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Several bills signed by Gov. Arnold Schwarzenegger in 2004 enact changes to insurance industry practices and coverages in the state. New laws related to special investigative units, workers’ compensation and health and auto insurance impose noteworthy changes. Much of the year’s insurance-related legislation was aimed at reducing fraud in general and, more specifically, in the areas of workers’ compensation and health insurance. The insurance industry will likely feel the impact of new legislation of general applicability that bolsters California’s consumer privacy protections. Practitioners should also take note of significant changes in 2004 to the regulations for fair claims settlement practices, which affect claims processing for the vast majority of consumer policies. � Special investigative units Every insurer admitted in California is required by statute to maintain a special investigative unit (SIU) to investigate possible fraudulent claims. AB 1227 adds teeth to the SIU requirement through � 1875.24 of the Insurance Code, which establishes a notice of non-compliance and imposes new reporting obligations and penalties for inadequate SIUs. The statute requires the insurance commissioner to issue a notice of non-compliance to suspected offenders that describes the manner and extent to which the noncompliance is believed to exist. The new law also specifies a reasonable time within which the insurer must correct the deficiency. When an insurer receives notice of noncompliance with the SIU regulations, it has three options: (1) establish that the noncompliance does not exist; (2) request a hearing; or (3) enter into a consent order with the commissioner to correct the noncompliance. Once an order requiring compliance is issued — either through a consent order or one issued by the commissioner after a hearing — the insurer must comply or face a civil penalty of up to $10,000 for each day that the insurer fails to comply with the order. � Workers’ compensation California’s workers’ compensation law has undergone substantial changes in recent years, with 2004 marking the probable apex in reform with the passage of SB 899. Several other bills enacted last year address fraud in workers’ compensation. Because SB 899 was passed as an urgency act, some of its provisions went into effect immediately upon the governor’s approval in April 2004. The remaining provisions went into effect on July 1, 2004, and Jan. 1, 2005, as specified in the statute. The legislation was primarily designed to achieve cost savings for California employers. Two key elements of the bill, which cuts a wide swath across the state’s Labor Code, are the creation of medical provider networks and implementation of a permanent disability schedule. SB 899 makes significant procedural and substantive changes to the penalties for unreasonable delays in payment of claims. Prior legislation imposed a penalty of 10 percent on the entire amount of benefits paid, including amounts that are timely paid. The new rules impose a 25 percent penalty on the amount of compensation that is unreasonably delayed or $10,000, whichever is less. Employers who discover potential violations before the employee claims a penalty may pay a self-imposed penalty of 10 percent if it is paid within 90 days of the discovery date. The new penalty legislation also specifically provides that it creates no civil cause of action, maintaining California’s exclusive remedy in workers’ compensation. The Legislature also gave employers and authorities new tools to combat workers’ compensation fraud. Under AB 2866 (codified in Insurance Code � 1871.9), the Department of Insurance will now maintain a public Web page that posts information relating to the case of any individual convicted of a violation of any insurance fraud provisions that involve workers’ compensation insurance, services or benefits. In addition, the list of government agencies authorized to request that an insurer release relevant information deemed important to a workers’ compensation fraud investigation under Insurance Code � 1877 was expanded to include, among other authorities, the Department of Corrections, any city attorney whose duties include criminal prosecutions and any law enforcement agency investigating workers’ compensation fraud. � Health insurance Several pieces of legislation enacted in 2004 affect health care coverage in California. For example, AB 254, which amends � 1375.621 of the Health & Safety Code and � 10116.5 of the Insurance Code, eliminates “senior” state-only COBRA. Prior law required that any health care plan issued on or after Jan. 1, 1999, that was subject to COBRA continuation offer specified health care coverage to former employees who were at least 60 years old at the time of their termination. AB 254 eliminates this benefit for those who do not meet the eligibility requirement prior to Jan. 1, 2005. The Legislature targeted insurance fraud in the health care industry with a law focusing on health care professionals who facilitate fraud. AB 2835, which amends � 810 of the Business & Professions Code, provides that a health care professional’s license may be revoked or suspended if that person engages in referrals, solicitations or acceptances with knowledge or reckless disregard that the individual being referred, solicited or accepted, or the individual making the referral, solicitation or acceptance, intends to commit insurance fraud. Finally, AB 2759 offers consumers some protection against the loss of individual health insurance benefits. Insurers must now continue to provide coverage to individual subscribers or policyholders even after the insurer stops offering individual coverage in the state as long as the insurer continues to offer group coverage in the state. These changes can be found in Health & Safety Code � 1366.3 and Insurance Code � 10127.17. � Automobile insurance Automotive insurers also saw changes in 2004. On the business side, revisions to � 1861.16 of the Insurance Code relieve insurers from the obligation to offer “good driver” discount policies issued by other insurers within a common ownership group under certain conditions. For example, this would apply to the business operations of insurers that are independently operated and directed. On the consumer side, AB 2677 added � 672 to the Insurance Code, which should make it easier for consumers to obtain quick and accurate cost estimates for personal automobile insurance. The statute requires insurers to maintain a toll-free telephone number or offer an online Web site through which consumers may obtain estimates for the insurer’s lowest priced personal automobile insurance at the limits the consumer has requested and for which the consumer is eligible. � Privacy While not specifically targeting the insurance industry, legislation expanding consumer privacy safeguards will affect insurance companies that maintain electronic records, including personal information about California residents. Under existing law (Civil Code � � 1798.29 and 1798.84), businesses are obligated to notify consumers if a breach of security may have resulted in the disclosure of electronic records containing the individual’s “personal information,” which is defined as an individual’s name along with either a Social Security number, driver’s license or California ID number or a credit card number. AB 1950, which added � 1798.81.5 to the Civil Code, further obligates businesses to implement and maintain reasonable security procedures to protect personal information from unauthorized access or disclosure. The statute also requires businesses that share personal information with third parties to require by contract that the third party also implement reasonable security practices. Privacy legislation of this type is pertinent to insurers as they become more equipped to maintain records in electronic form. For example, legislation passed in 2004 amends � 1871.3 of the Insurance Code to allow insurers to retain automobile theft records in electronic form rather than requiring hard copies. These records include settlement checks, claim forms and police reports. As more insurers begin to maintain electronic copies of documents, legislation such as AB 1950 will have a significant impact on the insurance industry. � Revisions to fair claims settlement practices regulations The California Insurance Code prohibits certain specifically identified claims settlement practices that have been deemed unfair. The Insurance Code also authorizes the Department of Insurance to issue regulations covering fair claims settlement practices aimed at governing the processing of insurance claims. These regulations were amended in 2003 but a lawsuit prevented their immediate implementation. In the wake of a partial settlement of that suit, certain of those amendments went into effect on Oct 4, 2004, and can be found in � � 2695.1-2695.13 of Title 10 of the California Code Regulations. The 2004 amendments broaden the applicability of the regulations and impose new fair settlement standards. For example, the regulations now apply to home protection contracts and home protection companies as well as to the California Earthquake Authority. Claims arising from life and disability insurance policies are no longer exempt from insurers’ 15-day claim response obligations. Insurers are now expressly prohibited from discriminating on the basis of age in their settlement practices. Insurers are also required to notify claimants in writing that a claim may be reviewed by the Department of Insurance for a partial denial of a claim, rather than just total denial of a claim. If an insurer intends to pursue subrogation of a first-party claim, it must provide notice to the insured. Any subrogation claim must include any deductible that the insured was required to pay, and insurers must share subrogation recoveries proportionately with the first-party claimant. The amended regulations also provide additional rights to insureds under first-party residential and commercial property insurance policies. An insurer can no longer require that the insured have the property repaired by a specific individual or entity. Also, if settlement is based on a written estimate prepared for the insurer, the claimant must be supplied with a copy of all documents upon which the settlement is based. Medical insurers that require pre-authorization of non-emergency medical services must give authorization immediately and no more than five calendar days after the request for authorization. The regulations prohibit a pre-authorization requirement for emergency medical services. The 2004 amendments also affect claims practices that are specific to automobile insurance policies. Bruce D. Celebrezze, a partner at Sedgwick, Detert, Moran & Arnold, leads the firm’s insurance coverage and bad faith litigation group in San Francisco. Erin Adrian, an associate at the firm, contributed to this article.

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