations opened by the Fraud
Division, by line of insurance, at the local, state and
federal level;
c. The number of investigations referred for
criminal prosecution, and the number of convictions at
the local, state and federal level; and
d. The number of vacant peace officer positions;
1. Would allow an insurer to recoup the special assessment in
#3 above, and specified automobile insurance fraud
assessments, through a surcharge on premiums charged on
insurance policies to which those fees apply, or by
including the assessments within the insurer's rates, as
specified;
2. Would provide that the amounts recouped under #5 would not
be considered premium for any purpose, including the
computation of gross premium tax or agents' commission;
3. Would require the surcharge allowed by #5 to be separately
stated on either a billing or a policy declaration sent to
the insured;
4. Would require the IC, in consultation with the Director of
the Department of Motor Vehicles (DMV), to report to the
Governor and the Joint Legislative Budget Committee by
October 1, 2008 on the feasibility and cost of having the
DMV collect the automobile insurance fraud-related
assessments in conjunction with the registration of motor
vehicles.
COMMENTS
1. Purpose of the bill. To increase the existing general purpose
AB 1401 (Aghazarian), Page 4
fraud assessment on insurers to support operations of the DOI's
Fraud Division, and allow the DOI to recruit and fill currently
unfunded peace officer positions.
2. Background . The general purpose fraud assessment on all
insurers was enacted in 1973, and at the time was $1,000. It
was adjusted to $1,300 in 2000. According to the DOI, if the
original assessment amount was adjusted for inflation, it would
be approximately $5,100, the maximum amount allowed by this
bill. As a result, current revenues have become insufficient to
fund approved levels of staffing authorized by the Legislature
in the Budget. The Fraud Division has been forced to leave 22
authorized positions unfilled. The increase in the assessment
in this bill will restore the Fraud Division funding to the
levels originally provided, once adjusted for inflation.
There are approximately 1300 admitted insurers to whom the
assessment would apply. The Fraud Division currently gets
approximately $1.7 million annually from the general assessment,
and would receive approximately $6.63 million, if the assessment
is increased to $5,100. The Fraud Division would be able to use
that money for any purpose, including administrative costs and
hiring
The Fraud Division gets considerably more revenue from the
special purpose assessments for automobile and workers'
compensation fraud. A total annual assessment of $1.80 per
automobile policy generated approximately $31.5 million in 2005.
An annual assessment on workers' compensation insurers, set
annually by the Fraud Assessment Commission, in 2005 brought in
approximately $36 million. Those moneys can only be used by the
Division for those specific purposes. Some must be distributed
as grants to district attorneys for prosecution of insurance
fraud.
There is nothing in current law that prevents insurers from
recouping the cost of general or special purpose assessments
from policyholders, and most do so. This bill would explicitly
grant authority to insurers to impose a surcharge on the
insurance policies to which the assessments apply, and would
require the amount of the surcharge to be separately stated on
either a billing or policy declaration sent to the insured.
Fee or Special Purpose Assessment ? All of the Fraud Division
assessments, including the general assessment and the automobile
and workers' compensation assessment "fees" are renamed in the
AB 1401 (Aghazarian), Page 5
bill as "special purpose assessments." Although they are
supportive of the increase in the fraud assessment in this bill,
the insurance companies are concerned that if characterized as a
fee, this assessment and the other special purpose fees, will
become subject to retaliatory tax liability in other states.
According to the insurers, California is a relatively high tax
state. Since retaliatory tax is the excess of tax burdens
imposed by a company's home state over the market state,
California's premium tax rates subject insurers doing business
in other states to retaliatory tax liability. Many states also
retaliate against "fees," and some do so on an item-by-item
basis. Since many states expressly exclude from retaliation
"special purpose assessments," domestic California insurers
doing business in those states will face reduced retaliatory tax
liability, if the fraud fee is converted to a special purpose
assessment.
The Reinsurance Association of America (RAA) has asked that the
bill be amended to exempt reinsurers from the general assessment
provision. According to the DOI, there are approximately 60
reinsurers admitted in California currently subject to the
$1,300 annual assessment. The reinsurers argue that because a
reinsurance transaction involves two sophisticated business
entities, it is not necessary to apply most consumer insurance
fraud laws to reinsurers. Reinsurers argue they have no direct
contact with consumers of insurance and are therefore not part
of the equation in which insurance fraud takes place.
3. Support . The Personal Insurance Federation of California
(PIFC), representing insurers who write over 50% of all personal
lines insurance sold in California, supports the increase in the
current assessment from $1,300 to $5,100 because the members of
PIFC take fighting fraud very seriously. Insurance fraud drives
up the cost of insurance for everyone in the state.
The Association of California Life and Health Insurance
Companies supports AB 1401 because it has long supported
increased fraud investigation at the DOI, and sees the bill as a
further step in protecting premium payers that includes enhanced
reporting and accountability measures to ensure the funds are
spent in the most cost effective manner.
The Pacific Association of Domestic Insurance Companies supports
this bill, and notes that California convicts more insurance
swindlers than any other state-one of every three insurance
fraud convictions in the U.S.
AB 1401 (Aghazarian), Page 6
4. Opposition . None received.
5. Suggested Amendment . Both this bill and SB 1038 (Committee on
Banking, Finance and Insurance) amend Insurance Code Section
1872.8. The provision in SB 1038 is considered a technical
change to the Code and was approved by this Committee on
consent. That bill is now on the Assembly Floor. Committee
staff suggests making the same correction in this bill to avoid
a subsequent chaptering out of that provision in SB 1038. In AB
1401, on page 3, lines 5-7:
Any district attorney who fails to submit an
application within 90 days of the commissioner's
deadline for applications by the deadline set by the
commissioner shall be subject to loss of distribution
of the money moneys .
POSITIONS
Support
21st Century Insurance
Association of California Life and Health Insurance Companies
California Chamber of Commerce
Department of Insurance (Sponsor)
Independent Maintenance Contractors Association
Pacific Association of Building Service Contractors
Pacific Association of Domestic Insurance Companies
Personal Insurance Federation of California
Oppose
None received
Consultant: Erin Ryan (916) 651-4102