2007 California Insurance Code Article 8. Requirements For Replacement Of Life Insurance And Annuity Policies

CA Codes (ins:10509-10509.9)

10509.  The purpose of this article is the following:
   (a) To regulate the activities of insurers and agents with respect
to the replacement of existing life insurance and annuities.
   (b) To protect the interests of life insurance and annuity
purchasers by establishing minimum standards of conduct to be
observed in replacement transactions by the following:
   (1) Assuring that the purchaser receives information with which a
decision can be made in his or her own best interest.
   (2) Reducing the opportunity for misrepresentation and incomplete
disclosures.
   (3) Establishing penalties for failure to comply with the
requirements of this article.



10509.1.  This article is applicable to all individual life
insurance and annuity policies.



10509.2.  (a) "Replacement" means any transaction in which new life
insurance or a new annuity is to be purchased, and it is known or
should be known to the proposing agent, or to the proposing insurer
if there is no agent, that by reason of that transaction, the
existing life insurance or annuity has been or is to be any of the
following:
   (1) Lapsed, forfeited, surrendered, or otherwise terminated.
   (2) Converted to reduced paid-up insurance, continued as extended
term insurance, or otherwise reduced in value by the use of
nonforfeiture benefits or other policy values.
   (3) Amended so as to effect either a reduction in benefits or in
the term for which coverage would otherwise remain in force or for
which benefits would be paid.
   (4) Reissued with any reduction in cash value.
   (5) Pledged as collateral or subjected to borrowing, whether in a
single loan or under a schedule of borrowing over a period of time
for amounts in the aggregate exceeding 25 percent of the loan value
set forth in the policy.
   (b) "Conservation" means any attempt by the existing insurer or
its agent to dissuade a policyowner from the replacement of existing
life insurance or annuity.  Conservation does not include routine
administrative procedures such as late payment reminders, late
payment offers, or reinstatement offers.
   (c) "Direct-response sales" means any sale of life insurance or
annuity where the insurer does not utilize an agent in the sale or
delivery of the policy.
   (d) "Existing insurer" means the insurer whose policy is or will
be changed or terminated in such a manner as described within the
definition of "replacement."
   (e) "Existing life insurance or annuity" means any life insurance
or annuity in force including life insurance under a binding or
conditional receipt or a life insurance policy that is within an
unconditional refund period.
   (f) "Replacing insurer" means the insurer that issues a new policy
which is a replacement of existing life insurance or annuity.
   (g) "Registered contract" means variable annuities, investment
annuities, variable life insurance under which the death benefits and
cash values vary in accordance with unit values of investments held
in a separate account, or any other contracts issued by life insurers
which are registered with the Federal Securities and Exchange
Commission.


10509.3.  (a) Unless otherwise specifically included, this article
does not apply to the following:
   (1) Credit life insurance.
   (2) Group life insurance or group annuities.
   (3) An application to the existing insurer that issued the
existing life insurance when a contractual change or a conversion
privilege is being exercised.
   (4) Proposed life insurance that is to replace life insurance
under a binding or conditional receipt issued by the same insurer.
   (5) Transactions where the replacing insurer and the existing
insurer are the same; provided, however, that agents proposing
replacement shall:
   (A) Comply with the requirements of subdivisions (a) and (d) of
Section 10509.4.
   (B) Provide and leave with the applicant a written statement
containing information relating to premiums, cash values, death
benefits, and outstanding indebtedness, and dividends and dividend
accumulations, if any, for the existing policy, both immediately
before and after replacement, and for the proposed life insurance or
annuity.
   (b) Registered contracts shall be exempt from the requirements of
paragraphs (2) and (3) of subdivision (b) of Section 10509.6
requiring provision of policy summary or ledger statement
information; however, premium or contract contribution amounts and
identification of the appropriate prospectus or offering circular
shall be required in lieu thereof.



10509.4.  (a) Each agent who accepts an application shall submit to
the insurer with which an application for life insurance or annuity
is presented, or as part of each application, both of the following:

   (1) A statement signed by the applicant as to whether replacement
of existing life insurance or annuity is involved in the transaction.

   (2) A signed statement as to whether or not the agent knows
replacement is or may be involved in the transaction.
   (b) Where a replacement is involved, the agent shall do all of the
following:
   (1) Present to the applicant, not later than at the time of taking
the application, a "Notice Regarding Replacement of Life Insurance"
in the form as described in subdivision (d).  The notice shall be
signed by both the applicant and the agent and left with the
applicant.  Obtain with or as part of each application a list of all
existing life insurance or annuities to be replaced and properly
identified by name of insurer, the insured and contract number.  If a
contract number has not been assigned by the existing insurer,
alternative identification, such as an application or receipt number,
shall be listed.
   (2) Leave with the applicant the original or a copy of all printed
communications used for presentation to the applicant.
   (3) Submit to the replacing insurer with the application a copy of
the replacement notice.
   (c) Every agent who uses written or printed communications in
conservation shall leave with the applicant the originals of any
materials used.
   (d) Each agent or broker shall present to an applicant the
following notice:

      NOTICE REGARDING REPLACEMENT
REPLACING YOUR LIFE INSURANCE POLICY OR ANNUITY?

   Are you thinking about buying a new life insurance policy or
annuity and discontinuing or changing an existing one?  If you are,
your decision could be a good one--or a mistake.  You will not know
for sure unless you make a careful comparison of your existing
benefits and the proposed benefits.
   Make sure you understand the facts.  You should ask the company or
agent that sold you your existing policy to give you information
about it.
   Hear both sides before you decide.  This way you can be sure you
are making a decision that is in your best interest.
   We are required by law to notify your existing company that you
may be replacing their policy.


___________________     ____________________     ____________________

    (applicant)                (agent)                  (date)
                   ______________________________





10509.5.  Every life insurer shall do the following:
   (a) Inform its field representatives or other personnel
responsible for compliance with this article of the requirements of
this article.
   (b) Require with, or as part of, each completed application for
life insurance or annuity a statement signed by the applicant as to
whether such proposed insurance or annuity will replace existing life
insurance or annuity.



10509.6.  Every life insurer that uses an agent in a life insurance
or annuity sale shall do the following:
   (a) Require with or as part of each completed application for life
insurance or annuity, a statement signed by the agent as to whether
he or she knows replacement is or may be involved in the transaction.

   (b) Where a replacement is involved:
   (1) Require from the agent with the application for life insurance
or annuity:  (i) a list of all of the applicant's existing life
insurance or annuity to be replaced, and (ii) a copy of the
replacement notice provided the applicant pursuant to Section
10509.4.  The existing life insurance or annuity shall be identified
by name of insurer, insured, and contract number.  If a number has
not been assigned by the existing insurer, alternative
identification, such as an application or receipt number shall be
listed.
   (2) Send to each existing life insurer a written communication
advising of the replacement or proposed replacement and the
identification information obtained pursuant to this section and a
policy summary, contract summary, or ledger statement containing
policy data on the proposed life insurance or annuity.  Cost indices
and equivalent level annual dividend figures need not be included in
the policy summary or ledger statement.  This written communication
shall be made within three working days of the date the application
is received in the replacing insurer's home or regional office, or
the date the proposed policy or contract is issued, whichever is
sooner.
   (3) Every existing life insurer or the insurer's agent that
undertakes a conservation shall, within 20 days from the date the
written communication plus the materials required in subdivisions (1)
and (2) are received by the existing insurer, furnish the
policyowner with a policy summary for the existing life insurance or
ledger statement containing policy data on the existing policy or
annuity.  Information relating to premiums, cash values, death
benefits, and dividends, if any, shall be computed from the current
policy year of the existing life insurance.  The policy summary or
ledger statement shall include the amount of any outstanding
indebtedness, the sum of any dividend accumulations or additions, and
may include any other information that is not in violation of any
regulation or statute.  Cost indices and equivalent level annual
dividend figures need not be included.  When annuities are involved,
the disclosure information shall be that in the contract summary.
   The replacing insurer may request the existing insurer to furnish
it with a copy of the summaries or ledger statement, which shall be
within five working days of the receipt of the request.
   (c) The replacing insurer shall maintain evidence of the "notice
regarding replacement," the policy summary, the contract summary, and
any ledger statements used, and a replacement register,
cross-indexed by replacing agent and existing insurer to be replaced.
  The existing insurer shall maintain evidence of policy summaries,
contract summaries, or ledger statements used in any conservation.
Evidence that all requirements were met shall be maintained for at
least three years.
   (d) The replacing insurer shall provide in its policy or in a
separate written notice which is delivered with the policy that the
applicant has a right to an unconditional refund of all premiums paid
which right may be exercised within a period of 30 days commencing
from the date of delivery of the policy.  In the case of variable
annuity contracts, variable life insurance contracts, and modified
guaranteed contracts, return of the contract during the cancellation
period shall entitle the owner to a refund of account value and any
policy fee paid for the policy.  The account value and policy fee
shall be refunded by the insurer to the owner within 30 days from the
date that the insurer is notified that the owner has canceled the
policy.


10509.7.  (a) If in the solicitation of a direct response sale, an
insurer does not propose the replacement, and a replacement is
involved, the insurer shall send to the applicant with the policy a
replacement notice as described in subdivision (c) of Section 10509.4
or other substantially similar form approved by the commissioner.
In those instances the insurer may delete the last sentence and the
reference to signatures from the form without having to obtain
approval of the form from the commissioner.
   (b) If the insurer proposed the replacement it shall do the
following:
   (1) Provide to applicants or prospective applicants with or as
part of the application a replacement notice as described in
subdivision (d) of Section 10509.4.
   (2) Request from the applicant with or as part of the application,
a list of all existing life insurance or annuities to be replaced
and properly identified by name of insurer and insured.
   (3) Comply with the requirements of paragraph (2) of subdivision
(b) of Section 10509.6, if the applicant furnishes the names of the
existing insurers, and the requirements of subdivision (c) of Section
10509.6, except that it need not maintain a replacement register.




10509.8.  (a) A violation of this article shall occur if an agent or
insurer recommends the replacement or conservation of an existing
policy by use of a materially inaccurate presentation or comparison
of an existing contract's premiums and benefits or dividends and
values, if any, or recommends that an insured 65 years of age or
older purchase an unnecessary replacement annuity.
   (b) For purposes of this section, "unnecessary replacement" means
the sale of an annuity to replace an existing annuity that requires
that the insured will pay a surrender charge for the annuity that is
being replaced and that does not confer a substantial financial
benefit over the life of the policy to the purchaser so that a
reasonable person would believe that the purchase is unnecessary.
   (c) Patterns of action by policyowners who purchase replacement
policies from the same agent after indicating on applications that
replacement is not involved, shall constitute a rebuttable
presumption of the agent's knowledge that replacement was intended in
connection with the sale of those policies, and such patterns of
action shall constitute a rebuttable presumption of the agent's
intent to violate this article.
   (d) This article does not prohibit the use of additional material
other than that which is required that is not in violation of this
article or any other statute or regulation.



10509.9.  (a) Any agent or other person or entity engaged in the
business of insurance, other than an insurer, who violates this
article is liable for an administrative penalty of no less than one
thousand dollars (,000) for the first violation.
   (b) Any agent or other person or entity engaged in the business of
insurance, other than an insurer, who engages in practices
prohibited by this chapter a second or subsequent time or who commits
a knowing violation of this article, is liable for an administrative
penalty of no less than five thousand dollars (,000) and no more
than fifty thousand dollars (,000) for each violation.
   (c) Any insurer who violates this article is liable for an
administrative penalty of  ten thousand dollars (,000) for the
first violation.
   (d) Any insurer who violates this article with a frequency as to
indicate a general business practice or commits a knowing violation
of this article, is liable for an administrative penalty of no less
than thirty thousand dollars (,000) and no more than three hundred
thousand dollars (0,000) for each violation.
   (e) After a hearing conducted in accordance with Chapter 4.5
(commencing with Section 11400) and Chapter 5 (commencing with
Section 11500) of Part 1 of Division 3 of Title 2 of the Government
Code, the commissioner may suspend or revoke the license of any
person or entity that violates this article.
   (f) Nothing in this section shall be deemed to affect any other
authority provided by law to the commissioner.