California's Commissioner, unfair practices and the guarantee association

These marketplace questions cover who regulates California insurance, how unfair practices are penalized, and what happens when an insurer fails.

Questions and answers, explained

All 11 questions above, with the correct answer and why it is correct. Everything here is on california's commissioner, unfair practices and the guarantee association.

1. How does a person become California's Insurance Commissioner?

   • AElected by the voters, for a four-year term, at most two termsCorrect
   • BAppointed by the governor
   • CSelected by insurers
   • DChosen by the legislature for life

   Why: Insurance Code section 12900 provides that the commissioner is elected by the people at the same time and in the same manner as the governor, for no more than two four-year terms. A mid-term vacancy is filled with legislative confirmation.

   Reference Cal. Ins. Code 12900 — CA objectives I.C4.1.c

2. Under California's Unfair Practices Act, who enforces its provisions?

   • AThe county district attorney
   • BOnly the Insurance CommissionerCorrect
   • CThe insurer's compliance officer
   • DAny consumer who files a private lawsuit for damages under the Act

   Why: The Unfair Practices Act (Insurance Code 790-790.15) is enforced only by the commissioner, who may also hold hearings to identify additional unfair acts or practices.

   Reference Cal. Ins. Code 790-790.15 — CA objectives I.C4.2

3. Under Insurance Code section 790.035, what is the maximum civil penalty for each willful act of an unfair or deceptive practice?

   • A$1,000
   • B$55,000
   • C$5,000
   • D$10,000Correct

   Why: Section 790.035 sets a civil penalty of up to $5,000 for each act, or up to $10,000 for each act if it was willful, fixed by the commissioner. Inadvertent issuance of a policy counts as a single act.

   Reference Cal. Ins. Code 790.035 — CA objectives I.C4.2

4. A California life agent who is not a surplus line broker places business with a nonadmitted insurer. Under Insurance Code section 703, this is:

   • APermitted whenever the client signs a written waiver acknowledging the insurer is not admitted
   • BA felony with a five-year license suspension
   • CA misdemeanor, with a $500 forfeiture plus $100 for each month it continuesCorrect
   • DPermitted for life insurance but not for health

   Why: Section 703 makes it a misdemeanor, except for a surplus line broker, to act as agent for, advertise, or aid a nonadmitted insurer in transacting business in California. The violator also forfeits $500 plus $100 for each month or part of a month the violation continues.

   Reference Cal. Ins. Code 703 — CA objectives I.C2.9; I.C3.2

5. A furniture store advertises 'free life insurance' with every purchase, at no separate charge. Under Insurance Code section 777.1 this is:

   • ARequired by law for purchases over $1,000
   • BAllowed, because consumers benefit from extra coverage they did not have to pay for
   • CAllowed if the store is licensed as an agency
   • DGenerally prohibited as free insurance used to induce a purchaseCorrect

   Why: Section 777.1 bars insurers from offering insurance or annuities as an inducement to buy or rent property or services without a separate charge, and bars agents from arranging it. Narrow exceptions include newspaper subscriptions, credit union share purchases and product performance guarantees.

   Reference Cal. Ins. Code 777.1 — CA objectives I.C2.10

6. A California licensee moves to a new residence. Under Insurance Code section 1729, when must the commissioner be notified?

   • AImmediately, using an electronic service the commissioner approvesCorrect
   • BWithin 90 days, by certified mail
   • CAt the next license renewal, which may be up to two years away
   • DOnly if the move is out of state

   Why: Section 1729 requires every licensee and applicant to immediately notify the commissioner, through an approved electronic service, of any change in email, residence, principal business or mailing address.

   Reference Cal. Ins. Code 1729 — CA objectives I.C2.11.b

7. An insurer incorporated in Arizona is licensed to do business in California. In California it is a:

   • ADomestic insurer
   • BForeign admitted insurerCorrect
   • CFraternal insurer
   • DAlien nonadmitted insurer, because it is organized outside California

   Why: A domestic insurer is organized in California, a foreign insurer in another U.S. state, and an alien insurer in another country (sections 26, 27, 1580). An admitted insurer holds a certificate of authority to transact business in California (section 24).

   Reference Cal. Ins. Code 24-27, 1580 — CA objectives I.C3.1

8. Policyholder dividends paid from divisible surplus are characteristic of which kind of insurer?

   • AA stock insurer, which pays its divisible surplus to the shareholders who own it
   • BA reinsurer
   • CA mutual insurerCorrect
   • DA nonadmitted insurer

   Why: A mutual insurer is owned by its policyholders and may return divisible surplus to them as policyholder dividends. A stock insurer pays divisible surplus to shareholders as shareholder dividends. Fraternal insurers are nonprofit societies with a lodge system.

   Reference CA objectives I.C3.6

9. The California Life and Health Insurance Guarantee Association covers life insurance and annuities of an insolvent insurer up to the lesser of a dollar cap or what percentage of the contractual obligations?

   • A90 percent
   • B50 percent
   • C100 percent
   • D80 percentCorrect

   Why: Insurance Code 1067.02(c) limits CLHIGA's liability on life and annuity contracts to the lesser of 80 percent of the contractual obligations or the dollar caps, including $300,000 in life death benefits and $100,000 in net cash surrender or withdrawal values per life.

   Reference Cal. Ins. Code 1067.02 — CA objectives I.C4.6

10. Under Insurance Code 1067.02, what is the most the California Life and Health Insurance Guarantee Association will pay in life insurance death benefits on any one life?

    • A$300,000Correct
    • B$250,000
    • C$1,000,000
    • D$100,000

    Why: Section 1067.02 caps life death benefits at $300,000 per life, and net cash surrender or withdrawal values at $100,000, in each case also limited to 80 percent of the contractual obligation.

    Reference Cal. Ins. Code 1067.02 — CA objectives I.C4.6

11. Under California law, an insured who signs a claim form containing statements he knows are false may be guilty of:

    • AOnly a breach of contract
    • BPerjury, as well as insurance fraudCorrect
    • CNothing, as long as the insurer catches the error before paying the claim
    • DA traffic infraction

    Why: Under the False and Fraudulent Claims article (sections 1871-1871.4), knowingly presenting a false claim is a crime, and an insured who signs a false claim form may be guilty of perjury. California funds anti-fraud efforts through its Fraud Division and district attorneys.

    Reference Cal. Ins. Code 1871-1871.4 — CA objectives I.C4.7

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