Honorable Calvin K.Y. Say

Speaker, House of Representatives

Twenty-Second State Legislature

Regular Session of 2003

State of Hawaii

Sir:

Your Committee on Consumer Protection and Commerce, to which was referred H.B. No. 504 entitled:

begs leave to report as follows:

The purpose of this bill is to contain costs of force-placed insurance, which the seller or lender in a credit sales contract purchases to protect their interest in the item sold under the contract when the buyer fails to maintain insurance coverage on the item. This bill requires the seller or lender to exercise the same level of care and diligence as the buyer when purchasing force-placed insurance.

A concerned individual provided testimony in support of this bill. The Hawaii Bankers Association and the Mortgage Bankers Association of Hawaii submitted testimony opposing this bill. The Department of Commerce and Consumer Affairs Insurance Division offered comments on the bill.

Your Committee finds that when a seller or lender force-places insurance on an item purchased under a credit sales contract, they do so because the buyer has failed to meet the contractual obligation to maintain insurance coverage on the item. The seller or lender thus protects its interest in the item by purchasing insurance, while the buyer under the terms of the contract must pay the premiums for that force-placed insurance.

Your Committee finds that the circumstances under which insurance is force-placed provide the seller or lender with no incentive to look for a reasonably priced insurance policy. In addition, in some cases insurers provide payments to encourage lenders to select their policies, and these payments are paid for by the force-placed buyer.

Your Committee believes that a seller or lender should be expected to exercise the same diligence as the buyer when pricing force-placed insurance, and should be required to find a policy that is reasonable, relative to the rate the buyer can obtain for comparable coverage.

Your Committee has amended this bill by:

1. Limiting its scope from all forms of secured lending to automobile loans, which involve the majority of consumer problems with force-placed insurance;
2. Providing that the rates charged to the buyers for a force-placed policy shall not exceed 110 per cent of the rate the buyer can obtain for coverage of the insurable interest, rather than the rate formerly paid by the buyer under the lapsed policy, which may be outdated by the time a policy is force-placed;
3. Defining "force-placed insurance" and "rule of 78," which are terms that are not universally understood;
4. Removing the provisions of this bill from the Insurance Code because it is unclear whether sellers or lenders, by purchasing force-placed insurance, are engaging in the business of insurance. Instead, the proposed law has been placed in chapter 480, Hawaii Revised Statutes, which prohibits unfair and deceptive trade practices;

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. 504, as amended herein, and recommends that it pass Second Reading in the form attached hereto as H.B. No. 504, H.D. 1, and be placed on the calendar for Third Reading.