Departmental Interpretation of Act No. 66 of 1999 (S.337, R.112)

(Issued upon December 3, 1999)

To:       All Insurers Writing Credit Life, Accident and Health or Property and Casualty Insurance within the State of South Carolina in Conjunction with Act No. 988 of 1966 and all insurers writing Credit Life, Accident and Health or Property and Casualty Insurance within the State of South Carolina in Conjunction with Consumer Credit Transactions Other than Loans Made Under  Act No. 988 of 1966

From:   Mr. Ernst N. Csiszar, Director

Re:       Departmental Interpretation of Act No. 66 of 1999 (S.337, R.112)

I. Purpose

The purposes of this bulletin are: (1) to inform insurers of the enactment of Act No. 66 of 1999; (2) to provide guidance with respect to various provisions of the Act; and (3) to provide answers to specific questions posed by the credit insurance industry. This bulletin addresses provisions related to credit insurance only. It is not intended to address issues related to provisions that may be under the purview of any other regulatory body.

II. Background

Act No. 66 of 1999 ("the Act") addresses various issues related to life, accident and health, and property and casualty insurance sold in conjunction with a consumer credit transaction.

Credit insurance refers to insurance sold in conjunction with a consumer credit transaction as provided for in the Consumer Finance Law (Chapter 29 of Title 34 of the South Carolina Code of Laws) and the Consumer Protection Code (Chapter 4 of Title 37 of the South Carolina Code of Laws). The Consumer Finance Law governs credit transactions of restricted lenders. In general, the Consumer Protection Code governs credit transactions of supervised lenders; however, there are some provisions that apply to both supervised and restricted lenders. In general, similar changes were made to both the Consumer Finance Law and the Consumer Protection Code. In some instances, it was appropriate to make changes only to the Consumer Protection Code.

In addition to applicable provisions of the Consumer Finance Law and the Consumer Protection Code, credit insurance products sold in conjunction with a consumer credit transaction must comply with applicable provisions of the South Carolina Insurance Code or any rule or regulation promulgated thereunder.

III. Major Provisions of the Act

A. Maximum Amount of Credit Life Insurance Coverage

SECTIONS 1 and 12 of the Act define the maximum amount of credit life insurance coverage that may be written. The maximum amount of credit life insurance that may be written varies depending upon the term of the loan (or debt):

1. For loans (or debt) with a term of sixty months or less, the maximum amount of credit life insurance that may be written is "the periodic installment payment multiplied by the number of scheduled periodic installment payments" (i.e., "gross coverage"). Gross coverage may also be defined as the scheduled outstanding balance of the loan plus the interest and finance charges that may be charged over the remaining life of the loan.

2. For loans (or debt) with a term in excess of sixty months, the maximum amount of credit life insurance that may be written is "the amount necessary to liquidate the remaining debt in a single lump sum payment, excluding all unearned interest and other unearned finance charges, plus six monthly installment payments" (i.e., "net coverage + 6 monthly payments").

It is important to note the following:

• The Act defines the maximum amount of credit life insurance coverage that may be written for loans (debt) of various terms. It is permissible to write a lesser amount of life insurance coverage. For example, "net + 2 monthly payments" may be written for a loan (debt) with a term in excess of sixty months. Alternatively, "net + 2 monthly payments" may be written for a loan (debt) with a term of sixty months or less as long as the amount of coverage does not exceed "gross coverage."

• If the amount of credit life insurance coverage written exceeds "net coverage," the policy must include a provision which stipulates that any coverage in excess of the amount necessary to discharge the indebtedness must be paid to the debtor's named beneficiary, other than the creditor, or the debtor's estate, in the event of death.

• SECTIONS 1 and 12 of the Act define the maximum permissible amount of credit life insurance coverage that may be written. They do not affect the calculation of the maximum amount of insurance that may be written for other types of credit insurance (e.g., credit accident and health insurance, credit unemployment insurance, etc.).

B. Refund of Unearned Premiums

SECTION 1 of the Act provides that restricted lenders are not required to provide refunds of unearned premiums under three dollars. This change was a technical amendment changing the minimum threshold for refunds of unearned premiums from two dollars to three dollars for both restricted and supervised lenders as provided by Act No. 139 of 1993 (South Carolina Code of Laws §37-4-204).

It is important to note the following:

• This change was not intended to affect any other aspect of the calculation of unearned premiums. For example, the method of refunding premiums must be made pursuant to the Rule of 78 or the Sum of the Digits method. Alternative methods of calculating the refunds may be used as long as they are not less favorable to the insured than the Rule of 78 or the Sum of the Digits method.

• Section 37-4-108 provides that supervised lenders do not have to issue refunds of less than two dollars. However, this provision was superseded by the provisions of Act No. 139 of 1993 (South Carolina Code of Laws §37-4-204).

C. Definition of Disability

SECTIONS 1 and 20 of the Act set forth the definition of disability that must be used in a credit accident and health insurance policy. In accordance with these provisions, "[disability shall not be defined more restrictively than the inability of the insured to engage in his own occupation during the first year of disability or for the length of the benefit period if less than one year. After the first year of disability, disability shall not be defined more restrictively than the inability of the insured to engage in the substantial duties of any gainful occupation for substantially equivalent remuneration to the insured's own occupation. Substantially equivalent remuneration means not less than seventy-five percent of the insured's base wage, exclusive of overtime and bonus, as of the date the disability commences."

It is important to note the following:

• This change applies to credit accident and health insurance policies or riders only.

• Policy forms containing this provision must reflect this change and be re-filed for approval.

D. Maximum Credit Life Insurance Premiums

SECTIONS 1 and 14 of the Act mandate a reduction in the maximum premiums that may be charged for credit life insurance. The reduction is phased in over several years. The first statutory premium decrease is effective January 1, 2001. The second statutory premium decrease is effective January 1, 2003.

Until January 1, 2001, credit life insurance premiums for each one hundred dollars of indebtedness are considered reasonable and may be charged if they are not greater than the amounts given in the following table times the number of years, or fraction of a year, that the indebtedness covered by insurance is scheduled to continue, subject to a minimum charge of three dollars:

Decreasing Balance Level Balance

Individual $.65 $1.30

Joint Insurance $1.08 $2.16

Effective January 1, 2001, credit life insurance premiums for each one hundred dollars of indebtedness are considered reasonable and may be charged if they are not greater than the amounts given in the following table times the number of years, or fraction of a year, that the indebtedness covered by insurance is scheduled to continue:

Decreasing Balance Level Balance

Individual $.57 $1.14

Joint Insurance $.95 $1.89

Effective January 1, 2003, credit life insurance premiums for each one hundred dollars of indebtedness are considered reasonable and may be charged if they are not greater than the amounts given in the following table times the number of years, or fraction of a year, that the indebtedness covered by insurance is scheduled to continue:

Decreasing Balance Level Balance

Individual $.55 $1.10

Joint Insurance $.91 $ 1.83

It is important to note the following:

• Current maximum credit life insurance premiums remain in effect until December 31, 2000.

• For purposes of this calculation, "indebtedness" may not exceed the maximum amount of credit life insurance coverage which may be written (i.e., "indebtedness" means the "approximate amount of debt" as defined in §§ 34-29-160 and 37-4-202(1)(a) of the South Carolina Code of Laws).

• If the life insurance coverage is truncated for any reason, the "number of years, or fraction of a year, that the indebtedness covered by insurance is scheduled to continue" may not exceed the term of the insurance coverage.

E. Claims Practices

SECTIONS 2 and 15 of the Act provide that any acts or attempts by parties to the consumer credit transaction that prevent the filing or receiving of payment on a legitimate insurance claim are prohibited. Consumers who are successful in challenging a party under this section may be awarded actual and consequential damages, if any, as well as reasonable attorney's fees and costs. In determining attorney's fees and costs, the amount of recovery on behalf of the consumer is not controlling.

F. Portability and Continuity of Coverage

SECTIONS 3 and 10 of the Act address the issue of "portability" of insurance coverage. The General Assembly based these changes upon various complaints. In some cases, consumers complained that when they refinanced their loans, coverage was continued without their knowledge. In other cases, consumers complained that coverage was not issued upon refinancing due to health conditions that arose while they were insured.

Both SECTIONS 3 and 10 provide that the consumer must have the option to obtain insurance coverage upon deferral, refinancing, or consolidation, if the insurance coverage upon the original loan has not lapsed. This option is subject to the following requirements:

a) The amount of the insurance coverage must be at least equal to the amount of coverage remaining at the time of the deferral, refinancing, or consolidation.

b) The term of the insurance coverage must be at least equal to the term of the original insurance coverage.

c) The insurance coverage, up to the amount of the coverage remaining at the time of deferral, refinancing, or consolidation and for a term not to exceed the length of the term of the original insurance, shall not be subject to evidence of insurability.

d) Incontestability and waiting periods for insurance coverage, up to the amount of coverage remaining at the time of deferral, refinancing, or consolidation and for a term not to exceed the length of the term of the original insurance, must be based upon the date of the original loan.

It is important to note the following:

• These provisions apply to insurance coverage on loans issued by both restricted lenders and supervised lenders.

• These provisions only apply if the deferral, refinancing, or consolidation is with the same lender (creditor) and the same insurer.

• These provisions do not apply to insurance for which no identifiable charge is made to the debtor.

• The right to this continued coverage must be specified in the insurance contract.

2. In addition, SECTION 10 provides the following for insurance coverage on loans issued by supervised lenders:

a) The election of the debtor with respect to the offer of the creditor to continue the insurance coverage as described above must be evidenced by an affirmatively signed, clear and conspicuous statement.

b) Coverage may not be required upon deferral, refinancing, or consolidation.

c) Such continued coverage may be subject to earlier termination according to insurance termination provisions of the policy or certificate that apply generally without regard to whether the insurance relates to a transaction that is or is not a deferral, refinancing, or consolidation, subject to specific conditions for termination of a group policy.

It is important to note that these provisions of SECTION 10 of the Act do not apply to restricted lenders.

G. Modification of Incontestability Provision

SECTIONS 4 and 17 of the Act modify the current ability of the insurer to contest the truth of the application for insurance and the representations of the insured. Under this provision, the policy or certificate cannot be declared void and the insurer cannot avoid payment of the claim based upon a misrepresentation made by the insured regarding medical conditions or health history required in furnishing evidence of insurability that is not causally related to the contingency or event by which the policy claim arises.

It is important to note the following:

• Prior to the enactment of this provision, the insurer was not required to prove a causal connection between the contingency or event by which the policy claim arose and the misrepresentation made by the insured in furnishing evidence of insurability to void the policy and avoid payment of the claim. Carroll v. Jackson National Life Insurance Company, 307 S.C. 267, 414 S.E.2d 777 (S.C. 1992).

• Policy forms containing an incontestability provision must be re-filed to reflect this modification to the incontestability provision. These forms must be approved by the Department.

H. Non-filing Insurance

SECTIONS 5, 8 and 18 of the Act address the maximum amount that may be charged for non-filing insurance and related issues. These provisions:

1. Require that the amount charged for non-filing insurance coverage shall not exceed seventy-five percent of the official fee1 defined in § 37-1-301(17) of the South Carolina Code of Laws;

(Footnote 1-The official fee is currently $8)

2. Exclude from the definition of "official fees" a premium payable for insurance in lieu of perfecting a security interest when the security interest is a purchase money security interest as defined in § 36-9-107, for which, in accordance with § 36-9-302(1)(d), perfection by the filing of a financing statement is not required effective April 1, 2000; and

C. Exclude from the definition of "official fees" a premium payable in lieu of perfecting a security interest when the collateral is such that it cannot be used as a security for a loan pursuant to the Federal Credit Practices Rule or § 37-5-108 of the South Carolina Code of Laws.

I. Medical Underwriting

1. SECTIONS 6 and 11 address concerns related to medical underwriting. Consumers complained to the General Assembly that they thought coverage had been issued when their loan was taken out only to discover upon an attempt to make a claim that the policy had not been issued due to medical underwriting. In one case, the consumer indicated that he had answered the medical underwriting questions truthfully but the agent had marked the questions on the application incorrectly.

It is important to note that South Carolina insurance laws already prohibit "post-underwriting." If a credit insurance policy is issued it may not be contested except as provided for in the incontestability provision.

Section 34-29-165 (1) was added to Chapter 29 of Title 34 to mirror a similar provision that already existed for supervised lenders in Section 37-4-201(1). Both of these sections provide that credit insurance may be subject to the furnishing of evidence of insurability. However, whether or not such evidence is required the term of insurance shall commence no later than when the debtor becomes obligated to the creditor or when the debtor applies for insurance, whichever is later, except as follows: (a) if any required evidence of insurability is not furnished until more than thirty days after the term would otherwise commence, the term may commence on the date when the insurer determines the evidence to be satisfactory; or (b) if the creditor provides insurance not previously provided covering debts previously created, the term may commence on the effective date of the policy.

It is important to note the following:

• The addition of this provision was intended to clarify that both restricted lenders and supervised lenders must comply with this requirement.

• This section does not allow underwriting in situations where South Carolina insurance laws would prohibit such underwriting (e.g., group accident and health insurance, or group life insurance issued to groups of 25 or more that is not supplemental to a basic policy.)

• This provision is intended to address the concern that consumers should know at the time they enter into the credit transaction whether or not they have been issued credit insurance.

2. Both SECTIONS 6 and 11 add the following new provision: "[i]f evidence of insurability is required, and the insured's eligibility is to be determined by inquiries about existing or past medical conditions, the medical conditions inquired about shall be clearly and conspicuously disclosed in plain language on forms promulgated or approved by the Department of Insurance which achieve a grade level score of no higher than seventh grade on the Flesch-Kincaid readability test. The disclosure shall be made in a clear and conspicuous manner in bold type, with space for the insured to personally acknowledge the disclosure by a dated signature or initial immediately adjacent to the disclosure. Insurance coverage shall not be denied on the basis of any medical condition not so disclosed. Coverage shall not be denied if the insured's dated acknowledgement does not appear on the form."

It is important to note the following:

• Each inquiry about existing or past medical conditions must be separately acknowledged by the insured with a dated signature or initial immediately adjacent to the inquiry. It is not sufficient to have several inquiries and one signature as is allowed under current statutes.

• If each inquiry is not clearly and conspicuously disclosed as described above and is not separately acknowledged by the insured then coverage may not be denied on the basis of an inquiry that was answered incorrectly or untruthfully.

• The Department does not currently have plans to promulgate a form to implement this provision. Hence, credit insurers must file forms that they plan to use for the purpose of complying with this provision to the Department for approval.

• See Section III L. of this Bulletin for additional information regarding the Flesch-Kincaid grade level score.

J. Disclosure

SECTIONS 7 and 9 of the Act add significant disclosure requirements for credit insurance policies. These requirements were added by the General Assembly to address concerns that consumers were not getting appropriate information with respect to the product purchased, the identity of the insurance company, the process to be followed in submitting a claim and how to get information about their policy or credit insurance in general. The provision requires:

Each policy or certificate of credit life insurance or credit accident and sickness insurance shall set forth the following information on the first page of the policy or attached thereto in a manner that is clear and conspicuous and achieves a grade level [score] of no higher than seventh grade on the Flesch-Kincaid readability test:

a) the name, address, and telephone number of the insurer and the process to be followed in submitting a claim;

b) the name or names of the debtor, or in the case of a certificate, the identity by name or otherwise of the debtor;

c) the age or date of birth of the debtor;

d) the premium or amount payable by the debtor separately for credit life insurance and credit accident and sickness insurance;

e) a description of the coverage including the amount and term of the coverage, and any exceptions, limitations, or restrictions;

f) a statement that benefits shall be paid to the creditor to reduce or extinguish the unpaid indebtedness;

g) a statement that, if the amount of insurance exceeds the amount necessary to discharge the indebtedness, any excess shall be payable to a beneficiary, other than the creditor, named by the debtor or to the debtor's estate;

h) a conspicuous statement that the insured debtor shall have the right to cancel the insurance policy or group certificate and have all premiums paid by or charged to the insured debtor refunded or credited, upon giving written notice to the insurer within thirty days from the date the insured debtor received the policy or certificate;

i) a conspicuous statement which reads as follows: "For specific information about credit insurance issued in conjunction with your loan, contact your creditor or your insurance company. For general information about credit insurance or complaints regarding your credit insurance, please contact the South Carolina Department of Insurance at [current toll-free number].

It is important to note the following:

• This disclosure must be filed with the Department for approval. The disclosure language may be included in the language of the policy provided it complies with the requirements of the Act or it may be attached to the front of the policy.

• See Section III.L. of this Bulletin for additional information regarding the Flesch-Kincaid grade level score.

• With respect to item (i), the telephone number of the insurer may be included after the phrase "contact your creditor or your insurance company." The telephone number of the insurer may be set forth in bold type.

• With respect to item (i), the disclosure should include both the toll free number and the local phone number of the South Carolina Department of Insurance. The numbers are currently 1-800-768-3467 and 737-6180, respectively.

• This disclosure requirement does not apply to insurance for which no identifiable charge is made to the debtor.

K. Length of Coverage

SECTION 11 of the Act adds a provision relating to situations where the term of the insurance coverage is less than the term of the consumer credit transaction. Under this provision, the originally scheduled term of the insurance must extend at least until the due date of the last scheduled payment of debt unless:

1. The insurance relates to a revolving charge account or revolving loan account, in which case the term need only extend until the payment of debt under the account and may be sooner terminated after at least thirty days' notice to the debtor; or

2. The consumer chooses to purchase insurance for less than the term of the consumer credit transaction and if the consumer is advised in writing that the insurance will be written for a specified shorter time, subject to the following conditions:

a) For all closed-end transactions in which the debtor's age at maturity would not exceed any applicable age limit, the debtor must be given a disclosure that the insurance is for the length of the loan.

b) The disclosure may allow the consumer to affirmatively sign a statement that the term of the insurance is less than the length of the loan, in which case, the coverage must be written for the duration agreed to by the parties and must clearly and conspicuously indicate the length of the insurance coverage and that the length of the insurance coverage is less than the term of the loan.

c) All insurance may be subject to a provision by which the insurance terminates when the insured debtor attains a specified age, which shall not be less than sixty-six years; provided that any premium paid by or charged to a debtor for a period of coverage beyond such terminating age shall result in coverage being continued until the end of the period for which the premium payment or charge is made.

d) The disclosures must achieve a grade level score of no higher than seventh grade on the Flesch-Kincaid readability test.

It is important to note the following:

• This provision does not apply to restricted lenders since they may force place coverage under certain conditions.

• This provision was intended to address consumer complaints that they were not aware that they had purchased insurance coverage with a term that was less than the term of the consumer credit transaction.

• In general, provisions in the South Carolina Insurance Code related to misstatement of age or sex apply to credit insurance. However, if a policy is issued beyond a terminating age (e.g., 66) due to a misstatement of age, the insurer must continue the coverage beyond the terminating age until the end of the period for which the premium payment or charge is made.

• See Section III.L. of this Bulletin for additional information regarding the Flesch-Kincaid grade level score.

• This form must be filed with the Department of Insurance for approval.

L. Flesch-Kincaid Grade Level Score

The Act adds various disclosure requirements which specify that these disclosures must achieve a grade level score of no higher than seventh grade on the Flesch-Kincaid readability test.

With respect to these disclosures it is important to note the following:

• The grade level score of no higher than seventh grade on the Flesch-Kincaid readability test applies to these specified disclosures only.2

(Footnote 2- The provisions which pertain to the specified disclosures include, but may not be limited to S.C. Code Ann. §§ 34-29-165 (Evidence of Insurability), 34-29-166 (Insurance Coverage), 37-4-105 (Insurance Coverage), 37-4-201(2) (Evidence of Insurability), 37-4-201(3)(b)(iv) (Truncated Coverage Disclosure), and 37-3-202(2)(d) (Insurance Coverage).

• The readability requirements in South Carolina Regulation 69-5.1 (D)(1)(a) continue to apply to all other forms for which a Flesch-Kincaid grade level score is not separately specified.

• If the disclosure is included as a part of a larger form, the larger form, taken as a whole, must continue to comply with the requirements of South Carolina Regulation 69-5.1 (i.e., it must achieve a Flesch score of at least 40).

• The formula for the calculation of the grade level score may be found in Appendix A: Questions & Answers, Question #8.

• The procedures set forth in South Carolina Regulation 69-5.1 should be followed in meeting the grade level score.

• A "grade level score of no higher than seventh grade on the Flesch-Kincaid readability test" means a score of 7.9 or less.

• The insurer must submit a certification which indicates the Flesh-Kincaid grade level score of this disclosure complies with the requirements of this Act and that the readability score of the form as a whole, if applicable, complies with the requirements of South Carolina Regulation 69-5.1.

M. Electronic Transactions

SECTION 16 of the Act grants exceptions to the signature requirement for certain required disclosures for electronic transactions that meet specific conditions. This provision states:

Notwithstanding the requirements of Sections 37-2-202(2), 37-3-202(2), 37-4-110(1)(e), and 37-4-201(3)(b) required disclosures must be given and acknowledged, but need not be signed by the debtor in a transaction that meets all of the following requirements:

(a) the plan is an open-end loan or open-end credit plan;

(b) the insurance election or change is made by the debtor at a time after the plan documents are initially completed and the plan is established;

(c) the premiums or insurance charges are to be added to the account monthly on an outstanding balance basis;

(d) the insurance election or change is requested by the debtor by telephone or other electronic means;

(e) the consumer has the ability to cancel the credit insurance at any time; and

(f) the consumer is given a clear and conspicuous disclosure in plain language on the first statement in which the additional charge is included stating that there has been an increase in the insurance premium and that the coverage may be canceled at any time. In lieu of providing the disclosure on the first statement in which the additional charge is included, a separate disclosure may be mailed to the consumer no later than in conjunction with the mailing of the first statement in which the additional charge is included.

N. Redundant Disclosures

SECTION 19 of the Act indicates that nothing in Chapter 4 of Title 37 of the South Carolina Code of Laws should be construed to prohibit the creditor from combining disclosures required by the chapter with other disclosures required under state and federal law in order to avoid redundancy.

O. Sale of Noncredit Term Life Insurance

SECTION 23 of the Act permits the sale of noncredit term life insurance subject to certain conditions. According to this provision noncredit term life insurance may be sold:

provided, that the person soliciting the sale of such insurance is properly licensed as required under South Carolina insurance laws and the lender is properly licensed as an agency as required under South Carolina insurance laws and clearly and conspicuously discloses to the insured, prior to the consummation of the insurance purchase, the right to cancel and provides the insured at that time with a form in duplicate signed by the insured. This form shall clearly and conspicuously state in a manner that achieves a grade level score of no higher than seventh grade on the Flesch-Kincaid readability test:

(i) that the purchase of this insurance is not a condition of any loan or extension of credit by including the following language: The purchase of this insurance is not required to obtain credit and will not be provided unless you sign this form and agree to pay the additional cost.;

(ii) that the interest rates and charges do not depend upon the purchase of this insurance;

(iii) that the insured has the option to pay the insurance premium from his own funds or to pay the premium with a portion of the loan proceeds;

(iv) the premium and a description of the coverage, including the face amount, term of the coverage, and any exceptions, limitations, or restrictions;

(v) that the insured may cancel this insurance by mailing a signed request to cancel, together with the policy, to the lender or the insurance company within thirty days after receipt of the policy and, that in the event of cancellation by the insured within thirty days after receipt of the policy, the insured will be promptly refunded the entire premium for such insurance;

(vi) that the insurance laws of South Carolina apply with respect to any type of termination other than as contained in subsection (v) of this item (d) and that the policy should be consulted for more information;

(vii) that the insurance is not tied to the loan in any manner and that if the loan is terminated, the insurance will remain in force unless it is otherwise terminated under the terms of the agreement between the debtor and the insurer;

(viii) the name, address, and phone number of the lender; and

(ix) the name, address, and phone number of the insurance company and the process to be followed in submitting a claim.

The noncredit term life insurance must be underwritten by an insurance company which is properly licensed as required under South Carolina insurance laws. In addition, the noncredit term life insurance must be filed for approval prior to use in accordance with South Carolina insurance laws, and the terms and conditions of the transaction must comply with any other applicable provisions of the South Carolina insurance laws.

If the creditor contracts for or receives a separate charge for insurance, the amount charged for the insurance may not exceed the premium to be charged by the insurer, as computed at the time the charge to the debtor is determined, conforming to any rate filings required by law and made by the insurer with the Director of the Department of Insurance.

Any attempt to tie the sale of the noncredit term life insurance to any loan or extension of credit or otherwise to coerce the debtor into purchasing the insurance is prohibited, and any party engaged in the tying or coercion is subject to penalties in accordance with Section 37-5-202.

It is important to note the following:

• This section applies to supervised lenders only.

• Tying and coercion of any type are prohibited.

• Non-credit term life policies must be filed with the Department for approval prior to use.

• Supervised lenders selling non-credit term life insurance must comply with South Carolina insurance licensing requirements. The entity must be licensed as an insurance agency, and all individuals offering, selling, recommending, negotiating, or providing insurance quote information, etc., must be licensed as insurance agents. See S.C. Code Ann. § 38-43-10 et. seq. and 25A S.C. Code Ann. Reg. 69-23.

• Disclosures required under this section must be filed for approval with the Department. See Section III.L. of this Bulletin for additional information regarding the Flesch-Kincaid grade level score.

• Supervised lenders shall not charge the insured more for the insurance policy than they are charged by the insurer. Additional fees or charges may not be added to the premium charged to the insured.

IV.  Filing Requirements

A. All policy forms, endorsements, and certificates must comply with applicable provisions of the Act effective January 1, 2000.

B. Endorsements may be filed on an informational basis (i.e., file and use) for existing policy forms to reflect the changes made by the Act. However, these endorsements may not be used for new issues and/or renewals beyond June 1, 2000.

C. All policy forms and certificates must be approved by June 1, 2000. Policies and forms must be submitted by March 1, 2000 in order to be approved by the June 1 deadline.

D. All credit life and credit accident and health insurance filings must comply with applicable provisions of Bulletin 93-2. In addition, all filings will be reviewed for compliance with applicable provisions of the South Carolina Insurance Laws and rules and regulations promulgated thereunder.

E. Filings should indicate whether the insurance will be issued in conjunction with credit insurance transactions of restricted or supervised lenders.

V.  Questions and Answers

The South Carolina Department of Insurance received numerous questions regarding The Act. The questions posed by interested parties as well as the Department's responses to those questions are attached to this Bulletin as Appendix A: Questions & Answers.

Ernst N. Csiszar

December 3, 1999

Appendix A: Questions and Answers

Q1: Does your Department interpret the word "loan" narrowly to exclude insurance on open-end credit.

A1: No. However, there are some provisions of the Consumer Protection Code that set forth specific requirements for insurance on open-end credit.

Q2: Are monthly outstanding balance coverages also subject to the disclosure requirements.

A2: Yes. However, exceptions are made to some of the disclosure requirements of Act 66 of 1999 for credit insurance for which no identifiable charge is made to the debtor and for certain electronic or redundant disclosures.

Q3: Can we amend the language mandated by South Carolina Code of Laws §§ 34-29-166 and 37-4-105(B)(9) regarding the display of the Department's telephone number separately from the insurer's telephone number to include the insurer's telephone number?

A3: Yes. In addition, the telephone number of the insurer may be in bold face type.

Q4: Do the South Carolina insurance laws exclude creditor paid insurance?

A4: No. However, certain exceptions are made to some of the disclosure requirements of Act 66 of 1999 for credit insurance for which no identifiable charge is made to the debtor.

Q5: I was unable to locate a credit insurance law. If there is one, what is the cite?

A5: Credit insurance refers to insurance sold in conjunction with a consumer credit transaction as provided for in the Consumer Finance Law (Chapter 29 of Title 34 of the South Carolina Code of Laws) and the Consumer Protection Code (Chapter 4 of Title 37 of the South Carolina Code of Laws). The Consumer Finance Law governs credit transactions of restricted lenders (i.e., lenders whose loans are at most $7,500). In general, the Consumer Protection Code governs credit transactions of supervised lenders (i.e., lenders whose transactions may be in excess of $7,500); however, there are some provisions that apply to both supervised and restricted lenders.

In addition to applicable provisions of the Consumer Finance Law and the Consumer Protection Code, credit insurance sold in conjunction with a consumer credit transaction must comply with applicable provisions of Title 38 of the South Carolina Code of Laws and/or any rule or regulation promulgated thereunder.

Q6: Can credit life & disability coverages be combined into one product?

A6: Yes.

Q7: Can group credit policies be underwritten?

A7: It depends upon the type of coverage. Group credit life or accident and health insurance policies must adhere to the same standards with respect to underwriting as any other group life or accident and health insurance policy. For group accident and health insurance, no evidence of individual insurability may be required at the time the person first becomes eligible for insurance or within thirty-one days thereafter. (See South Carolina Code of Laws § 38-71-730(3)). Group life insurance may not be underwritten for groups of size 25 or more at the time the person first becomes eligible for insurance or within thirty-one days thereafter except for insurance supplemental to basic coverage. (See South Carolina Code of Laws § 38-65-40(3)).

Q8: What is the Flesch-Kincaid formula for scoring our form for readability?

A8: This is a US Government Department of Defense standard test.

Calculate L, the average sentence length (number of words / number of sentences)

Calculate N, the average number of syllables per word (number of syllables/number of words).

The grade level = (L x 0.39) + (N x 11.8) – 15.59.

Q9: What is the toll free number for insureds to call the South Carolina Insurance Department for general information or complaints?

A9: Currently the toll free number for insureds to call the South Carolina Department of Insurance for general information or complaints is 1-800-768-3467.

Q10: On loans with a term of 61 months or longer, net pay is mandatory, but the new law allows an additional amount of insurance up to six monthly payments. If net pay is issued on loans of 60 months or less, can the additional amount up to six monthly payments be added or does it only apply to longer term loans?

A10: Six monthly payments can be added if net pay is issued on loans of 60 months or less as long as the total amount of insurance issued does not exceed the maximum amount of insurance allowed for loans with terms of 60 months or less (i.e., "gross coverage"). See Section III.A. of this Bulletin for additional information.

Q11: Is it OK to use an endorsement until a company can get a revised policy approved and electronically formatted?

A11: Yes. However, endorsements may not be used for new issues and/or renewals beyond June 1, 2000.

Q12: SECTION 12 of the Act addresses amendments to Section 37-4-202(1)(a). It states the amount of insurance may not initially exceed the debt and, if the debt is payable in installments, may not at any time exceed the greater of the scheduled or actual amount of the debt. Assume a case where the loan has no past due payments and a death occurs. The payoff, excluding all unearned interest and unearned finance charges, plus six monthly payments, would appear to exceed the scheduled or actual amount of debt.

Are the six monthly payments required or optional?

A12(a): Optional

(b) If the six monthly payments are required, must they be included in the initial amount of insurance shown in the insured's schedule, or are they summed and added to the death benefit?

A12(b): If six monthly payments are required, they must be included in the initial amount of insurance shown in the insured's schedule.

Q13: Does the language in SECTION 2 which addresses amendments to Section 34-29-161(portability) have to appear in the policy form, or is this an administrative issue? If it has to appear in the policy form, is there a required placement or format?

A13: Beginning January 1, 2000, with new issues and/or renewals, the language which addresses portability must appear in the policy form since it is a right of continuation for a policyholder. There is no required placement or format for this policy provision which would not apply generally to other policy provisions. See Section III.F. of this Bulletin for additional information.

Q14: Does the language in SECTION 4 which addresses amendments to Section 34-29-163 (causal relationship) have to appear in the policy form, or is this an administrative issue? If it has to appear in the policy form, is there a required placement or format?

A14: The language in SECTION 4 which addresses amendments to Section 34-29-163 (causal relationship) must appear in the policy form since it is a part of the incontestability provision. This provision must be in the format and placement that is required for the incontestability provision in the applicable insurance law.

Q15: Will the language contained in SECTION 10 which addresses amendments to Section 37-4-110(3)(a) be required to be added to our current renewal and refinancing language?

A15: Yes. See the response to Q13. above.

Q16: Can a general good health question be used? e.g., "To the best of your knowledge, during the past 12 months, you have been in good health and have not been diagnosed or treated or been advised to have treatment for any of the following(list of conditions)." If not, can we list each condition and have the person check yes or no for each condition?

A16: Both of the questions above would be considered medical underwriting and may only be used in applications for policies for which medical underwriting is allowed (e.g., individual policies). For policies for which medical underwriting is allowed, either question described above is acceptable. However, the inquiries must comply with the provisions of SECTIONS 6 or 11 of Act 66 of 1999. (See Section III. I. of this Bulletin for additional information.)

Q17: What is the overall Flesch score required, i.e., must the entire policy form or certificate meet a seventh grade reading level?

A17: No. This applies only to certain policy provisions. (See the Section III.L. of this Bulletin for additional information.) Insurers may write the entire policy at a seventh grade reading level, but the overall required policy Flesch score is 40.

Q18: Are health questions allowed in individual policies.

A18: Yes. However, any health questions must comply with the provisions of SECTIONS 6 or 11 of Act 66 of 1999. (See Section III. I. of this Bulletin for additional information.)

Q19: On a loan over 60 months, can we calculate the insurance premium on gross coverage for the first 60 months and the remaining months on net coverage? For example, if the loan is for 120 months, can we calculate 60 months on gross and 60 months on net? Or must the entire 120 months be calculated on net coverage?

A19: The entire 120 months must be calculated based on net coverage, with the caveat that 6 monthly premiums may be added to the net coverage. See Section III.A. of this Bulletin for additional information.

Q20: Is any consideration being given to extending the compliance time beyond January 1, 2000, in order to give us (banks) time to get our systems programmed to handle the new premium calculations? At this time we have a freeze on any new programming, due to Y2K preparation.

A20: It is not within the purview of this Department to extend the compliance time beyond January 1, 2000. The South Carolina General Assembly provided that the Act take effect January 1, 2000. See Section IV of this Bulletin.

Q21: I would like clarification on one additional issue, as it pertains to a commonly used portion of the Misstatement of Age provision. We currently use the following language, "If any Debtor correctly states his age as being over the age limit, we must refund the premiums within 90 days from the date of the debt and prior to a claim. If we do not, the insurance will remain in force." Is this language still allowable? If not, will the language approved by other states which use a similar prohibition (i.e., Georgia) be acceptable (see sample language)? SAMPLE: "If you or your co-debtor were not eligible for this insurance by reasons of age and your correct age or date of birth is stated in the schedule, non-eligibility by reason of age is waived."

A21: The language you currently use violates Section 37-4-201(3)(iv) which was added by SECTION 11 of the Act. This section provides that any premium paid or charged to a debtor for a period of coverage beyond the termination age (which must not be less than 66) shall result in coverage being continued until the end of the period for which the premium payment or charge is made. The sample language provided complies with the above referenced section for debtors who correctly state their age. It is unclear whether the provision complies for debtors who have not correctly stated their age.

Q22: If a loan has a term of 60 months or less but the payments are deferred for 30 days, would this be considered a term in excess of 60 months?

A22: As long as the deferral period does not exceed 60 days, this would be considered a term of 60 months or less.

Q23: Does the new credit regulation prohibit the sale of credit insurance on first mortgages?

A23: Act 66 of 1999 does not address the issue of whether or not credit insurance may be sold on first mortgages.

Q24: When an applicant has to sign and/or initial that the applicant has read all of the health questions, must the applicant initial immediately adjacent to each health question or is it acceptable if the applicant signs via full signature on a line drawn immediately below the health questions?

A24: The applicant must sign or initial immediately adjacent to each health question to acknowledge the disclosure. It was the intent of the General Assembly to have the applicant acknowledge each disclosure by a dated signature or initial.