Proposed Bill Threatens Avalanche of Lawsuits Against Independent Insurance Agents & Brokers

SACRAMENTO, CA, March 22, 2023 — IIABCal is committed to fighting one of the worst bills proposed in years which, if enacted, would create a tsunami of unwarranted litigation against insurance agents and brokers in California.   

SB 263 seeks to impose radical new limitations on the sale of annuities and similar life insurance products. It would create a “fiduciary relationship,” as a matter of law, and permit private lawsuits whenever an agent or broker was accused of failing to act in a customer’s “best interests.”   

IIABCal and other industry groups have supported a “model act” created by the National Association of Insurance Commissioners (NAIC)--and enacted into law in 33 states—that prohibits unscrupulous practices in marketing annuities towards seniors and other potentially vulnerable populations. 

The NAIC Model creates clear standards for agents selling annuities, expressly disavows the creation of any “fiduciary relationships,” and does not depend on private lawsuits for enforcement. 

SB 263: Drastic Departure From Model Legislation  

SB 263 was initially thought to be a bill to update California’s annuity suitability statutes with the “NAIC Suitability in Annuity Transactions Model Law.” That model has now been passed by 33 states, both red and blue, and is pending in seven other states in 2023. 

However, as amended, SB 263 goes far beyond the NAIC Model in a number of areas and would establish a horrible precedent for all future insurance transactions.  It would expressly create an ill-defined fiduciary relationship—which imposes the highest duty of care, and liability, imposed by the civil law—and permits lawyers to sue agents any time a customer’s “best interests” have not been fully met.

“Obviously, no one supports churning or other unethical and illegal practices,” said IIABCal General Counsel Steve Young, “but it flies in the face not only of centuries of legal precedent, but also common sense, to say that an agent of an insurance company owes a primary duty of loyalty to some other party.  This law is so vague, no producer could ever hope to know what was required to avoid liability.  Does “best interest” mean lowest price, or does it mean most coverage?  It could only rarely be both.” 

Agent Compensation Disclosure Required  

SB 263 would require agents to disclose the specific compensation he or she would be paid by the insurer over a 10-year period. These provisions do not seem to apply to agents paid on a salary or arrangements other than commission. The bill's disclosure provisions, therefore, discriminate against independent agents who generally are paid higher commissions than other insurance delivery systems because they own their own businesses and pay all of their own overhead and expenses. Thus, even if the insurance policy sold is relatively the same price, the independent agents’ commission will often be higher.

Incentive Compensation Prohibition  

The bill would prohibit an insurer from providing any non-cash support for its agents and would also ban any type of incentive compensation on an agents’ book of business. 

Although aimed at life insurance and annuity transactions, SB 263 is a lawyer’s dream for targeting insurance agents for litigation, said IIABCal Legislative Advocate John Norwood, and would create a horrible precedent that could be expanded to any other insurance product or service. 

IIABCal's Strong Opposition   

"SB 263 “Best Interest” standard creates a fiduciary standard subjecting insurance agent to second guessing litigation due to a vague standard of compliance and allowing a private cause of action allowing lawyers to sue agents," Norwood said. "Moreover, SB 263 discriminates against insurance agents paid on a commission and, particularly, against independent agents." 

IIABCal is strongly opposed to SB 263. The bill is expected to be heard in the Senate Insurance Committee on April 26th. A grassroots opposition letter will soon be going out to member agents and brokers in key districts requesting they contact legislators to file an objection to this seriously flawed proposal.