California Insurance Enters Rugged 2021 Legislative and Regulatory Terrain

Client Alert

California lawmakers proposing changes in the state’s insurance laws face their first significant hurdles in the next two weeks. These bills must be set, heard and passed by the Insurance Committee in their house by May 7 (or sooner) to meet house of origin deadlines or risk becoming a two-year bill—meaning the bill will not come up for consideration again until 2022. The California Department of Insurance (CDI), the state’s primary insurance regulator, is also commencing its own review of new regulatory proposals, making this and the next few months a particularly important time for California’s insurers. Here Manatt provides a snapshot of various insurance policy proposals that will be at the forefront of legislative and regulatory deliberations this year.

Life Insurance

Under California law, life insurers must provide consumers with at least 30 days’ notice prior to lapse and termination of their policy, and life insurance contracts must contain a grace period of no less than 60 days for the policy owner to address the issue. In 2012, the California Legislature passed legislation that required life insurers to permit policy owners to designate at least one other person to receive notice before the lapse or termination of a policy for nonpayment. Recently introduced legislation by Assemblymember Low, AB 1498, would provide that the person designated by the policy owner to receive the notice may live at a different address. AB 1498 would also apply this change retroactively to life insurance policies issued prior to January 1, 2013. Insurers are opposed to AB 1498’s retroactivity, arguing that insurance policies are governed by the statutory and decisional law in force at the time the policy is issued. AB 1498 is set to be heard in the Assembly Insurance Committee on April 29, 2021.

Auto Insurance

CDI looks to have an especially heavy regulatory agenda in 2021, with numerous regulatory changes proposed by Insurance Commissioner Lara that are likely to affect consumers and the insurance industry. In auto insurance, as it did in 2020, CDI continues its efforts to compel insurers to refund insurance premiums to consumers affected by the COVID-19 pandemic. Earlier this year, CDI issued an order to require insurers to report by April 30, 2021, how they will return to consumers additional premiums that were “over-collected” in 2020. According to CDI, the rationale for its order is that “on average, insurance companies over-collected premiums due to the lower loss exposures during the pandemic and did not return enough premium to drivers in 2020.” It should be noted that as in last year’s directive, CDI’s 2021 order is silent about its regulatory authority to impose the requirement.

Another insurance issue brought to center stage by the insurance commissioner is the long-standing practice of “affinity group” auto discounts for California drivers. As the state’s landmark law on auto insurance, Proposition 103, plainly states, “Any insurer may issue any insurance coverage on a group plan, without restriction as to the purpose of the group, occupation or type of group.” Over the decades, group discounts have become widely available to various membership and occupational groups, including, for example, alumni associations, professional organizations, credit unions, police and firefighters, and union groups representing teachers and nurses. Critics of auto group discounts have argued that such programs unfairly subsidize affluent communities at the expense of lower-income communities. According to CDI data, drivers living in ZIP codes with average per capita income above $49,000 are more likely to receive auto group discounts than are drivers who live in ZIP codes with average per capita income of $22,500 or below.

In early February, CDI issued draft regulations intended to phase out existing auto group discounts and instead require insurers to extend auto group discounts to drivers who live in specific ZIP codes. Insurers argue that millions of drivers could lose their group discounts if the regulations are adopted, and policy change is likely to draw litigation, particularly on the question of whether CDI has the authority to restrict auto group discounts when California voters long ago approved broad discretion in the creation of such groups by enacting Proposition 103.

Wildfire Insurance

California’s wildfire crisis continues to headline public policy discussions as state policymakers attempt to address the issue of insurance availability and affordability in wildfire areas. While it is well-documented that homeowners’ insurance has been difficult to find in certain parts of California, more recently commercial insurance has also been difficult to obtain for farmers and winemakers in territories threatened by wildfires. In a recent Senate Insurance Committee hearing, insurers testified that CDI’s decision to pause approval of commercial coverage pending review of insurer data has not helped the availability of commercial insurance coverage. To help address the farm insurance coverage issue, Senator Rubio (Chair of the Senate Insurance Committee) is authoring SB 11 (sponsored by the California Farm Bureau), which would allow the California FAIR Plan (California’s property insurer of last resort) to cover farm risks moving forward. SB 11 was amended and then passed as a consent item by Senator Rubio’s committee on April 8. Other legislation, such as AB 1522 by Assemblymember Levine, proposes a far more sweeping approach, prohibiting insurers from canceling or refusing to renew residential and commercial insurance solely on the basis that the property is located in a high-risk wildfire area. AB 1522 has not been set for a committee hearing as of this writing, and has until May 7 to be heard and reported to the Assembly Floor if passed by the Assembly Insurance Committee.

Commercial Insurance

Business interruption coverage and civil authority coverage are both additional coverages businesses can purchase to insure against loss of income and to reimburse operating expenses for businesses after a covered event. A typical policy provision requires demonstration of physical damage to the policyholder’s business property (e.g., fire damage) and generally excludes losses resulting from communicable diseases or any viruses such as COVID-19. In 2020, many state legislatures, including California’s, attempted to pass legislation that would have included COVID-19 as a covered loss, but such proposals ultimately stalled. One of the primary arguments against the proposals is that they would be unconstitutional. The U.S. Constitution’s Contract Clause prohibits states from passing laws that impair the obligations of contracts (Article I, Section 10, Clause 1), and many of the legislative proposals in 2020 were to require retroactive coverage for losses related to COVID-19.

In 2021, California continues to consider making changes to business interruption insurance, with Assemblymember Ramos introducing AB 743. As proposed, AB 743 provides that COVID-19 cannot be excluded from business interruption coverage unless viruses are expressly stated as an exclusion, and the bill is drafted to apply retroactively to all business interruption policies in force on and after March 4, 2020. AB 743 has not been set for a hearing and it is unclear whether it has the votes to move forward at this point, but commercial insurers, as they were a year ago, are opposed to the measure on the basis of its retroactive application.

Workers’ Compensation Insurance

Lawyers representing injured workers and labor groups are sponsoring legislation, AB 1465 by Assemblymember Reyes, to create the California Medical Provider Network (CMPN) as a state-administered network of workers’ compensation medical providers. The rationale for AB 1465 is that it will lead to greater access to care for injured workers, as they will know which medical providers are available to them. The sponsors argue that having the CMPN will also encourage more medical providers to welcome workers’ compensation patients, and reduce the risk of employers having influence over the doctor a patient will see.

Under existing law, employers create medical provider networks (MPNs) and select medical providers to be part of the MPN. An injured employee is then required to choose his or her treating medical provider from the employer’s MPN. A coalition of employers and insurers is collectively opposing AB 1465 because, according to the coalition’s members, the quality of care for injured workers could actually plummet as medical providers who “seek to defraud or otherwise provide poor quality medical treatment to injured workers” are likely to be included in the CMPN.

Employers and insurers more broadly argue that AB 1465 increases costs—which is counterproductive as the business community attempts to climb out of the pandemic—and wipes away important prior reforms that were the subject of negotiations between labor and management. Given the robust support for and opposition to AB 1465 and significant policy changes for employers and injured workers, the bill is likely to be heavily debated and a difficult vote for policymakers. AB 1465 is set to be heard in the Assembly Insurance Committee on April 29, 2021.

What to Expect in 2021

While COVID-19 greatly curtailed the number of bills considered and ultimately enacted by the California Legislature in 2020, it seems likely that many proposals that didn’t “make the cut” last year will be fully considered this year, and a good number of them—including our highlighted bills—will be hotly debated in committee and outside the hearing process. The Senate and Assembly adjourn for this first year of the two-year session on September 15, and it will then be up to Governor Newsom to make the final decision on whether to sign or veto bills passed this year. In the meantime, the regulatory machinery for consideration of CDI’s non-legislative policy proposals is not subject to fixed deadlines this year. The process is gathering steam and should provide another interesting and highly contested public policy forum on insurance issues in the coming months.



pursuant to New York DR 2-101(f)

© 2024 Manatt, Phelps & Phillips, LLP.

All rights reserved