California "Fair Claims" Insurance Regulations Amendments Become Effective on August 30, 2006

On June 1, 2006, the California Insurance Commissioner’s office filed a notice of effective date of amendments to California’s Fair Claims Settlement Practices Regulations that have been in the works since 2003. 10 Cal. Code Regs., §§2695.1, et seq. As some of our clients may know, these amended regulations are part of the 2004 settlement between the Department of Insurance and the Surety Association of America stemming from the lawsuit entitled Personal Insurance Federation and The Surety Association of America v. John Garamendi, Los Angeles Superior Court Case No. 298284.

Some of the more significant changes that will be effective on August 30, 2006 include the following:

2695.1 – Preamble

Subsection 2695.1(c) was changed to eliminate the prior recognition of the unique nature of surety bonds as distinguished from insurance, which was cited in the Cates v. Talbot Partners [21 Cal.4th 28 (1999)] decision as one reason to decline to extend the "bad faith" tort damages theory to sureties. In its stead, a new subsection (c) provides:

(c) In recognition of both the unique relationship which exists under a surety bond between the surety, the obligee or beneficiary, and the principal, and the fact that the processing of surety claims is subject to the Unfair Practices Act, beginning with California Insurance Code Section 790, only sections 2695.1 through 2695.6, inclusive, section 2695.10, and sections 2695.12, 2695.13 and 2695.14, inclusive, shall apply to the handling or settlement of claims brought under surety bonds.

2695.2 – Definitions

Subsection 2695.2(s), defining "Proof of Claim," was broadened to the following:

"any evidence or documentation in the possession of the insurer, whether as a result of its having been submitted by the claimant or obtained by the insurer in the course of its investigation that provides any evidence of the claim and that reasonably supports the magnitude or the amount of the claimed loss."

Thus, "evidence" from a surety’s investigation, even though not in response to a particular claim (such as a principal’s books and records examination) is now included as "proof of claim."

2695.10 Additional Standards Applicable to Surety Insurance

Subsection 2695.10(b) was added requiring that all claim denials be in writing providing the claimant all factual and legal bases for denial within the surety’s knowledge. If the denial is based on a statute or bond provision, a full explanation of the bond provision or statute is required.

Subsection 2695.10(b)(1) was added, limiting a surety’s reliance on the principal’s conduct as an excuse for not determining a claim. It states as follows:

"A principal’s absence, non-cooperation, or failure to meet the bonded obligation shall not excuse unreasonable delay by the insurer in determining whether a claim should be accepted or denied."

Under Subsection 2695.10(b)(2), a surety’s right to rely on the principal’s position is also impacted as follows:

"While an insurer may consider all information provided by a principal, absent reasonable factual and/or legal bases for denying a claim, no insurer shall deny a claim based solely upon a principal’s protest of a claim or denial of liability for a claim."

Perhaps most significantly, Subsection 2695.10(g) was added to require the surety to inform claimants of applicable statutes of limitations or suit limitations periods. That section provides:

"Except where a claim has been settled by payment, every insurer shall provide written notice of any statute of limitation or other time period requirement upon which the insurer may rely to deny a claim. Such notice shall be given to the claimant not less than 60 days prior to the expiration date; except, if notice of claim is first received by the insurer within that 60 days, then notice of the expiration date must be given to the claimant immediately…."

This change alone is significant, and requires that sureties know the applicable statutes of limitations for various types of bonds and be in a position to articulate those limitations periods to claimants.

Timelines for Compliance

Additionally, the timelines for evaluating, responding, and paying claims have changed, in most instances, providing the surety less time to act than under prior versions of the regulations. The following chart summarizes these new deadlines:

TIME LIMITS

ACTION REQUIRED

CITATION

15 calendar days upon receiving notice of claim

Acknowledge receipt of notice of claim, provide claim forms, and begin any necessary investigation of claim

§2695.5(e)

40 calendar days after receipt of proof of claim

Accept or deny claim, in whole or in part, and affirm or deny liability, in writing, with notification that claimant can have matter reviewed by DOI.

§2695.10(b)

10 calendar days following affirmation of liability

Provide release to claimant

§ 2695.10(f)

15 calendar days of receipt of signed release

Tender payment to claimant

§ 2695.10(f)

15 calendar days following affirmation of liability

Tender payment to claimant, if release not required

§ 2695.10(f)

60 days prior to expiration of limitations period, or immediately if expiration is less than 60 days

Inform the claimant of the applicable statute of limitations or other suit limitations period

§ 2695.10(g)

Perhaps the most significant of these deadline changes is the reduction from sixty (60) to forty (40) days to admit or deny a claim after "proof of claim" is received.

Conclusion

In all, there are significant changes to the insurance regulations that affect sureties. So, sureties take note and be prepared to comply on August 30th!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.