By: Wes Johnson
Senate Bill 1567 was passed during the regular called session of the 83rd Texas Legislature and signed by Governor Rick Perry on June 14, 2013. The bill was sponsored by Sen. Wendy Davis (D – Fort Worth). S.B. 1567 applies its provisions to an insurance policy that is delivered, issued for delivery, or renewed on or after January 1, 2014
S.B. 1567 was one of three specific bills filed in both the House and the Senate in effort to end or restrict the practice of so-called “named driver policies.” Named driver policies are non-standard personal auto policies that are intended to limit an insurance carrier’s exposure to unlisted drivers residing in the household of the person applying for insurance coverage. The way that a named driver policy works is fairly simple. The applicant presents himself to an agent requesting coverage. In an effort to keep premiums low, the agent might offer the option of a named driver policy. This would potentially mean that persons in the household, such a teen drivers or persons with bad driving records, are not extended coverage because the policy specifically excludes all residents who are not listed on the policy itself. These policies have become very popular in economically challenged sections of the state and have been lent to criticism from consumer rights activists and lawmakers who believe that these policies prey on poor communities. Consequently, the 83rd Legislature had multiple efforts to either ban such policies outright or restrict their proliferation.
S.B. 1567 appears to be a compromise designed not to end named driver policies, but to better inform the public about their restrictive nature. The statute amends the Texas Insurance Code to prohibit an agent or insurer, including a county mutual insurance company, from delivering or issuing for delivery in Texas a personal automobile insurance policy unless the policy provides at least the minimum coverage specified by provisions of the Texas Motor Vehicle Safety Responsibility Act relating to the establishment of financial responsibility through motor vehicle liability insurance. Prior to accepting any premium or fee for a named driver policy, the agent or insured must disclose to the applicant or insured, orally and in writing, that a named driver policy does not provide coverage for individuals residing in the insured's household not named on the policy. The agent or insurer must receive a signed copy of the disclosure from the applicant before accepting the premium or fee and confirmation must be received contemporaneously in writing that the application received the required oral disclosure. The bill requires an agent or insurer to specifically include the required disclosure in the policy and conspicuously identify the required disclosure on the front of any proof of insurance document issued to the insured.
S.B. 1567 further amends the Texas Transportation Code to add the required disclosure for a named driver policy to the contents of a standard proof of motor vehicle liability insurance form prescribed by the Texas Department of Insurance.
On its face, S.B. 1567 appears rather innocuous and this may mean that many legislators did not grasp the practical impact of the bill. It does not appear that any significant lobbying effort was launched by the non-standard industry to resist any element of the bill itself.
The fact that the statute applies to both new business and renewals is the most impactful element to carriers. It would take a herculean effort to get every existing insured to come to their agent and sign the disclosure required to maintain the named driver policy prior to the renewal date. The alternative is likely less desirable: effectively non-renew every insured that fails to appear before the agent. (Remember, the bill provides that the agent must provide an oral recitation of the warnings and secure a signed copy of the disclosure notice. Thus, it is likely that the method used to obtain this is through an in-person visit to the agent's office.) Non-standard carriers might be in the business of reducing their exposure to a higher level of risk presented by their clientele. However, they need customers to stay in business like any other industry. Running the risk of losing a significant part of their book of business through a scheme of global non-renewal is not attractive.
Second, the carrier becomes very dependent on the agent to adopt best practices in maintaining the oral disclosure and the contemporaneous written disclosure. This element is fraught with potential fact questions in litigation as to whether the agent actually delivered the required oral disclosure and when in time it was actually given. There appear to be many potential pitfalls to the carrier at the agency level, along with increased exposure to the agency itself. If any of these disclosures are not strictly complied with, then the carrier has essentially agreed to provide coverage for all residents of the household.
Last, the language employed by the statute is loose. The term "resident of the household" is used. It does not define that terminology any more clearly. Does it mean resident at the time of loss? At the time of application? What is a "resident?" Could an exchange student be a resident? How about a missionary? Texas law has loosely defined resident for purposes of insurance contracts as a person who lives in a home with the intent to remain indefinitely or who is not living in the home, but has the intent to return. See State Farm Mut. Auto. Ins. Co. v. Nguyen, 920 S.W.2d 409, 412–13 (Tex.App.—Houston [1st Dist.] 1996, no writ) (citing Amco Ins. Co. v. Norton, 243 Neb. 444, 500 N.W.2d 542, 546–47 (1993)). Employing such a definition here could potentially create a vast swath of coverage exposure amongst the substantial undocumented immigrant community in Texas. It is highly recommended that all non-standard carriers employ definitions of "household" and "resident" in their policy forms to limit their exposure.
However, perhaps the most significant development from this bill is the definition of “named driver policy” itself. Under this bill, a “named driver policy” is defined as “an automobile insurance policy that provides coverage only for drivers specifically named on the policy and not for all individuals residing in the named insured’s household and that may or may not provide coverage for drivers using a vehicle covered by the policy with permission and not residing in the insured’s household. The term includes an automobile insurance policy that has been endorsed to only provide coverage for drivers specifically named on the policy.” This is a significant departure from the definition used by The Texas Department of Insurance ("TDI") for years, which simply defined named driver policies as policies that only covered the drivers named on the policy – no permissive use. Thus, SB 1567’s definition encompasses more policies than the TDI because it also includes policies that limit access for just the household members not listed, but otherwise would allow permissive use.
The new reality is that, while S.B. 1567 was likely not intended to end named driver policies, the practical effect is that it might. Industry compliance with S.B. 1567 is likely going to be very cumbersome. It is possible that many carriers will elect to not offer this type of product at all. Even if they do, underwriting standards will have to tighten dramatically to investigate the persons living at the home and obtain a 515A Named Driver Exclusion on any potential driver that the carrier does not want to cover under the policy.
The net result will likely be that non-standard carriers will attempt to reduce their exposure in other sections of their policy form and institute premium increases to counter the effect of the increased exposure to liability caused by covering so many persons that the policy was not intended to cover in the first place. Other possible outcomes could be the increased pursuit of material misrepresentation claims by carriers against their insureds, and errors and omissions claims against their agency force.