Study Guide

1. Definition of Insurance (CIC 22)

Statutory definition: insurance is "a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event."

Person (legal) = an entity acting on its own behalf, accepting legal/civil responsibility, contracting in its own name — individuals, associations, organizations, corporations, partnerships, and trusts.

2. Insurable Events (CIC 250)

"Any contingent or unknown event, whether past or future, which may damnify a person having an insurable interest, or create a liability against him, may be insured against."

3. Reinsurance (CIC 620)

One insurer indemnifies another for part/all of its liabilities. Purpose: protection against catastrophic losses.

4. Classes of Insurance (CIC 100–120)

20 regulatory classes exist. Key definitions for the exam:

1. The Insurance Policy (CIC 380)

The insurance policy = the written instrument setting forth the contract of insurance.

2. Six Required Specifications (CIC 381)

3. Key Legal Terms & Distinctions

Warranty Details (CIC 440–449)

• No special wording needed to create a warranty.
• Express warranty = written in policy → automatically part of contract.
• Implied warranty = unwritten, presumed from circumstances.
• Created at or before execution; not limited by time (past, present, future, or combination).

Concealment — what does NOT need to be disclosed (CIC 330–339)

• Known information / information that should be known
• Information the other party waives
• Information excluded by a warranty and not material to the risk
• Information excepted from insurance and not material to the risk
• Information based on personal judgment

Materiality (CIC 334)

Example: concealing a recent heart attack has greater materiality impact than misstating age by 5 years — materiality is about impact on the decision, not the type of fact.

Representations & Misrepresentations (CIC 350–361, 780–784)

A representation is false when the facts fail to correspond with its assertions. A material misrepresentation would alter the underwriting decision if discovered. If material AND intentional → fraud.

4. Rescission (CIC 331, 338, 359, 447)

An injured party may rescind for:

1. A false material representation (effective from when the representation became false)
2. Concealment (regardless of intent)
3. Violation of a material warranty or other material provision

Burden of proof: insurer must prove the omission was intentional AND done to obtain insurance fraudulently.

5. Fraud Penalties

Health care fraud estimate: 3–10% of costs, conservatively >$53 billion/year (Coalition Against Insurance Fraud).

1. Distribution Systems

2. Producer Licensing

"Transacting insurance" = soliciting, negotiating, executing, or handling resulting transactions.

3. Federal Prohibited Persons (18 U.S.C. §§1033–1034)

Applies to insurance business affecting interstate commerce.

1033 waiver = written consent from a state insurance official letting a disqualified felon work in insurance — must specifically cite 18 U.S.C. 1033.

1. Agents vs. Brokers

2. Life Settlements

Life settlement = selling a no-longer-needed policy to a third party for cash. Seller's life expectancy must be more than 1 year (distinguishes from viatical settlements, for the terminally ill).

3. Acting Without Appointment

• Insurer requires all agents appointed (captive) → unappointed agent can't solicit/submit applications.
• Insurer doesn't require it → unappointed agent can present proposals; client payments go to the insurer, not agent; if a policy issues, insurer is deemed to have appointed the agent and must file notice with the Commissioner within 14 days.

4. Solicitors

• Assists a P&C agent/broker with non-life/disability/health insurance.
• Cannot simultaneously hold an agent/broker license.
• Can work for multiple producers at once.

5. Agent's Errors & Omissions (E&O) Insurance

• Covers negligent errors (done wrong) or omissions (not done). Highest-risk moments: sales interview & policy delivery.
• Claims-made (modern trend) vs. occurrence (older, requires insured's consent for out-of-court settlement).
• Deductibles usually $500–$1,000 per claim; renews annually.

1. Nonadmitted Insurers & Surplus Lines (CIC 703)

Nonadmitted insurer = not licensed/present in CA; represented only via surplus lines brokers.

2. Free Insurance Ban (CIC 777.1)

Illegal to give free insurance as an incentive for other business → up to 1-year suspension/revocation.

Exceptions: newspaper subscriptions, credit union shares, product-performance guarantees, title/life/disability insurance paying off debt on death/disability, attorney services, motor club services (towing, roadside, bail bond, DMV).

3. Names, Advertising, Records

Disapproved name words include: advisor, analyst, assurance company, department, government, investment, national, state, trust, underwriter / affordable, cash, cheap, discount, elder, expert, legal, protection, secure, specialist.

4. Fiduciary Duty & MGAs

Diverting fiduciary funds = theft. Producer must remit premiums (minus commission) and hold funds in a separate trustee account.

MGA = negotiates ceding reinsurance / manages insurance business as insurer's agent.

5. Appointment Rules

• Insurer must file notice of appointment within 14 days; licensee becomes legal / insurer becomes liable as of the date the insurer signs.
• Inactive license (no appointments) ≠ lost license — reactivates on next appointment.
• Licensee may surrender license anytime (CIC 1708).

6. License Denial / Suspension / Termination

• "Convicted" includes nolo contendere (no contest) pleas.
• All convictions must be disclosed, even if dismissed/expunged/probated — failure to disclose = automatic denial.
• Cheating on the license exam → barred from exams/active license for 5 years.
• License auto-terminates on death, org dissolution, or partner changes (unless filed within 30 days).

7. Continuing Education

• 24 hours per 2-year term, incl. 3 hours ethics (Life, A&H, Property, Casualty, Personal Lines).
• Multi-license holders: one set of CE satisfies all held license types.
• Carryover: only 2nd-year hours carry over, capped at the renewal requirement.
• Exempt: 30 continuous years licensed in CA and age 70+.
• LTC training: 8 hrs/year for first 4 years, then 8 hrs/2-year term (counted within, not added to, overall CE).

8. Ethics

Client's interest first; competence; needs-based recommendations; plain language; confidentiality; obey the law; no unfair competitor remarks.

1. Admitted vs. Nonadmitted (CIC 24-25)

Nonadmitted business limited to: reinsurance of an admitted insurer, marine/navigation perils, aircraft/spacecraft, interstate railroad property — only via a surplus lines broker.

2. Domestic / Foreign / Alien (CIC 26-27, 1580)

5 U.S. territories (still "foreign," not alien): American Samoa, Guam, Northern Mariana Islands, Puerto Rico, U.S. Virgin Islands.

3. Stock vs. Mutual

1. Free-Look / Right to Cancel

Every individual life policy or annuity must state on the cover page/policy that the owner can return it within a set period for a full refund, no questions asked. Rescission means the policy is treated as if it never existed.

Age 60+ Notice Requirement

• Must appear on cover page/policy jacket in 12-point bold, with 1-inch margin on all sides, or on an affixed sticker.
• Applies to individual life policies/annuities — excludes variable contracts and modified guaranteed contracts.
• The phrase "known as a surrender charge" may be omitted if no surrender charges exist.

2. Replacement Rules (CIC 10509–10509.09)

Replacement = purchasing a new individual life/annuity contract that causes an existing policy with another insurer to be lapsed, surrendered, terminated, forfeited, converted (e.g., a nonforfeiture option), or have benefits reduced.

Replacement Rules Do NOT Apply To:

• Credit life insurance
• Group life insurance or group annuities
• Same-insurer conversions/changes (internal policy change)
• Replacing insurer = existing insurer (same-company transaction)

No-Agent Sales (direct response/internet)

• Insurer must still present the replacement disclosure as soon as replacement is suspected, even if that means at policy delivery (e.g., via mail).
• Must still ask on the application about existing life insurance/replacement intent.
• Not using agents does not excuse replacement duties.

Burden of compliance falls on the replacing insurer — must ensure its agents comply, and must return incomplete applications/disclosures to the agent.

3. Agent Duty & Liability Pitfalls

• If a client insists on canceling early against advice: get a signed letter stating the client is acting against the agent's advice (protects the agent from liability).

Replacement considerations to weigh (common distractor topics):

• New policy may cost more (client is older, potentially less insurable)
• Incontestability period may restart with the new insurer — check if the new company honors the already-met period
• Premium guarantees may differ between policies
• Surrender charges on the current cash-value policy — consider a 1035 exchange

4. Penalties for Replacement Violations

5. Required Cover-Page Disclosures (CIC 10127.10)

Non-variable individual life/annuity policies need the standard 30-day/surrender-charge notice, in 12-pt bold, with 1-inch margins, on the cover page/jacket or a sticker.

Variable annuity/life/modified guaranteed contracts require an expanded notice covering: cancellation policy, investment restrictions, refund policy, and penalty/surrender charge.

6. Investment Handling During Free-Look (CIC 10127.10)

During the 30-day free-look for a variable annuity, the premium defaults to fixed-income/money-market investments unless the purchaser specifically directs it into the stock/bond portfolio underlying the contract.

Core Definition

• Anyone can insure their own life — no insurable interest issue (the owner controls the policy: increase, decrease, cancel, change provisions).
• To insure someone else's life, you need insurable interest and that person's consent.

The 4 Test Questions

1. Would the insured's death cause the policyowner (or dependents) financial hardship?
2. Does the insured owe the policyowner money or economic support (current/future)?
3. Do they share a close relationship with common economic/familial goals?
4. Do they have common ownership interest in property?

Statutory List — Every Person Has Insurable Interest In:

Memory Device: "Blood and Business"

Insurable Interest vs. Beneficiary Designation

Applies across insurance types generally (e.g., you can't insure a car you don't own — same ownership-interest logic).

⏰ Timing Rule — Highest-Yield Exam Trap

Application note: if the relationship between insured and proposed owner isn't obvious (e.g., different last name/address), the agent should note the relationship on the application so the underwriter can verify insurable interest exists.

1. Education Requirements (CIC 1749c)

Accident & health agents who want to sell 24-hour care coverage must complete an approved CE course on workers compensation and general principles of employer liability.

2. 24-Hour Coverage (CIC 1749.02)

24-hour coverage = an employee is covered by two separate policies together: a workers compensation policy (on-the-job injuries) plus a medical/disability policy (off-the-job injuries/illness) — combined, the employee is covered 24 hours a day, and the time/place of injury doesn't matter.

Disadvantages: government regulation; difficulty coordinating WC benefits with the group/individual health plan; possible overlap between the two plans; confusion over deductibles, coinsurance, and copayments.

3. Medical Expense Insurance — Regulation of Providers (CIC 740)

Health care services plans that stay under CDI include those run by nonprofit agencies, schools/colleges/universities, public agencies (for employees/students/faculty), and self-funded employer plans.

Pre-Existing Conditions

Pre-existing condition = a condition for which medical advice/treatment was recommended or received within 6 months preceding the policy's effective date.

Free-Look / Return of Policy (CIC 10232.7)

Home Care Required Benefits (CIC 10232.8)

For tax-qualified policies, benefits trigger when the insured is chronically ill: impaired in at least 2 of 6 activities of daily living (ADLs), or has a severe cognitive impairment. Assessment must be by a health care practitioner who is NOT an employee of the insurer.

Prohibited Provisions (CIC 10233.2)

• Must be guaranteed renewable for life; can only be cancelled/nonrenewed for nonpayment of premium.
• No new waiting period on a same-insurer replacement/conversion — except a benefit increase may get a temporary exclusion of up to 6 months.
• Cannot limit benefits to skilled nursing only, use vague "usual and customary" language, or raise/cancel a spouse's coverage after divorce.
• Additional specific benefit must be ≥5× the daily facility benefit.
• Home/community care daily benefit must be ≥ the greater of $50/day or 50% of the facility-care benefit.

Replacement Policies (CIC 10233.3, 10234.95, 10234.16)

New contract cannot deny pre-existing conditions or restart an already-satisfied elimination period; insurer cannot reduce payment for expenses already paid out-of-pocket.

Replacement notice to the applicant must cover: whether the decision could be a good one; that pre-existing conditions might not be covered immediately by the new policy; to check with the existing insurer; and that nondisclosure of medical history can void the contract (with full premium refund).

Outline of Coverage (CIC 10233.5)

Marketing Standards & HICAP (CIC 10234.93)

HICAP = Health Insurance Counseling and Advocacy Program — free help for consumers evaluating LTC policies. Insurers must disclose HICAP's existence, provide a current Area Agencies on Aging list, and give the Dept. of Aging's shopper's guide. Prohibited: twisting, high-pressure tactics, and undisclosed cold lead advertising.

1. Medicare Supplement (Medigap) Plans (CIC 10194.2–10194.3)

Core benefits (in every plan, incl. A): hospital co-pays days 61–90; lifetime reserve days 91–150; 365 extra days after Medicare is exhausted; first 3 pints of blood; Part B coinsurance (20%).

2. Guaranteed Issue & Anti-Discrimination

During open enrollment, the insurer must: sell the policy (guaranteed issue); cover pre-existing conditions after 6 months; not charge more for past/present health problems. (CIC 10194.8) bans unfair treatment of any person/class of risk in sale or pricing.

3. Medigap Replacement (CIC 10197)

• No one may cause an unnecessary replacement (decreased benefits + increased premium).
• Agent must list all other disability policies sold to the applicant — in force and those sold in the past 5 years even if lapsed.
• Replacement notice (signed by applicant & agent) must be given before the new policy is issued; direct response insurers give a similar notice upon issuance instead.

4. Long-Term Care Insurance — Definition & Settings

Medicare pays for a max of 100 days in a skilled nursing facility (not 100% of cost). Medi-Cal LTC requires "spend down" and "asset recovery" after death.

LTC insurance covers diagnostic, preventive, therapeutic, rehabilitative, maintenance, or personal care services outside an acute care hospital unit (nursing homes, home health care, adult day care, hospice, etc.).

LTC can be added as a rider to a Medicare supplement or health policy, but it never pays actual Medicare or major medical expenses.

Duties of Honor, Good Faith & Fair Dealing (CIC 10234.8)

All insurers/brokers/agents owe LTC clients a duty of honesty, good faith, and fair dealing. Pre-purchase conduct during the offer/sale can be used as evidence in a legal action alleging a breach.

Unnecessary Replacement (CIC 10234.85)

Advertisement & Cold Lead Disclosure (CIC 10234.9)

Replacement Commission Rules (CIC 10234.97a–b)

Commission on a replaced LTC policy = calculated on the difference between the new and old annual premiums. If the new premium is ≤ the old one, commission is capped at the renewal rate (not first-year rate). Replacement requires the insurer to declare the new policy materially improves the insured's position. Does not apply to group insurance replacement. "Commission" includes any compensation — bonuses, gifts, prizes, awards, finder's fees.

1. No Insurable Interest — Void Contract (CIC 280)

If the insured has NO insurable interest, the contract is void — full stop.

2. Property Insurance Timing Rule (CIC 286)

An interest in insured property must exist when the insurance takes effect and when the loss occurs — but it does NOT need to exist in the meantime.

3. Contingent or Expectant Interests (CIC 283)

A simple conditional or expectant interest in anything, not based on any actual right or claim to that thing, nor upon any valid contract for its ownership or possession, is NOT considered an insurable interest.

The mandated core policy form underlying CA fire coverage. Exam questions pull from its exact clauses.

1. Concealment & Fraud Clause

The entire policy is void if the insured willfully concealed or misrepresented any material fact/circumstance concerning the insurance, the subject of it, or the insured's interest — or committed fraud or false swearing — whether before or after a loss.

2. Uninsured & Excepted Property

The policy does not cover accounts, bills, currency, deeds, evidences of debt, money, or securities; nor bullion or manuscripts unless specifically named in writing.

3. Perils Not Included

• Enemy attack, invasion, insurrection, rebellion, revolution, civil war, or usurped power
• Order of any civil authority — except destructive acts taken to prevent the spread of fire
• Neglect of the insured to use all reasonable means to save/preserve the property
• Theft

4. Other Insurance, Suspension & Endorsements

• Other insurance may be prohibited or limited by endorsement.
• Coverage is suspended while: the hazard is increased within the insured's control/knowledge; the building is vacant/unoccupied for 60+ consecutive days; or loss results from explosion/riot — unless fire ensues, in which case only the fire loss is covered.
• Any additional peril must be added by written endorsement.
• No waiver of any provision is valid unless it's in writing.

5. Insured's Duties After a Loss

• Give written notice without unnecessary delay; protect property from further damage; separate damaged from undamaged property; furnish a complete inventory.
• Render a signed, sworn proof of loss within 60 days after the loss, unless the insurer extends it in writing.
• May be required to exhibit remaining property and submit to examination under oath.
• Insurer must inform the insured that tax returns are privileged; must furnish copies of claim-related documents within 15 calendar days of a request (excluding privileged/attorney work-product material).

6. Appraisal Process

7. Adjusters, Company Options & Settlement

• If the insurer assigns a 3rd or subsequent adjuster within a 6-month period, it must give the insured a timely written status report.
• The company may elect to take all/part of the property at the agreed/appraised value, or to repair/rebuild/replace with like kind and quality — it must notify its intent within 30 days after receiving the proof of loss.
• No abandonment of property to the company is allowed.
• Loss is payable 60 days after proof of loss is received and the amount of loss is determined (by agreement or appraisal award).
• Suit for recovery must be commenced within 12 months after the loss, or it's barred.
• Subrogation: the insurer may take an assignment of the insured's right of recovery against a responsible third party, to the extent of the payment made.

(CIC 125–140; Federal Liability Risk Retention Act, USC Title 15)

1. Core Definitions

2. Purpose of the Federal Liability Risk Retention Act

• Regulate the formation and operation of RRGs and PGs in California.
• Help Californians who are having difficulty obtaining liability coverage form and operate RRGs/PGs.
• Authorize RRG formation for directors and officers of corporations (for-profit or nonprofit) in the same line of business.

3. Regulatory & Tax Treatment

• An RRG is liable for premium taxes on CA business (gross premiums written, less returned premiums) and is taxed/fined like a foreign admitted insurer.
• Surplus line brokers must report to the Commissioner premiums placed with an RRG not chartered in California.
• RRGs must comply with CA's deceptive/fraudulent practice laws, but the Commissioner needs a court injunction to act on that conduct.
• An RRG must submit to a Commissioner-requested exam if its domicile regulator hasn't examined it within 60 days of California's request.

4. Mandatory Disclosure & Restrictions

• RRGs can't solicit/sell to anyone ineligible for membership, or while in a hazardous financial condition.
• RRGs can't join or contribute to any CA insurance insolvency guarantee fund — and their insureds aren't eligible for guarantee-fund benefits.
• RRGs are excluded from CA's joint underwriting associations, the CA Automobile Assigned Risk Plan, the FAIR Plan, and market assistance plans.
• A PG buying from a nonadmitted insurer or an RRG must tell its members the risk isn't protected by a guarantee fund and may not follow all CA insurance laws.

5. Who Can Place This Business

• Only a licensed fire & casualty broker-agent may procure RRG liability insurance in CA — except salaried RRG employees/officers not paid on a commission basis.
• Only a licensed surplus line broker may procure PG liability insurance from a nonadmitted insurer on behalf of a CA purchasing group (a nonresident may hold this license for that purpose).
• No civil liability attaches to an agent/broker who placed liability coverage for a properly licensed/incorporated CA RRG that later becomes insolvent.

1. Open vs. Valued (CIC 411, 412, 2053, 2054)

Valued policies are used when it's difficult to establish a loss value after the fact, or when the parties prefer to fix a value in advance. On a total loss, a valued policy pays the full policy amount — without regard to actual cash value or depreciation.

2. Warranties

(CIC 481.5, 660–669.5, 670, 673, 675–679.6)

1. Address Excluded From Property Policies (CIC 2071)

A property insurance policy must state the issuing company's name and a description of coverage (including term and premium) — but the insured's address is NOT required to appear in the policy.

2. Auto Insurance

• If cancelled for a reason other than nonpayment, the insurer must notify the insured of possible eligibility through the California Automobile Assigned Risk Plan.
• An admitted insurer covering drivers hired by a commercial business cannot cancel/nonrenew solely because those drivers were convicted of Vehicle Code violations while driving a private passenger vehicle not owned/leased by their employer.
• Insurers may not nonrenew a policy solely based on the insured's age.

3. Liability Policies Issued to Public Entities

A liability policy naming a local public entity or state agency as the insured can't be cancelled, or have renewal declined, for reasons other than nonpayment unless notice is mailed:

• At least 45 days before the effective date of nonrenewal, or
• At least 60 days before the effective date of cancellation.

No such notice is needed if a renewal notice stating the new premium was already sent at least 45 days before cancellation/expiration.

4. Homeowners & Financed Policies

Financed insurance: a lender may not cancel a policy for the insured's default under a premium payment loan agreement until the lender gives the insured 10 days' notice of cancellation.

(CIC 753)

1. Prohibited Insurer Conduct

Insurers are prohibited from:

• Requiring that a vehicle be repaired at a specific shop;
• Suggesting or recommending a specific repair shop; or
• Requiring a claimant to travel an unreasonable distance to inspect a replacement vehicle, get an estimate, or have the vehicle repaired.

2. If a Recommendation Is Made

If the claimant accepts a recommended shop, the vehicle must be restored to its pre-loss condition at no additional cost to the claimant beyond what the policy/law otherwise requires.

Required statement: "We are prohibited by law from requiring that repairs be done at a specific automotive repair dealer. You are entitled to select the auto body repair shop to repair damage covered by us. We have recommended an automotive repair dealer that will repair your damaged vehicle. If you agree to use our recommended automotive repair dealer, we will cause the damaged vehicle to be restored to its condition prior to the loss at no additional cost to you other than as stated in the insurance policy or as otherwise allowed by law. If you experience a problem with the repair of your vehicle, please contact us immediately for assistance."

1. Origins of the Standard Fire Policy

The Standard Fire Policy (SFP) was drafted by the insurance industry in 1918 to indemnify the insured for loss or damage to the insured building, furniture, fixtures, or other named personal property, caused by fire.

In 1943, it was standardized into the "New York Standard Fire Policy" and adopted by 46 of the 48 states at the time as the standard form. (Massachusetts adopted the New England Fire Policy; Texas adopted its own form.)

The policy set out its conditions in a 165-line format and required additional forms to be attached to address important aspects of coverage.

2. Property Covered & Excluded

The 1943 standardization added coverage for fire, lightning, and the removal of property after a fire (to protect undamaged property from further damage). Modern policies also cover property removed because of endangerment by an insured peril, even though a loss has not yet occurred.

Property covered is limited to property actually described in the policy, for loss by a peril insured against in the policy.

The Removal Provision

If described property is removed from its original location to protect it from an insured peril, the policy automatically covers that property for 5 days at the other location against virtually all types of perils (all-risk).

Example: Joe's building and contents are insured. The building catches fire, so Joe removes the contents and puts them in a warehouse so they won't burn. That night, the removed contents are stolen. Even though theft is NOT a covered peril under the policy, Joe would still collect for the loss under the removal provision.

Even though the SFP identifies covered property generally, an additional coverage form must still be attached to actually describe the type of property being covered. Manuscripts or bullion are covered only if specifically named in the policy.

3. Excluded Property

The Standard Fire Policy excludes coverage for:

• Accounts
• Currency
• Deeds
• Bills
• Evidence of debt, money, or securities

1. Insuring Agreement — Three Named Perils

The SFP covers direct loss resulting only from:

1. Fire — hostile fires only, not friendly fires
2. Lightning
3. Removal of property from premises endangered by an insured peril — automatic for 5 days

2. Losses Covered & Excluded

Without endorsement, the 165-line 1943 NY Standard Fire Policy covers loss/damage on an ACV basis by:

Only direct losses caused by the named perils are covered — direct loss means actual physical damage to, or destruction of, the insured property.

Specifically Excluded Losses (Directly or Indirectly Caused)

• Any act of war
• Ordinances of civil authority
• Insured's neglect to reasonably save or preserve the property
• Theft
• Loss occurring while the hazard is increased within the knowledge or control of the insured
• Any loss occurring when the building is vacant or unoccupied for 60 days or more

3. Limitations on Amount Payable

To prevent overinsurance, the amount payable cannot exceed the smallest of:

Example: a $100,000 building is insured under two separate standard fire policies of equal amount. Without the pro rata clause, the insured might try to collect $200,000 for a total loss of a $100,000 building; with the clause, each insurer pays only its pro rata share (half, in this example).

4. California Regulations (CIC 2070)

All fire policies issued in California must be written in the standard form and may not contain any additions. No part of the standard form may be omitted or changed, except for a policy providing coverage against the peril of fire only (or fire combined with other perils), provided the fire coverage is substantially equivalent to or more favorable to the insured than the standard form.

1. Who Must Receive It (CIC 10101, 10102)

For all policies written or renewed in California, the named insured must be given a copy of the California Residential Property Insurance Disclosure Statement. The agent or insurer must obtain the applicant's signature acknowledging receipt of the disclosure form within 60 days of the date of the application, beginning at the time of the original application.

The Disclosure Statement describes the principal forms of dwelling insurance coverage available in California and identifies which form of coverage the insured purchased or selected. It is only a general description and is NOT part of the actual policy.

2. Building Code Upgrade Coverage

Building code upgrade coverage disclosed by the form applies only to the extent that codes, standards, or laws impose stricter requirements than the level of insurance coverage applicable to the property.

If the policy includes this coverage, the insurer must: (1) state on the declarations page, in no less than 10-point type, that the coverage is included, state any applicable limits, and identify any other terms/conditions/restrictions there or in a separate attached disclosure form; and (2) if a separate disclosure form is used for those terms/limits/restrictions, print it in no less than 10-point type.

3. No-Fire-Coverage Rule

If an insurer issues a new residential property policy on or after July 1, 2021 that does not cover the peril of fire, the insurer must: (1) obtain a signed acknowledgment from the applicant/insured that the new policy doesn't cover fire; and (2) prominently disclose on the declarations page a bold, uppercase statement in no less than 12-point type, plus information on the FAIR Plan and the CA Insurance Finder.

4. Coverage-Level Hierarchy

5. Required Disclosure Language

Additional Statutory Provisions

1. Earthquake Coverage (CIC 10081, 10084)

Earthquake = a trembling or shaking of the earth of volcanic or seismic origin, often resulting in severe damage. It's a peril excluded by most standard property forms; coverage may be added by endorsement, or written as a separate Difference in Conditions (DIC) policy.

Every residential property policy issued, delivered, or initially renewed in California must include an offer of earthquake coverage — either within the residential policy itself (by provision or endorsement), or in a separate policy/certificate covering earthquake alone or combined with other perils.

Insurers may comply by: (1) offering to underwrite the risk directly; (2) arranging for coverage through an affiliated insurer; or (3) arranging for coverage through an agent/broker under a policy issued by a nonaffiliated insurer.

2. California Earthquake Authority (CEA) (CIC 10089.6, 10089.26, 10089.28)

The CEA is a publicly managed, not-for-profit organization administered under the Commissioner's authority. It is authorized to sell policies of basic residential earthquake insurance only — it may not sell any other line of insurance. Participating insurers write the underlying residential property policy and may be reasonably compensated for claims and policyholder services provided on the CEA's behalf.

Condo Earthquake Loss Assessment Minimums

CEA Policy Disclosure — 14-Point Boldface Notice

1. CEA coverage differs from the homeowners policy — e.g., it doesn't cover pools, and may limit coverage for chimneys, outbuildings, and masonry fences more than the HO policy.
2. If CEA's losses exceed its resources, it may reduce or install payments; the policy is NOT covered by the California Insurance Guarantee Association — no claims are paid if CEA becomes insolvent.
3. Premiums may be surcharged up to an additional 20% if CEA's obligations rise to a predefined level.

3. California FAIR Plan (CIC 10090, 10091, 10093a, 10091c)

FAIR = Fair Access to Insurance Requirements. It provides equitable distribution among admitted insurers of the responsibility for insuring qualified property that cannot get basic property insurance through the normal marketplace.

The FAIR Plan is an industry placement facility and joint reinsurance association — not a state agency, even though the state established it. All CA property insurers participate, proportional to market share (a company writing 10% of CA's property insurance underwrites 10% of every FAIR Plan policy).

A producer must be admitted by the FAIR Plan association to submit applications. Every agent/broker transacting basic property insurance in CA must either assist clients in securing FAIR Plan coverage or provide them the association's toll-free number.

In 2021, the CA FAIR Plan Association launched a clearinghouse program to reduce existing FAIR Plan policies by letting admitted insurers offer homeowners policies to FAIR Plan policyholders.

Basic property insurance (CIC 10091c) = direct loss coverage on real/tangible personal property at a fixed location, from perils under the standard fire policy plus extended coverage and vandalism/malicious mischief, plus any Commissioner-approved additions — excludes automobile and farm risks.

1. Financial Responsibility Law (CVC 16020, 16021, 16025, 16451)

California's Compulsory Financial Responsibility Law requires every driver and every owner of a motor vehicle to maintain financial responsibility (liability coverage) at all times. Four forms satisfy it:

Drivers must carry written evidence of financial responsibility and show it to a peace officer after a citation stop or accident.

2. Good Driver Discount — Eligibility (CIC 1861.025)

A person qualifies for a Good Driver Discount policy only if all of the following are true:

• Licensed to drive a motor vehicle for the previous 3 years
• During those 3 years, has not: had more than one violation-point count under the Vehicle Code (an at-fault accident causing property damage = one point count); had more than one dismissal of charges in a 36-month period for violations that would've caused more than one point count; or been the driver of a vehicle in an accident causing bodily injury or death, while principally at fault

3. Discount Amount & Rating Factors (CIC 1861.02, 1861.02a)

A Good Driver Discount policy's rate must be at least 20% below what the insured would otherwise be charged for the same coverage.

Rates/premiums for private passenger auto policies (PAPs) must apply these factors in decreasing order of importance:

1. The insured's driving safety record
2. The number of miles driven annually
3. The number of years of driving experience

The Commissioner may adopt other factors with a substantial relationship to risk of loss; the weight given to each factor is set by regulation.

4. Cancellation & Nonrenewal (CIC 1861.03c1, 661, 662, 663)

A notice of cancellation is only effective if based on one of these reasons:

• Nonpayment of premium
• The insured's driver's license or vehicle registration was suspended/revoked during the policy period, or during the 180 days preceding its effective date
• Discovery of fraud in pursuing a claim
• Discovery of material misrepresentation of: safety record; annual miles driven; years of driving experience; record of prior auto insurance claims; or any other factor substantially related to risk of loss
• Substantial increase in the hazard insured against

1. Policy Limits — Compliance with Financial Responsibility Law (CIC 11850.1b, CVC 16056)

An auto policy issued in California is only "effective" if: (1) issued by an insurer admitted to do business in California; and (2) it meets the minimum limits below.

• No policy/bond covers a vehicle not registered in California (or registered elsewhere) unless the issuing company is admitted in California as of the policy's effective date or most recent renewal — unless the company executes a power of attorney authorizing the DMV to accept service of notice/process on its behalf.
• A nonresident driver whose driving privilege was suspended/revoked may substitute a written certificate of proof of insurance from a company that covers vehicle operation in California, meets California's liability requirements, and is admitted to do business in that driver's home state — in place of a California-admitted company's certificate.

2. Uninsured Motorist Coverage — Offer or Reject (CIC 11580.2a1)

No auto liability policy for a vehicle principally used or garaged in California may be issued/delivered without uninsured motorist (UM) coverage. However, the coverage must merely be offered — the insured may reject it.

• By written agreement, the insurer or any named insured may: delete the UM provision entirely; delete UM coverage when the vehicle is operated by a specifically named person; or reduce the amount of UM coverage.
• If UM coverage is rejected on a policy, any continuation or renewal of that policy will not provide the coverage either.

1. California Workers Compensation Inspection Rating Bureau (CIC 11750.3)

The WCIRB is an unincorporated, nonprofit association comprised of all companies licensed to transact workers compensation insurance in California — it has over 400 member companies.

Its main functions:

• Provide reliable statistics and rating information regarding Workers Compensation and employer's liability insurance
• Collect and tabulate information/statistics to develop pure premium rates submitted to the Commissioner for issuance or approval
• Inspect risks for classification or rate purposes and furnish this information to the insurer (and to the employer, upon request)

2. California State Compensation Insurance Fund (CIC 11784)

California operates the State Compensation Insurance Fund (State Fund / SCIF), but there is also open competition for workers comp insurance among commercial insurers.

Rate-Setting Factors

SCIF's Board of Directors sets the rates charged by the Fund. Rates must be fixed within each class of business, considering:

• Bodily risk or safety, premises, or work hazard for each insured employer
• The manner in which the work is conducted
• A reasonable regard for the accident experience of each insured
• A reasonable regard for the means and methods of caring for injured persons by each insured

Very small employers are no longer required to prove that at least three insurers declined to cover them. Certain employers regulated under the U.S. Longshore and Harbor Workers' Compensation Act (rather than state WC law) may also obtain coverage from SCIF as well as commercial insurers.

Employers not eligible to self-insure must obtain the insurance. An employer who fails to do so is subject to a cease and desist order from the Department of Industrial Relations, closing the business until coverage is obtained.

3. Employers Liability Coverage (CIC 11750.1f)

Under the compulsory Workers Compensation law, injured employees are barred from seeking damages outside WC law — the exclusive remedy doctrine. But some situations fall outside WC coverage, and Employers Liability coverage is designed for exactly those. Most common covered situations:

• Exempt or illegal employment
• Third-party-over claims — an employee successfully sues a third party, and that third party then sues the employer
• Situations involving another relationship between employer and employee, called dual capacity

Example: an employee is instructed to make repairs using tools the employer manufactures, and is injured because of the tools. The employee can collect both Workers Compensation benefits AND additional compensation for being injured by a tool the employer manufactured.

• Family loss of consortium, or loss of companionship, resulting from an employee's disability or death
• Consequential bodily injury to an employee's family members, resulting from the employee's injury
• Employees who attempt to seek benefits from parent-subsidiary relationships of the employer

Example: an employee is injured by a company (subsidiary) that is actually owned by another company (parent). The employee may collect Workers Compensation from the subsidiary AND seek additional compensation from the parent company.

4. 24-Hour Coverage (CIC 1749.02)

24-hour coverage provides employees with both a workers compensation policy and some type of medical insurance coverage (a disability income policy, health care service plan contract for injuries, etc.). Because the employee is covered at work by workers compensation, and during non-work hours by the medical plan, the worker is covered 24 hours a day.

1. Ethics Defined

The purpose of ethics training is to build the foundation of knowledge and understanding an individual needs to function ethically as an insurance professional — with a focus on the social, professional, and legal aspects of ethics.

Ethics derives from the Greek words ethikos ("moral") and ethos ("character"). By textbook definition, ethics is "a branch of philosophy that deals with the values of human life in a coherent, systematic, and scientific manner." The Oxford English Dictionary defines it as "the department of study concerned with the principles of human duty" and the "rules of conduct recognized in certain associations or departments of human life."

2. Avoiding Conflicts of Interest

An agent who has signed an exclusive contract with an insurer cannot serve two principals at once. As a "captive" agent, they owe a singular loyalty to that insurer — it would be unethical to represent two insurance companies selling the same policies.

An agent also has an ethical obligation to inform their company about any other related services they provide and are paid for (e.g., part-time tax preparation/filing, or consulting for a local business), so the insurer can determine whether a conflict of interest exists.

Dual-Agency Guidelines for Independent Agents

Independent agents face this issue too, serving clients while contracted to an insurer. Conflicts are avoided by following two rules:

• The agent represents the insurance company when insurance is being applied for and while it's being underwritten, in recordkeeping, and in claim settlement or other insurer-related activities.
• The agent "represents" the client only during the process of helping the client select the insurance plan best suited to their needs.

Three Questions to Consider

Is it ethical for an agent to use a prospect list of names who registered for a new-home drawing at a supermarket? Is it ethical to call yourself a "financial planner" or "estate planning specialist" without the proper training, experience, or qualifications? Is it ethical to show a prospect a policy illustration without explaining the difference between guaranteed and nonguaranteed benefits?

An agent's four primary ethical responsibilities are to the:

• Insurer
• Policyowners
• General public
• State

1. Ethical Responsibilities to the Insurer

The duties an agent owes the insurer are established by the concept of agency, tangibly represented by the agency contract both parties sign. Within that contract's scope, the agent owes the insurer honesty, good faith, and loyalty, and is obligated to reveal all material facts concerning the agency.

2. Ethical Responsibilities to Policyowners

The agent meets responsibilities to policyowners by filling needs and providing quality service — service is a primary function of the industry, and how it's provided often determines the agent's future (clients are a source of future sales and referrals).

The agent also owes the policyowner the same degree of loyalty owed to the insurer, and is charged with: full disclosure, confidentiality, timely submission of applications, and prompt policy delivery.

Selling to Needs

Part of this responsibility is a commitment to educating the prospect or client about the products and plans that may be implemented.

Service the Sale: selling to needs is only part of the job — service during and after the sale is just as important. Since 1972, the Strategic Planning Institute of Cambridge, Massachusetts has collected data on what corporate strategies drive performance; its studies consistently show that successful companies stress quality service over their competitors.

Service Begins with the Application: in securing coverage for a client, the agent's main responsibility is to act reasonably under the circumstances and see that the prospect completes the application accurately and completely. The agent's primary responsibility during the application process is to the insurer (as its agent) — the insurer relies on the agent for full disclosure of pertinent applicant information. But the agent also has an ethical responsibility to educate the prospective insured so they fully understand the application process, including:

• Why the information is required
• How it will be evaluated
• The need for accuracy and honesty in answering all questions
• The meaning of terms such as "waiver of premium," "automatic premium loan," "nonforfeiture options," and "conditional receipt"

Confidentiality: while qualifying a prospect, completing a financial questionnaire, analyzing needs, or working on an estate or business plan, agents become privy to a client's personal and financial information. Ethics require the agent to respect the sensitive nature of this information and keep it confidential — personal information about a client should never be released without the client's proper approval.

3. Commitment to Knowledge and Skills

The relationship between a professional agent and the policyowner is built on the policyowner's trust in the agent's knowledge and skills. The policyowner relies on the agent to provide informed options and trusts that recommendations are in the client's best interest.

This means the agent has an ethical responsibility to obtain the necessary knowledge and skills to evaluate and service clients' needs, and to stay current with industry standards and developments that may affect client interests — committing to a program of continuing education.

4. Commitment to Educating the Prospect/Client

A client's trust must be earned, nurtured, and constantly reinforced. The agent who remembers this basic rule is the one clients trust — because they communicate why a particular policy or program is being recommended and how it will serve the client.

5. Ethical Responsibilities to the Public

The insurance agent has more control over the public's attitude toward insurance than sales representatives for most other consumer products — because the agent initiates contact, determines the prospect's need, recommends a product or solution, makes the sales presentation, and develops a long-term after-sale relationship. In many cases the prospect has little or no direct contact with the insurance company itself.

Because this special relationship involves so much contact between consumer and agent (and because the public generally understands very little about insurance), public perceptions of the industry are based on how well or poorly an agent does their job. The professional agent has two main ethical responsibilities to the public:

• To inform the public about insurance with the highest level of professional integrity
• To strive for an equally high level of professionalism in all public contacts, to maintain a strong, positive image of the industry

6. Ethical Responsibilities to the State

The responsibility to regulate the insurance industry is shared by federal and state governments, but states carry the burden of regulating insurance affairs, including the ethical conduct of licensed agents. Some states categorize this regulation under "marketing practices"; others refer to it as "unfair trade practices."

Whatever it's called, all states have established a code of ethical standards for insurance agents by defining through laws and regulations what an agent can and cannot do. These laws differ from state to state, but there are enough similarities to discuss them in general terms.

7. Underwriting Process

Keeping the Applicant Informed: the underwriting process for an insurance application can be time-consuming. Most insurance companies strive to complete the process within a 21-day period, assuming no delays. Delays can occur whenever an underwriter needs additional information from the applicant, or when a counteroffer, different policy, or different rate is proposed to the applicant (again, through the agent). An agent's ethical responsibilities during underwriting center on promptness and policy delivery.

Promptness

An agent needs to ensure there are no unnecessary delays in the underwriting process. This doesn't mean rushing from an applicant's home to the nearest post office to mail an application — it does mean checking the application for accuracy and giving it careful thought before submission. Many underwriting delays happen simply because the application is incomplete or not clear. Applications should be submitted as soon as possible, though the appropriate timeframe varies with the plan and complexity of the case. If the underwriting process may take longer than anticipated, the agent should notify the applicant of the delay.

Policy Delivery

Most policies are issued as applied for. In these cases the agent owes the new policyowner prompt delivery of the policy and a review of its features and benefits — this solidifies the sale and is a step toward making the policyowner a lasting one.

Some policies, however, will be rated or rejected. When this happens, the agent has two responsibilities:

1. To personally review the rating or rejection. (Was it medical? Was there an unfavorable medical report? Was something overlooked or not made known to the underwriter? Should additional information be submitted? Is the rating or rejection proper? Should the application be reconsidered?) The agent should have as much information as possible and be able to explain the rating or rejection to the applicant.
2. Assuming the rating or rejection was valid, to notify the applicant promptly. Withholding this information is a breach of ethics and could actually harm the applicant and their family.

1. Deceptive Use of Advertising Material

Two indisputable facts about insurance and the buying public: the average buyer knows very little about insurance and relies on the advice/recommendations of the agent; and by the time a consumer finds that a policy doesn't meet their needs or live up to the agent's promises, it may be too late to purchase another one.

Because the potential for deceptive advertising by companies and agents alike is significant — and the consequences to consumers can be severe — all states have enacted laws regulating insurance advertising. The basis for many of these statutes is the NAIC Model Unfair Trade Practices Act, which cites false advertising as an unfair trade practice and prohibits it. "Advertising" is defined broadly here: print and radio material, descriptive literature, sales ads, slide shows, prepared group talks, brochures, sales illustrations, policy illustrations, TV commercials — almost any communication or presentation used to promote the sale of an insurance policy.

Some states separately regulate life and health insurance advertising. Life insurance ads cannot use the terms "investment," "savings," or "profit" in a misleading way. Health insurance ads must disclose provisions regarding renewability, cancellability, termination, or modification of benefits.

2. Deceptive Sales Presentations

Deceptive sales presentations have probably generated more complaints of unethical agent behavior than any other activity — a concern shared by the National Association of Life Underwriters (NALU), the American Society of CLU & ChFC, the Independent Insurance Agents of America, and even U.S. Congressional committees studying insurance company activity.

What constitutes a deceptive sale? Any presentation that gives a prospect the wrong impression about any aspect of a policy or plan is deceptive. Any presentation that doesn't provide complete disclosure is deceptive. Any presentation with misleading or inconclusive product comparisons is deceptive.

Some deceptive presentations are blatant, like comparing a term policy to a whole life policy on premium rates alone. Others are subtler: describing a personal life insurance policy as a "tax shelter" without mentioning that premiums aren't deductible and surrendered cash values may be taxable, or recommending a health policy without explaining the conditions under which it could be canceled or premiums increased. All of these are misleading and unethical, even if they might help make the sale.

3. Policy Illustrations

Nothing in life insurance marketing has generated more controversy than the use and misuse of policy illustrations. As policies evolved — with more emphasis on the growth, return, and investment aspects of permanent plans, the "unbundling" of accumulation and protection elements, and flexible premiums — insurers and agents found the computerized policy illustration was one of the best ways to demonstrate a policy's complex mechanics.

The more flexible a policy and the more aggressive its assumptions, the more sensitive it is to changes in mortality, expense, and interest rates — shifting risk back to the buyer. In many sales situations, the illustration itself became the product being sold.

Example: buyers who purchased policies in the mid-1980s (when interest rates were high), expecting to pay premiums for only 7–8 years before accumulated values "vanished" the premium, instead found those values insufficient and were charged against the policy's cash value. Others who bought plans expecting a few hundred dollars a year to grow into a million-dollar retirement fund discovered they were far short of that goal.

These experiences fueled a "crisis" narrative around policy illustrations, leading to lawsuits against some agents and companies. In response, insurers are redesigning disclosures around policy pricing, performance, and illustration assumptions, and instructing agents to show illustrations under a variety of assumptions — not just the current ones. The NAIC has drafted model legislation on policy illustrations, and the American Society of CLU & ChFC developed an illustration questionnaire to help agents understand the assumptions behind sales illustrations.

4. Attitude Toward Competition

Agents should avoid criticizing other agents — it's detrimental to everyone in the business. Criticism of other companies' policies should also be avoided; an incomplete comparison is misleading and harmful to the public, and can even result in revocation of the offending agent's license.

If asked to evaluate an insurance company's reputation, refer questioners to a widely-respected rating system instead — these evaluate a company's financial status, reserves, underwriting, investments, and management. Some of the best-known: A.M. Best Company, Standard & Poor's, and Weiss Ratings, Inc.

In situations like handling death claims or a national disaster, insurance professionals should set aside competition entirely and work together to serve the people involved.

Ethics is the rightness of what you do. Values are what you believe in — what you hold important. Values that represent how a person should behave are called moral values (respect, honesty, fairness, responsibility); statements about how these values are applied are sometimes called moral or ethical principles.

1. Core Ethical Principles

We build a more principled life through the small choices we make each day. Ethical decision-making is a process of evaluating and choosing among alternatives, with the goal of eliminating unethical options and selecting the best ethical one. To consistently make ethical decisions, one must: (1) evaluate alternative courses of conduct against core ethical principles; and (2) choose the action that best advances those principles.

2. Rationalization as a Tool

We often revert to rationalizations to make ourselves more comfortable with actions that don't earn the high ethical ratings we give ourselves. Common ones:

• "I'm simply fighting fire with fire."
• "If it is legal, it must be okay."
• "I was just doing it for you."
• "We all do it; it's just how you play the game."
• "If it doesn't hurt anyone, it's okay."
• "It's necessary to get the order."
• "Business is business. I'll be as ethical as the competition allows."
• "I deserve it. I have it coming."

3. The Bottom Line

Four basic principles of a highly ethical individual:

1. Is at ease when interacting with diverse customers.
2. Is obsessed with fairness — other people's interests count as much as their own.
3. Assumes personal responsibility for their actions, answering to themself first and their organization second.
4. Sees their activities in terms of purpose — tying the individual to the organization, and the organization to the environment.

Characteristics of a highly ethical organization or industry:

1. A clear vision and picture of integrity exists throughout the industry.
2. That vision is owned and embodied by top management, over time.
3. The reward system is aligned with the vision of integrity.
4. Policies and practices are aligned with the vision — no mixed messages.
5. Every significant decision is understood to have ethical dimensions.
6. Everyone is expected to work through conflicting value perspectives.

4. The Benefit of Applying Ethics

• Supports individual growth: attention to ethics helps an agent face realities, good and bad, and deal confidently with whatever comes their way.
• Helps avoid lawsuits: ethics programs are a form of insurance — they help policies and practices stand up to public or shareholder scrutiny. It's far cheaper to build ethical practices now than to pay for litigation later.
• Helps avoid criminal acts and lowers fines: ethics standards help detect issues and violations early. Failing to report a known or potential violation to the appropriate authority can itself be a criminal act — and industry-wide ethical guidelines can reduce fines when an effort to operate ethically is evident.
• Helps manage values: ethics programs identify preferred values, align behavior with them, and are useful for managing strategy — expanding market share, reducing costs, managing diversity.
• Promotes a strong public image: organizations that regularly attend to ethics are seen as valuing people over profit, which supports marketing and public relations — even though that shouldn't be the primary reason to manage ethics.

1. Common Circumstances

Insurance fraud is a significant problem for insurers and insureds alike — premiums for most forms of insurance have risen in recent years because of the increasing number of fraudulent claims. The most common areas:

• Staged automobile accidents
• Fraudulent healthcare billings (including HMO and Medi-Cal)
• False and/or inflated property loss claims
• Phony Workers Compensation claims
• Fraudulent denial of Workers Compensation benefits
• Arson for profit
• Fake life insurance claims
• Workers Compensation premium fraud by employers

2. Efforts to Combat Fraud

Federal, state, and local law enforcement work together, aided by insurance companies and industry support organizations. The California Department of Insurance created the Fraud Division to enforce the Penal Code and administer the fraud reporting provisions. (CIC 1872)

The Arson Information Reporting System helps combat fraud through cooperation between insurers, law enforcement, fire investigating agencies, and district attorneys. The State Fire Marshal oversees the System's establishment, operation, and maintenance within a Department of Justice database.

Insurance companies, agents, and brokers also have a responsibility to report suspected fraud. Whenever an insurer or licensed rating organization knows or reasonably believes a person has committed a fraudulent act relating to a workers compensation insurance claim or policy, it must notify the local district attorney and the Fraud Division, and may notify any other authorized government agency of the suspected fraud, providing additional information as to the basis for suspicion.

The Commissioner may license an organization as an Insurance Claims Analysis Bureau if it's a nonprofit corporation organized for fraud prevention with at least 2 years of relevant experience. The Bureau must: collect and compile information/data from members concerning insurance claims; disseminate claims-related information to members to prevent and suppress insurance fraud; promote training and education related to investigation, suppression, and prosecution of insurance fraud; and provide to the Commissioner (without fee or charge) all state data and information in its records for further prosecution of insurance fraud.

Insurers, agents, and brokers have legal immunity from civil suits claiming libel or slander that might result from giving statements, filing reports, or furnishing other information — as long as the information is offered "in good faith and without malice."

3. Fraudulent Claims Form

An insurer who reproduces, prints, or furnishes a form to any person — on which the person applies for a policy, seeks to amend coverage, furnishes underwriting information affecting premium or eligibility, gives notice of a claim, or makes a claim against the insurer — must have the following statement printed or displayed prominently on the form:

In the case of a claim arising from the theft of an insured vehicle, the claim form must also contain a warning that false representations made on the signed claim form by the insured are subject to a penalty of perjury. The claim form must be signed under penalty of perjury.

4. False and Fraudulent Claims Article

Chapter 12 of the Insurance Code is devoted exclusively to the Insurance Fraud Prevention Act. It describes the basic responsibilities that the Commissioner, law enforcement agencies, insurers, agents, brokers, and others have when "confronting aggressively the problem of insurance fraud in this state."

State insurance claim forms are required to carry a notice informing claimants of their liability for a fraudulent claim: "For your protection California law requires the following to appear on this form: Any person who knowingly presents a false or fraudulent claim for the payment of a loss is guilty of a crime and may be subject to fines and confinement in state prison."

5. Steps a Licensed Agent Should Take When Fraud Is Suspected

An agent or broker who, before placing an insurance application with an insurer, reasonably suspects or knows that a fraudulent application is being made must submit the information on an electronic form to the Fraud Division, within 60 days after determining that the application is potentially fraudulent.

If an agent or broker reasonably suspects or knows that fraud was perpetrated after an application has already been placed with an insurer, the agent must instead report that information directly to the insurer's Special Investigative Unit.

1. The Fraud Division

The insurance industry involves many transactions with the potential for abuse and illegal activity. The Commissioner and CDI are responsible for investigating insurance fraud cases, stopping fraudulent activities, and assisting local, state, federal, and administrative law enforcement in prosecuting suspected fraud.

Within CDI, the Fraud Division enforces the Penal Code and administers the fraud reporting provisions. It consists of four fraud-related programs:

• Automobile Insurance Fraud
• Workers Compensation Fraud
• Property, Life, Casualty Fraud
• Disability and Healthcare Fraud

The Enforcement Branch also oversees grant programs supporting local district attorney offices: Automobile Insurance Fraud; Organized Automobile Fraud Activity Interdiction; Disability and Healthcare Fraud; and Workers Compensation Insurance Fraud. The Investigation Division separately administers the Life and Annuity Consumer Protection Program.

2. Types of Fraud Cases

The Commissioner's Annual Report summarizes the activities of CDI, the Conservation and Liquidation Office, and the general condition of the insurance business in California, highlighting the Investigation Division's enforcement outcomes. The Commissioner's priorities emphasize investigation and prosecution in:

• Premium theft
• Senior citizen abuses
• Health insurance violations
• Unauthorized insurers and insurance transactions
• Deceptive sales and marketing practices
• Title insurance rebates
• Public adjuster violations
• Abusive acts committed by auto insurance agents and companies
• Illegal bail practices

The Investigation Division also investigates other complaints and alleged violations of laws relating to the transaction of insurance prohibited by the California Insurance Code, the California Code of Regulations, the California Penal Code, and Title 18 of the U.S. Code.

Fiscal Year 2022–23 Annual Report Statistics

Real-world examples of insurance fraud and the steps taken by the Department's Fraud Division.

Insurance Agent Arrested for Stealing from Elderly Client

An agent was arrested on multiple felony counts of financial elder abuse, grand theft of an elder, and forgery following a CDI investigation, accused of defrauding an elderly client of $90,995 who was deemed unable to provide consent. The agent moved in with the victim under the guise of being a roommate and, exploiting the victim's medical condition, gained control of the victim's finances while posing as their "health care manager" — including forged checks.

The agent sold the victim two annuities totaling more than $580,000, not in the victim's financial interest, generating over $7,800 in commissions, and attempted to withdraw over $110,000 from the victim's IRA and sell their home. Orange County Adult Protective Services and the Public Guardian intervened and petitioned for a conservatorship. The agent was arrested (bail set at $50,000), the case handled by the Orange County DA's Major Fraud Unit, and the agent's license was revoked along with an industry ban.

Source: California Department of Insurance "SIU E-Blast," February 2023

Los Angeles Delivery Company Owners to Repay More Than $2 Million After a Workers Compensation Scheme

A Los Angeles couple were sentenced after a CDI investigation found they underreported more than $21 million in employee payroll across their delivery companies. One was sentenced to 60 days in county jail, the other to 30 days; both received 10 years of felony probation and were ordered to pay $2,254,748 in restitution for unpaid workers compensation premiums.

The couple owned three companies but only obtained workers comp coverage for one, leaving two uninsured. When employees at the uninsured companies were injured, the couple fraudulently filed claims under the covered company's policy, concealing the lack of coverage and misclassifying their workforce — at least 20 uninsured employees had claims improperly filed this way over four years. A forensic audit found the companies' combined payroll exceeded $25 million, while only about $1.4 million was reported to their carrier, letting the couple avoid roughly $3 million in premiums.

Source: California Department of Insurance "SIU E-Blast," June 2025

Five Defendants Charged in a Multi-Million-Dollar Life Insurance Fraud Case

CDI announced five individuals, including former insurance agents, charged in a fraud scheme involving misrepresented life insurance policies, resulting in fraudulent commissions totaling over $1.4 million. A former agent allegedly orchestrated the scheme with four co-defendants; the former agent and three co-defendants were arraigned on felony charges including grand theft, and one individual remains at large.

The investigation began after a consumer complaint alleging forgery and fraud linked to policies sold by the former agent, revealing that the defendants misrepresented policy terms to California consumers while falsifying agent information on applications submitted to multiple carriers between 2017 and 2023 — collecting unearned commissions from four insurance carriers. In total, the defendants fraudulently obtained over $1.4 million in commissions by manipulating over $2 million in premiums from 28 California consumers; CDI has helped recover over $2 million for the affected victims.

Source: California Department of Insurance "SIU E-Blast," July 2025

1. Creation of an Anti-Fraud Unit

Every insurer admitted to transact business in this state, except those otherwise exempted, must provide for the continuous operation of a unit or division to investigate possible fraudulent claims (anti-fraud unit) by insureds or persons making claims for services or repairs against policies held by insureds. Insurers may maintain the unit using their own employees or by contracting with others.

2. Complying with the IFPA and California SIU Regulations

Every insurer admitted to do business in this state must establish a Special Investigative Unit (SIU) tasked with investigating possible fraudulent claims by insureds or individuals making service/repair claims against a policy. The unit may be maintained by the insurer's employees or a contracted third party; the added costs of staffing or contracting for investigations may be included as an administrative expense when setting premium rates.

Key Definitions

An insurer's SIU must comply with standards set by the Insurance Fraud Prevention Act (IFPA) and California SIU regulations. The SIU Compliance Office inspects each insurer's SIU to ensure compliance with California law and the Code of Regulations.

Adequacy of SIU Operation

An insurer must adequately staff its SIU. Staffing factors include the number of policies written and claims received in California annually, and the number of suspected fraudulent claims currently under investigation in the state.

Detecting and Investigating Fraud

Anti-fraud personnel are responsible for identifying and reporting suspected fraud as part of their regular duties. The SIU must establish, maintain, distribute, and monitor written procedures for detecting, identifying, documenting, and referring suspected fraud, outlining specific red flags per type of insurance/product. During an investigation, the SIU is responsible for:

• Analyzing the claim, application, or transaction for factors indicating fraud
• Identifying and interviewing potential witnesses on the accuracy of the claim/application
• Using one or more industry-recognized databases appropriate to the line of authority
• Preserving documents and other evidence collected
• Completing an investigation summary that includes: what led to the report of suspected fraud; suspected misrepresentations and who made them; why the misrepresentations are material and how they affect the claim/transaction; the identity of witnesses who alleged misrepresentation; documentation supporting that misrepresentation occurred; and a statement on whether the investigation is complete

Training Requirements

Insurers must establish an anti-fraud training program and designate one SIU staff member to coordinate it. Programs must have three separate levels:

Training may occur at anti-fraud conferences, SIU roundtables hosted by the Fraud Division, association meetings, or in-house sessions. Training records (including materials) must be maintained and made available to the Department on request.

1. Detection

Available Databases

• The Insurance Services Office (ISO) provides member insurers with past claim history and potential fraud indicators that other insurers have reported.
• The Insurance Claim Analysis Bureau collects and compiles claim information/data for insurers, to prevent and suppress fraud, and promotes related training and education. All claim data it collects must be made available to the Commissioner.
• The Arson database, maintained by the Department of Justice, is a good resource for property insurers — if someone has been convicted of arson, their name will likely appear, a strong indicator for insurers/producers to reconsider writing a policy for them.

Fraud Trends and Indicators

Procedures for detecting suspected fraud must compare any insurance transaction against: (1) patterns or trends of possible fraud; (2) red flags; (3) events or circumstances present on a claim; (4) the behavior or history of the person(s) submitting a claim or application; and (5) other criteria that may indicate possible fraud.

Red flags are usually specific; fraud indicators are more general — hesitation answering a question could signal fraud, or just an honest lapse of memory. General indicators include: indirect answers, vague answers, hesitation to sign applications, pushy behavior, or unexplained walk-ins.

During underwriting, examples of fraud indicators include: mismatched or only out-of-state addresses on an application; inconsistent personal information between forms; using money orders or cash for the initial premium; unwillingness to provide accurate contact information; newly-listed beneficiaries with no apparent connection to the insured; lack of cooperation with underwriting; and any suspicious or evasive behavior.

2. Referral

The SIU must provide for the referral of suspected fraud to the Fraud Division and district attorneys (if required). Referrals must be submitted whenever facts and circumstances create a reasonable belief that a person or entity has committed or is committing insurance fraud, within the timeframe the Insurance Code specifies. Each referral must contain:

• Fraud and referral type
• Reporting party information
• Alleged victim information
• Insurance policy or claim information
• Other agency referral information
• Referral contact information
• Information for each party associated with the referral

The SIU must complete as much of its investigation as reasonable before referring to the Fraud Division, and each referral must indicate whether the case is complete or needs further investigation.

3. Cooperation with Law Enforcement

Insurance agents must comply with the insurer's SIU and law enforcement officials. When contacted by a Fraud Division Detective or a District Attorney Investigator, agents are obligated to cooperate.

Requested information must include: insurance policy information; applications; premium payment records; claims history; information relating to the carrier's investigation (statements, proof and notice of loss); claim file documents and notes; investigation files (including an investigator's notes); and any other relevant information. Agents must promptly respond to all communication seeking clarification, and must comply if law enforcement requests an interview — coordinating a time and location with the officer.