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Unlicensed Insurance Sellers Flourish in State
Debate about controlling phone, Internet sales

Most people shopping for insurance assume the deal is fairly straightforward -- find a broker or agent licensed by the state, choose the right coverage and hand over a check.

But in this era of 800 numbers, Internet sales and direct mail, some of those old rules no longer apply. New ways of buying many types of insurance have given rise to new types of insurance sellers, many of whom are not licensed to sell in California.

Thousands of sellers without state licenses or regular state supervision are offering insurance over the phone, at car rental counters or via the computer.

``This is a huge body of people selling coverage, and they may or may not know what they're doing,'' said Steve Young, general counsel for Insurance Brokers and Agents of the West, a trade association.

No one really knows how much insurance is being sold by unlicensed people. But two recent lawsuits demonstrate the potential scope of the problem.

In Southern California, a suit filed last year accused auto dealers and insurance firms of allegedly cheating more than 1 million motorists by selling inadequate auto coverage. And Levitz Furniture Corp. paid $10 million last year to settle a lawsuit alleging that it deceived customers into buying credit insurance.

Attempts to reform licensing laws have bogged down in the Legislature during the past two years, and consumer advocates and licensed agents say state lawmakers and the Department of Insurance have not moved quickly enough to resolve the licensing issue.

Earlier this year, an investigation by The Chronicle found that the department, under Commissioner Chuck Quackenbush, had let agent discipline slip and had cut financing for investigations and enforcement. The Republican commissioner, who was re-elected last month, has close ties to the insurance industry.

But Insurance Department officials say they have moved as quickly as the complex issues allow. This spring, the department convened a task force to try to reach a consensus on new licensing requirements.

``We wanted to see if we could get all these groups into a detente mode, as opposed to having it turn into a legislative shooting war,'' said chief deputy insurance commissioner David Knowles.

California law dictates that traditional insurance agents and brokers be licensed by the Insurance Department. There are about 150,000 licensed agents and brokers in the state.

Other states, including Texas and New York, have already addressed changes in the way insurance is sold by offering a new type of ``limited'' license.

Such licenses, which are less costly and time-consuming to obtain, require that a seller offering only one type of insurance, such as car rental coverage, get a license limited to that coverage.

The Insurance Department is now considering limited licenses. Serious disagreements among some insurance interests, however, could hinder a solution.

A major licensing dispute remains between traditional agents and brokers and companies that offer ``direct'' sales, mostly over the phone.

Some direct-sales companies, such as USAA, have licensed agents handling policies. Others, such as 20th Century Insurance Co., rely on extensive in-house training for their sales and customer service representatives instead of individual state licenses for every employee.

Traditional agents and brokers argue that sales made via a direct 800 number are no different from traditional insurance transactions and should require a license. They also want to see direct sellers paying the same fees already required of traditional agents and brokers.

``State code says that if you're explaining coverages and trying to sell coverages, you must be licensed,'' said Young of the brokers organization.

But at companies such as 20th Century, which insures about 1 million cars in the state, executives say such complaints are out of step with the changing insurance market.

Rick Dinon, senior vice president at 20th Century, said the Southern California firm caters to consumers who know what they want and would rather spend a few minutes on the phone ordering their coverage than look for an agent and listen to sales pitches.

``Our staff is trained for the needs of our customers, not to meet state requirements that may not fit the way the insurance business has changed,'' Dinon said.

``The Department of Insurance is still empowered to crawl all over us, and they're not shy about doing it.''

With the task force plan due soon, the two sides seem far from offering a recommendation.

The department has been criticized for allegedly condoning the sale of auto insurance by unlicensed people working for auto dealers. In some instances, lawsuits filed in Southern California allege, the pricey coverage sold does not meet minimum state requirements.

The suits charge that more than one-third of the state's 7,000 dealerships are selling policies that -- unknown to car buyers -- do not provide required liability coverage. The coverage, also allegedly containing excessive broker fees, is marketed throughout the state by two Southern California companies that wholesale policies to auto dealers.

Citing alleged sales abuses, former state Senator Herschel Rosenthal introduced legislation two years ago to tighten up insurance sales practices in auto dealerships. But the bill encountered stiff industry opposition and died in committee.

The legislation would have required anyone selling insurance at a dealership to be licensed. Currently, employees are generally covered by a master license.

Department officials say there is no evidence of widespread improper selling of auto insurance, noting that a recent investigation of dealerships found only one possible significant violation.

The department has tentatively said that no new licenses should be required for auto dealers.

Most car rental companies seem willing to accept a new limited license for employees who offer liability or other coverages when a car is rented. Proposed new state requirements would also improve the insurance information customers are given when they rent a car.

``We would have no problem with this approach,'' said Richard McEvily, deputy general counsel for Hertz Corp., which has more than 75 rental offices in the state. ``We have not found limited licenses to be overly burdensome in other states.''

The department may also recommend a limited organizational license for businesses that offer credit insurance. Such coverage, routinely offered by credit card companies and other businesses that lend money, pays off debts should a customer default on a loan.

The crackdown on Levitz, according to the department, has sent a strong signal to credit insurance sellers that they face stiff penalties if they skirt state laws. The suit against the furniture retailer, filed by the department and four district attorneys, covered credit insurance sold to about 300,000 customers between 1993 and 1997.

For sales of insurance over the Internet, the department has determined that current licensing laws are adequate. Any company or agent that sells over the Internet must be licensed.

The department may also require that a company or agent's license number be displayed on the Internet site, as is currently required for business cards, letterhead and other documents.

Department officials hope to have a final plan ready to present to lawmakers early next year, even if different interests cannot agree on issues such as licensing for direct writers.

Without a full agreement, however, unresolved areas could wind back in the hands of the Legislature, where the group with the most money and the most persistent lobbyist usually wins -- a result that may not be the best when it comes to consumer protection.

``Without new laws, there is no way for the state of California to guarantee these (insurance sellers) know what the heck they are talking about,'' said Young.


When it comes to buying insurance, the old image of stopping by the neighborhood agent's office to get a new policy is giving way to 800 numbers, forms in the mail and the Internet. When buying coverage through some of these newer channels, here are some things consumers can do to make sure they are getting sound information:

-- Direct sales

Many companies that sell insurance directly rather than using agents deal with customers by telephone. Some of these direct sales representatives are licensed. Others are not, although they may have received extensive in-house training.

If you are inquiring about a new policy or changing your coverage, ask the telephone representative if they are licensed. If they are, ask which states they are licensed in -- an 800 number may be connecting you to offices all over the country.

If a company's representatives are not licensed, ask what sort of training they have received and whether the company they work for is licensed in California. You can check a company's license with the state Department of Insurance by calling 1-800-927-HELP or going to the department's web site at

-- Auto dealers

Auto dealers often offer insurance to people buying or leasing cars. You should ask sales representatives whether they are personally licensed or operating under the auspices of a dealership official who is licensed. You should also check to see if the policy includes liability coverage and obtain a detailed list of fees charged for the insurance.

Drivers are ultimately responsible for having insurance that meets the minimum required by state law -- a minimum liability policy with at least $15,000 coverage for bodily injury to one person; at least $30,000 for all those who suffer bodily injury; and at least $5,000 coverage for damage to property as the result of any one accident.

-- Rental car insurance

Under current law, car rental company employees who offer auto coverage when a car is rented do not have to be licensed. Customers are also often frustrated by unclear information about what coverage they may need.

Rental car insurance is not required in order to rent a vehicle. All drivers, however, must be insured to the minimum required by state law. Many personal auto policies and some credit cards will provide at least some coverage. Before renting a car, check with your own insurance company or credit card company to see how much coverage you have when renting.

-- Internet sales

Some companies and agents or brokers are turning to the Internet to offer quotes and make contact with customers. State law requires that any company or person making such sales have a license. In many cases, the license number will appear on the web site. If it does not, ask if the company or seller is licensed. Licenses may be checked with the Department of Insurance at the number or URL listed above.

-- Credit insurance

This coverage is routinely offered by credit card companies, businesses that sell goods on credit or other firms that essentially loan money to customers. The insurance covers the debt if the borrower is unable to pay to due unforseen events such as death, illness or loss of a job.

Current state law does not require employees of such businesses to have a license. Customers, when signing up for credit accounts, should carefully read all documents before signing or initialing to make sure they are not purchasing unwanted credit insurance.

Sources: California Department of Insurance, California Department of Motor Vehicles, Chronicle research.


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