The Insurance Code is the set of statutes enacted by the state legislature which regulate the business of insurance in California. The Commissioner does not have the authority to change the Insurance Code; only the state legislature has the authority to write or amend the Insurance Code.
The Department of Insurance and the Insurance Commissioner are a primary source of consumer protection activities in California, and the general purpose of the Code is defined by the four broad "powers" conferred on the Commissioner and the Department of Insurance:
Prevent insurer insolvency and prevent fraud in the conduct of the insurance business or by individuals.
Insure that policies are reasonably priced and widely available in most lines of insurance.
Establish procedures that guide the operation of insurance companies, and the activities of agents, brokers, and other licensees.
Provide the authority needed by the Insurance Commissioner to oversee insurance agents and companies.
The Insurance Code provides specific definitions for various persons, organizations, and the activities they conduct.
As used in this Code the word "shall" is mandatory and the word "may" is permissive, unless otherwise apparent from the context.
A living human being (as opposed to a business entity).
Mailing as Proof of Notice
Any notice required to be given to an insured may be mailed, postage paid, and addressed to the policyowner, insured, claimant, or beneficiary to be notified at his/her last known address of record. The written notice may also be provided by electronic transmission if each party has agreed. The affidavit of the person who mails or transmits electronically the notice, stating the facts, is sufficient (prima facie) evidence that the notice was mailed. The policyowner is responsible for notifying the insurer of address changes including any change of email address.
The person who undertakes to indemnify another by insurance is the insurer, and the person indemnified is the insured.
Any person capable of making a contract may be an insurer, subject to the restrictions imposed by this Code.
Any person, except a public enemy, may be insured.
A person authorized, by and on behalf of an insurer, to transact all classes of insurance other than life, disability, or health insurance, on behalf of an admitted insurance company.
A representation may be altered or withdrawn before the insurance is effected, but not afterwards. An applicant for insurance may correct a misrepresentation prior to the issuance of a policy. Once a policy is issued, and until a policy becomes incontestable, a material misrepresentation in the application may result in denial of a claim and/or rescission of the contract by the insurer.
A representation is false when the facts fail to correspond with its assertions or stipulations.
If a representation is false in a material point, whether affirmative or promissory, the injured party is entitled to rescind the contract from the time the representation becomes false.
Neglecting to communicate information that a party knows and ought to communicate, whether intentional or not.
Rescission is the termination of a contract from the beginning as if it had never existed. An insurer is entitled by law to rescind a policy in the case of:
Intentional or unintentional concealment of information material to the risk being insured
An intentional and fraudulent omission of matters proving the falsity of a warranty
Violation of a warranty
The Commissioner has authority to conduct examinations of an agent or insurer's books and records at any time.
Upon receiving a request for records, insurers and/or agents must deliver the records to the Commissioner within 30 days. If the requested files cannot be immediately furnished, on request the agent will be given an additional 60 days to provide the information. Failure to maintain the required files may result in administrative sanctions including fines and suspension or revocation of a person's license. Most administrative sanctions can only be issued following a public hearing into the conduct of the agent. A notice of hearing must be provided to the agent not less than 45 days in advance of the scheduled hearing, and must be accompanied by a pleading that informs the agent of the violations alleged, as well as the possible sanctions that may be applied.
There are also civil penalties enumerated for persons who furnish false information to the Commissioner not to exceed $100,000 per violation, as well as a $5,000 penalty for every 30-day period during which the person fails to comply with a request, or up to $10,000 if the person willfully refuses to deliver requested information, up to a maximum of $100,000.
Persons who transact insurance without being appropriately licensed may be issued a cease and desist order, carrying administrative penalties of up to $5,000 per day for each day a violation occurred, as well as a fine of up to 5 times the amount of money received by the unlicensed person for acting in a capacity which requires a license.
The Commissioner also has authority to issue cease and desist orders relative to unfair acts and practices enumerated in the Code. Committing any act considered an unfair method of competition or an unfair act or practice recognized by the Code may result in an administrative fine of $5,000 for each such act, up to $10,000 per act when determined to be a "willful" violation or committed with such frequency that it may be considered a "general business practice" of the person. If a person is issued a cease and desist order, failure to cease the prohibited act may result in a $5,000 fine, or up to $55,000 for willful violation.
Regulation of admitted and non-admitted insurers
An admitted insurer is one that has complied with the laws of this state to become authorized to transact insurance. An admitted insurer has been issued a Certificate of Authority from the State of California. Admitted insurers are also known as "standard" insurers because they sell policies for the standard market, which covers average or better than average risks. When risks are too high for the standard market, they must be covered by other types of policies, such as surplus lines or assigned risk.
A non-admitted insurer is not authorized to transact insurance in this state and has not been issued a Certificate of Authority. Excess and Surplus lines insurance for risks that are too high for the standard market can be placed through a non-admitted insurer. An Excess and Surplus lines insurer writes standard coverage in a state where the insurer is unlicensed.
Some risks can be placed only with non-admitted insurers. Such risks include:
Shipowner interest, international maritime transportation
Marine builder's risks, dry docks
Aircraft or spacecraft insurance
Property or operations of railroads engaged in interstate commerce
These risks may only be placed by a special lines surplus lines broker. A special lines surplus lines broker is subject to the same fees and requirements. If a person is licensed as both an insurance broker and special lines surplus broker, only one fee can be collected.
A licensed surplus line broker may accept business from any other originating licensee duly licensed for the type(s) of insurance involved, and may compensate those licensees.
A surplus lines broker may not:
Issue a binder or any other evidence of coverage without the prior written approval of the insurer
Place auto insurance with a non-admitted insurer unless the applicant has first been rejected by the standard market and the California Automobile Assigned Risk Plan (CAARP)
Each surplus lines broker must ensure that a diligent search is made among admitted insurers actually writing the particular type of insurance in this state before procuring the coverage from a non-admitted insurer. Within 60 days of placing the coverage with a non-admitted insurer, the broker must file a report with the Commissioner detailing the efforts made in trying to place the coverage with an admitted insurer.
Potential Consumer Consequences
Consumers should be aware of the following potential consequences of being issued a policy by a non-admitted insurer:
Non-admitted insurers are not subject to the financial solvency regulation and enforcement that applies to California licensed insurers.
Non-admitted insurers do not participate in any of the insurance guaranty funds created by California law, and therefore, these funds will not pay the insured's claims, or protect the insured's assets if the insurer becomes insolvent and is unable to make payments as promised.
Certificate of Authority
A person cannot transact any class of insurance business in this state without first being admitted or authorized by securing a Certificate of Authority from the Commissioner. The certificate will be issued once the applicant meets the necessary qualifications.
The penalty for unlawfully acting as an insurer without a Certificate of Authority is imprisonment (state or county jail) not to exceed 1 year, and/or a fine not to exceed $100,000
The law requires insurers to be sufficiently capitalized. Insolvency means any impairment of minimum "paid-in capital" or "capital paid-in" required of an insurer for the classes of insurance, which it transacts. This means that there is an inability for a company to meet its financial obligations when they are due.
An insurer cannot escape the condition of insolvency just by being able to provide for its liabilities and reinsure outstanding risks. An insurer must not only provide for all its liabilities, but must also possess minimum paid-in capital requirements. The Paid-in Capital requirements are as follows:
For foreign mutual insurers without outstanding capital stock, the value of its assets that is in excess of all expenses, taxes, indebtedness and reinsurance as provided by law. The paid-in capital of available cash assets must amount to at least $200,000.
For domestic insurers, the value of its assets that are in excess of the sum of its liabilities for losses reported, expenses, taxes, and all other indebtedness or the aggregate par value of its issued shares of stock, including treasury shares, whichever is lower.
For the purpose of computing paid-in capital or capital paid-in, shares of stock are not taken as liabilities.
Examination of Insurers - The Commissioner conducts examinations on every domestic insurer in this state not less frequently than every 5 years.
Rehabilitation and Liquidation - Regardless of the regulations and controls, a few insurers find themselves in financial difficulty. When this happens, the Commissioner will step in and attempt to help the insurer become solvent again.
Conservation of Insurers
The Commissioner may file an application with the superior court, and the court may issue an order for the Commissioner to become Conservator of either a financially impaired or insolvent insurer, and be vested with its assets, books, records, property and conduct business, if any of the following conditions exist:
The person or entity has refused to submit books, papers, accounts, or affairs.
The person has neglected or refused to observe an order of the Commissioner to make good any deficiency in its capital or reserve.
The person is found, after an examination, to be in a hazardous financial condition.
That any officer or attorney in fact has embezzled, sequestered, or wrongfully diverted any of the assets of the person.
That a domestic insurer does not comply with the requirements for a Certificate of Authority, or its Certificate of Authority has been revoked.
Summary Seizure - If it appears to the Commissioner that irreparable loss and injury to the property and business of any person engaged in the insurance business has occurred or is about to occur unless acting immediately, the Commissioner will, without notice and before applying for a court order, take possession of the property, business, books, records and accounts and retain possession subject to the issuance of the court order. It is a misdemeanor to refuse to deliver books, records, or assets to the Commissioner after a seizure order has been issued in an insolvency proceeding. This is punishable by a fine of up to $1,000 and/or imprisonment for up to 1 year.
Liquidation - If it is not prudent to proceed as a conservator, the Commissioner may apply to the court and after a full hearing the court may order the winding up and of the insolvent insurer with the Commissioner as liquidator.
The Unfair Trade Practices defines unfair and deceptive acts and unfair methods of competition. These practices apply to all persons engaged in the business of insurance.
The following trade practices are considered unfair or deceptive and are prohibited:
Misrepresentation - Making, issuing, or circulating any estimate, illustration, circular, or statement misrepresenting the terms of any policy issued; using any name or title misrepresenting the true nature of any policy or class of policies; misrepresenting the financial condition of any insurer; or making any misrepresentation to a policyholder insured by any company for the purpose of inducing the policyholder to lapse, forfeit, or surrender a policy.
Twisting - A form of misrepresentation involving replacement of existing insurance which induces a person to lapse, forfeit, or surrender an existing policy, based on an unfair comparison of features or concealment of material disadvantages of a proposed policy.
Rebating - Returning a portion of the agent's commission or anything of value to an insured as an inducement to buy insurance. It is illegal for life and health insurance agents to rebate.
Defamation - Making or disseminating before the public in any newspaper, publication, or advertising device, any statement containing any assertion, representation, or statement with respect to the business of insurance, or with respect to any person in the conduct of insurance business, which is untrue, deceptive, or misleading.
Boycott, Coercion or Intimidation - Entering into any agreement that would result in an unreasonable restraint of, or monopoly in the business of insurance.
False Financial Statements - Filing with any supervisory or other public official any false statement of financial condition of an insurer with intent to deceive.
False Entries - Making any false entry in any book, report, or statement of any insurer with intent to deceive any public official to whom the insurer is required by law to report, or who has authority by law to examine its condition or into any of its affairs, or omitting to make a true entry of any material fact pertaining to the business of the insurer in any book, report, or statement of the insurer.
Unfair Discrimination - Making or permitting any unfair discrimination between individuals of the same class and equal expectation of life in the rates charged for any contract of life insurance or life annuity, in the dividends or other benefits payable, or in any other of the terms and conditions of the contract.
Advertising of California Insurance Guarantee Association - Making or disseminating in any publication or other advertising device a statement that a named insured or specified insurers are members of the California Insurance Guarantee Association and are insured against insolvency. All admitted insurers are required to be covered under the association, therefore, advertising membership is not permitted.
Deceptive Advertising - Advertising insurance that an insurer will not sell. An intentional violation is considered a misdemeanor punishable by a fine of up to $10,000. This does not prohibit an insurer from advertising insurance products it is licensed to sell in this state where the product is not available as long as the unavailability is disclosed. This does not apply to advertisements by an insurer where the advertisements are broadcast and originate from outside this state. This also does not apply to any insurer that refuses to sell a policy of insurance on the basis of its underwriting guidelines.
The Commissioner has the power to investigate the affairs of any person engaged in the business of insurance to determine whether such person has been or is engaged in any unfair method of competition or unfair or deceptive act or prohibited practice. If it is believed the person has violated a trade practice, the Commissioner will issue a statement of charges, a statement of potential liability for civil penalties, a show cause order as to why a cease and desist should not be issued, and a 30-day notice of a hearing.
If the charges are justified, a civil penalty not to exceed $5,000 for each act will be assessed. If the violation is willful, the maximum penalty is $10,000 for each act. A cease and desist order will be placed requiring the individual to refrain from engaging in the prohibited acts. Violation of a cease and desist order imposes a penalty of up to $5,000 per violation or a maximum penalty of $55,000 if the violation is willful. Subsequent violations will lead to suspension or revocation of a license.
Every licensee's claim files are subject to examination by the Commissioner at all times. Claims files are required to contain all documents, notes and work papers, including copies of all correspondence, which reasonably pertain to each claim in such detail that pertinent events and the dates of the events can be reconstructed, and the licensee's actions pertaining to the claim can be determined.
Insurers are required to maintain claim data so that it is accessible, legible, and retrievable for examination, and must be able to provide the claim number, line of coverage, date of loss, date of acceptance, date of payment, date of denial or closing without payment. This data must be available for all open and closed files for the current year, and the 4 preceding years. Licensees must also record the date the licensee received, transmitted, or mailed every material and relevant document in the file, or otherwise processed anything relevant to a claim.
It is an unfair practice for any insurer to discriminate in the investigation or settlement of a claim on the basis of a person's age, race, gender, income, religion, language, sexual orientation, ancestry, national origin, physical disability, or upon the territory of the property or person.
Unless the insurer requires additional information to determine liability for a loss, the insurer is generally expected to either affirm or deny a claim within 40 days of notice of the loss. This time limit does not apply to disability income or health insurance. When a claim cannot be resolved within 40 days, the claimant must be notified of this fact and, as discussed previously, the insurer must continue to communicate the status of the claim no less often than every 30 days.
When the insurer approves the claim, in whole or in part, and when necessary, upon receipt of a properly executed release, the insurer is required to make payment to the claimant or an assignee, or take action to perform its claim obligation within 30 days. Disability income insurance claims payments must be made at least once every 30 days until the insurer's obligation to pay claims has ended.
No admitted insurer can fail to accept an application or cancel insurance under conditions less favorable to the insured, except for reasons that apply to all persons of the same marital status, gender, race, color, religion, national origin or sexual orientation. No admitted insurer can fail to accept an application or cancel insurance under conditions less favorable to the insured, except for reasons that apply to all persons of the same marital status, gender, race, color, religion, national origin or sexual orientation. An individual or group life, annuity, or disability insurer may not refuse to insure, or refuse to continue to insure, or limit the amount, extent, or kind of coverage available to an individual, or charge a different rate for the same coverage solely because of a physical or mental impairment, except where the refusal, limitation or rate differential is based on sound actuarial principles or is related to actual and reasonably anticipated experience. "Physical or mental impairment" is any physical, sensory, or mental impairment which substantially limits one or more of that person's major life activities. The Commissioner will specify the manner and type of records to be maintained by those licensees acting as insurance agents and brokers and the location where the records must be kept. Life and Disability insurance agents must maintain records in their place of business for at least 5 years and must be open to inspection or examination by the Commissioner at all times. Original (or certified copies) must be delivered to the Commissioner within 30 days of request.
Records must be kept by agents for at least 5 years following actual policy delivery, or 5 years from the date of application if no policy is issued. The records must include names, dates, amounts and policy numbers of each transaction. The records are composed of all of the following:
The original application for each policy sold in this state
A record of insurance policies issued and premiums received
Production records indicating the policies sold by each agent in the past 5 years
Record of commissions paid and to whom
Records identifying any agent other than the agent on the application who handled any portion of an insurance transaction and who was not compensated
Correspondence or written solicitations sent to a prospective insured
Correspondence or notices of termination or nonrenewal of a policy
The written comparison of benefits, limitations and exclusions of the existing policy to the proposed new coverage
Correspondence between the policyholder or prospect and the agent or insurer
Outline of coverage or disclosure statement
Correspondence of any person acting on behalf of the policyholder or prospect and the agent or insurer
In the case of broker-agents who have authority to maintain trust accounts for the collection and distribution of premiums for property & casualty insurance, bank records, including periodic statements of an account supplied by the bank, records of all deposits, cancelled checks, and records of withdrawals, must be maintained at all times.
Agents have a duty to carefully determine the insured's needs and suitability. Failing to meet these needs when making a recommendation can affect the insured's coverage or leave them without coverage due to the agent's neglect. The agent can be held legally responsible for neglect, errors, or omissions when making customer recommendations.
E&O insurance is used for the purpose of protecting an agent from this legal liability and provides coverage for legal defense and settlement costs up to a limit. Errors and Omissions insurance is usually offered with a minimum limit of liability of $1 million. Policies usually include a significant retention (or deductible) of $2,500 or $5,000.
Most E&O policies are issued on a "claims made" basis, meaning the policy covers claims which arise while the policy is in force, and usually requires continuous coverage from the time of the claim to the time of adjudication. A "tail" provision may be added to cover acts which occurred prior to the inception of the policy.
E&O policies also provide limited protection for the negligent acts of an agent's unlicensed employees. But E&O policies never provide coverage for fraud, illegal activities, or criminal acts of the agent or an employee, nor does it provide protection for liability or casualty losses which are normally covered by a commercial liability policy, such as personal injury, property damage, or torts such as libel and slander. Misuse of client funds is also excluded.