Honorable Calvin K.Y. Say

Speaker, House of Representatives

Twenty-Second State Legislature

Regular Session of 2004

State of Hawaii

Sir:

Your Committee on Consumer Protection and Commerce, to which was referred H.B. No. 1820 entitled:

begs leave to report as follows:

The purpose of this bill is to shorten, from 30 to 15 days, the period of notice and extended coverage that a motor vehicle insurer must provide before a policy may be cancelled for nonpayment of the premium.

Testimony in support of the bill was provided by the Hawaii Insurers Council, Hawaii Independent Insurance Agents Association, and GEICO. The State Insurance Commissioner testified in support of the intent of the bill and suggested an amendment. The Consumer Lawyers of Hawaii (CLH) opposed the bill.

Your Committee heard two related bills at the same public hearing -- this bill, H.B. No. 1820, and H.B. No. 1821. Your Committee has consolidated both bills in an amended H.B. No. 1820. Accordingly, the Committee's discussion of this bill also includes a discussion of the substance of H.B. No. 1821.

Your Committee finds that motor vehicle insurance commonly includes a period of extended coverage after a missed premium payment, to reduce the risk of an inadvertent policy lapse. However, in most states, the extended coverage period is 10 to 15 days, and only Hawaii and West Virginia have a 30-day extended coverage period for automobile insurance.

While Hawaii's longer period of extended coverage may appear to benefit both consumers and insurers by allowing them to avoid an inadvertent policy lapse, your Committee finds that the following disadvantages attach when the cancellation period is too long:

Your Committee heard concerns that 15 days does not give consumers adequate time to respond to a notice of policy nonrenewal or cancellation. Your Committee disagrees and notes that in the three decades since the 30-day extended coverage period was established, changes in technology now allow consumers to make payments very quickly.

Your Committee finds that H.B. No. 1821 allows a motor vehicle insurer to cancel a policy on or before the 60^th day after issuance. This is known as an "underwriting period."

The underwriting period gives insurers time to perform driving record and claims history searches to ensure that a policy is properly rated. In cases where an insurer issues an improperly rated policy to a consumer who has failed to disclose traffic violations and accidents, large additional premiums may need to be charged, and collection activities may become necessary.

To avoid this problem some insurers ask a prospective insured to obtain an abstract of their traffic record prior to issuing a policy. The consumer must then visit the District Court, adding to the lines and workload, and cannot obtain insurance until the traffic abstract is delivered to the insurer.

Your Committee finds that the addition of an underwriting period gives the insurer the time needed to obtain the consumer's traffic abstract data and avoid the costs of an improperly rated policy. It also makes it possible for more insurers to offer immediate coverage.

Although concerns were voiced that the addition of an underwriting period and the ability to cancel a policy during this period would increase the number of uninsured drivers, your Committee does not believe that this bill will have a significant net effect on the number of uninsured drivers. Although some motorists will drive without insurance after a policy is cancelled, any additional increment of uninsured drivers due to cancellations will be partially or completely offset by the reduction in uninsured drivers due to the immediate access to insurance afforded by an underwriting period. The benefits of an underwriting period, to both insurers and honest consumers, clearly outweigh the hypothetical and, probably, de minimus change in the number of uninsured drivers.

Your Committee also heard the concern that discriminatory criteria would be applied during the underwriting period to cancel a policy. Your Committee notes that the law already prohibits the use of specified discriminatory criteria to cancel a policy.

Accordingly, your Committee has amended this bill by:

Technical, nonsubstantive amendments were also made for purposes of clarity, consistency, and style.

Your Committee believes that the changes to the motor vehicle insurance law proposed in H.B. No. 1820, H.D. 1, have the potential to save Hawaii's motor vehicle insurance companies several million dollars a year, and that Hawaii's competitive market for automobile insurance will assure that these savings are passed through to consumers.

As affirmed by the record of votes of the members of your Committee on Consumer Protection and Commerce that is attached to this report, your Committee is in accord with the intent and purpose of H.B. No. 1820, as amended herein, and recommends that it pass Second Reading in the form attached hereto as H.B. No. 1820, H.D. 1, and be placed on the calendar for Third Reading.