AN ACT Relating to prepaid legal service plans; adding a new chapter to Title 48 RCW; prescribing penalties; and providing an effective date.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF WASHINGTON:

NEW SECTION. Sec. 1. PURPOSE. Legal service plans are designed to make access to an attorney more affordable and thus facilitate the protection and preservation of individual legal rights. This chapter provides a mechanism for approving and regulating the operation of certain activities and entities in the state and overseeing the quality and marketing of legal service plans that involve payment of a fee in return for certain legal services. This chapter is intended to place authority with the insurance commissioner for the regulation of entities and their representatives responsible for operation of such plans, while leaving the regulation of the practice of law to the state supreme court. Except as specifically provided in this chapter, such legal service plans shall not be subject to the other provisions of this title.

NEW SECTION. Sec. 2. DEFINITIONS. Unless the context clearly requires otherwise the definitions in this section apply throughout this chapter.

(1) "Legal service organization" or "organization" means any person or group of persons authorized or licensed to do business in the state as such under Title 48 RCW that provides or offers to provide a legal service plan or plans.

(2) "Legal service plan" or "plan" means an arrangement creating an express or implied contractual relationship whereby services are to be provided to an organization's members or whereby such members are to be reimbursed for charges incurred for legal services, in consideration of a specified payment. Each plan shall be categorized as either an access plan or a comprehensive plan.

(a) "Access plan" means a plan which provides for legal advice or consultation on noncomplex legal matters which can be reasonably handled over the phone or by a limited review of routine legal documents and also includes preparation of noncomplex legal documents such as simple wills or powers of attorney.

(b) "Comprehensive plan" means a plan providing for legal advice and consultation regarding more complex or time-consuming matters and may include legal advice and representation in and regarding administrative and civil or criminal judicial proceedings.

(4) "Member" means a person who is eligible to receive legal services under a legal service plan.

(5) "Membership agreement" means the written contract or agreement entered into on behalf of or between a member or a group of members and the legal service organization providing for the receipt of legal services by the member.

(6) "Person" means any person, partnership, company, corporation, or other legal entity.

(7) "Provider agreement" means a written contract or agreement between a legal service organization and a providing attorney for the rendering of legal services to a plan member.

(8) "Providing attorney" means an attorney licensed and in good standing in this state who provides legal services pursuant to the membership agreement of a plan.

(9) "Sales or marketing representative" means a person who promotes, markets, or solicits for members for or on behalf of a plan.

NEW SECTION. Sec. 3. EXCLUSIONS. This chapter does not apply to the following arrangements:

(1) Retainer contracts made by an attorney or firm of attorneys with a specific individual or group of individuals, pursuant to which fees are based on reasonable estimates of the nature and amount of services to be provided, and similar contracts made by an attorney or firm of attorneys with a group of clients involved in the same or closely related legal matters;

(2) Any two-party agreement providing for the delivery of specified legal services in return for a specified payment including an administrative fee, whereby an arrangement is made between an attorney or firm of attorneys and a group of individuals who are all members of the same bona fide nonprofit membership organization or group of individuals who are all employed by the same employer when the primary purpose of the membership organization or employer is other than the provision of legal services. Such groups of individuals may be but are not limited to members of churches, labor unions, trade groups, credit unions, or associations. Under such an arrangement, no third party such as a legal service organization or sales or marketing representative may be involved in receiving any of the specified payment or in overseeing the delivery of the specified legal services;

(3) Referral of clients to an attorney to the extent that such referral is provided by a nonprofit lawyer referral service or public corporation such as a state or local bar association;

(4) Employee welfare benefit plans to the extent that state regulation is preempted by section 514 of the federal employee retirement income security act of 1974, or successor legislation;

(5) Legal assistance plans financed primarily by public funds, interest on lawyers' trust accounts (IOLTA) funds, or other public service funds; or

(6) Insurers authorized to offer a legal service plan or the equivalent of a legal service plan in this state under Title 48 RCW.

NEW SECTION. Sec. 4. SCOPE OF REGULATION‑-CERTIFICATE OF REGISTRATION. (1) One hundred eighty days after the effective date of this section, no legal service organization or other person may offer, provide, market, or otherwise do business in this state on behalf of a plan unless a certificate of registration has been issued and is in force for the plan.

(2) Every certificate of registration shall specify the name and location of the principal office of the organization, the name and location of the individuals having a ten percent or greater ownership interest in the legal service organization, the name and location of the principal person or persons involved in administering its plan or plans, and additional information as the commissioner may reasonably require. The applicant shall also file with the commissioner a copy of a statement of its financial condition in a form satisfactory to the commissioner.

(3) Application for such certificate shall be made to the commissioner on a form prescribed by the commissioner, shall be effective for one year from the date of issue, and shall be accompanied by a filing fee and copies of all provider agreement and membership agreement forms and assurances that mechanisms for delivery of services are already in place. A certificate of registration may be renewed for successive annual periods by notifying the commissioner of such intent and paying an annual renewal fee. The fees shall be reasonable in amount as determined by the commissioner from time to time, deposited in the commissioner's regulatory account in the state treasury, and shall be used to pay the costs, including overhead, of administering this chapter.

(4) The certificate of registration shall be issued within ninety days of receipt of an application or renewed within ninety days of the anniversary of issuance by the commissioner if the commissioner determines that the applicant for the certificate has demonstrated to the satisfaction of the commissioner that the organization:

(a) Is financially responsible and may be reasonably expected to meet its obligations to its members; or

(b) Is able to meet the requirements for the certificate.

(5) The commissioner may decline to issue or renew the certificate if, after investigation or upon receipt of reliable information, the commissioner determines that the organization is, or the directors, officers, or management of the plan or organization are found by the commissioner to be incompetent, untrustworthy, or a source of injury and loss to the public, or are so lacking in managerial experience as to make the operation of the plan hazardous to the plan member.

(6) The organization holding a certificate that has not been renewed or has been revoked shall immediately surrender the certificate to the commissioner at the commissioner's request, provide written notice of such surrender to all plan members, return within ninety days all unearned payments from plan members on a prorated basis, and file an accounting of such disbursements with the commissioner.

(7) The commissioner may decline to issue, renew, or may suspend or revoke any certificate issued under this chapter for failure to comply with this chapter or the rules adopted under it:

(a) By order to the organization not less than fifteen days prior to the effective date of the certificate, subject to the right of the organization to an administrative hearing as provided in RCW 48.04.010; or

(b) By an order on hearing made pursuant to RCW 34.04.120 effective not fewer than ten days after the date of the giving of the order, subject to the right of the organization to appeal to the superior court.

(8) The commissioner may temporarily suspend the certificate of registration by order given to the organization not less than three days prior to the effective date of the certificate if the order contains the notice of revocation and includes a finding that the public safety or welfare imperatively requires emergency action. The suspension shall continue only until proceedings for revocation are concluded.

NEW SECTION. Sec. 5. MINIMUM REQUIREMENTS. (1) No organization may operate and no plan may be offered in this state unless the organization enters into a provider agreement with the providing attorney or attorneys. No provider agreement may contain any provision that allows the providing attorney to seek payment from a member, other than any copayments and deductibles scheduled in the agreement, in the event of nonpayment by the organization for any services that have been performed under the plan by the providing attorney.

(2) No organization may offer a plan in this state without entering into a membership agreement with or with someone on behalf of each member. Each membership agreement and provider agreement shall contain at least the following:

(a) A listing and clear description of the legal services promised or for which expenses are to be reimbursed and a clear explanation of the limits of the services;

(b) The copayments, deductibles, or fees, if any, which the member is required to pay;

(c) The name and address of the principal place of business of the legal service organization offering the plan and the names and location of the individuals, if any, having a ten percent or greater ownership interest in the organization;

(d) If the plan offers a limited choice of providing attorneys, a mechanism to provide the services of an alternate attorney in case representation by the designated providing attorneys would be improper, unethical, or impractical under the circumstances;

(e) A provision for an impartial review for settling disagreements about the grounds for demanding an alternative attorney or any benefit;

(f) All criteria by which a member may be denied renewal of membership;

(g) A paragraph reciting that an annual report is on file with the commissioner; that a copy of the current membership agreement forms and the current provider agreement forms used by the organization and a schedule of the rates charged members is on file with the commissioner; and that the name, address, and phone number for the commissioner's office is printed on the provider agreement forms.

(3) A copy of the current membership agreement forms and the current provider agreement forms used by an organization, a schedule of the rates charged members, and the schedule of fees paid to providing attorneys shall be filed with the commissioner. Any material change in the provider agreement, membership agreement, or rates charged shall be filed with the commissioner prior to use.

(4) The commissioner may disapprove any form of provider agreement or membership agreement for any of the following reasons:

(a) It contains or incorporates by reference any inconsistent, ambiguous, or misleading clauses, or exceptions and conditions that unreasonably or deceptively affect the risk purported to be assumed;

(b) It has any title, heading, or other indication of its provisions that are misleading;

(d) For other good reasons as determined by the commissioner and adopted by rule following a public hearing.

(5) No provider agreement or membership agreement may contain provisions which are unfair, discriminatory, misleading, encourage misrepresentation or misunderstanding of the agreement, might endanger the solvency of the plan or legal services organization, or are contrary to law.

(6) For the duration of the membership and provider agreements referred to in this chapter, and for six years thereafter, every legal service organization shall maintain at its principal administrative office, adequate books and records of all transactions between the organization and the providing attorneys and adequate books and records of all transactions between the organization and plan members. The commissioner shall have reasonable access to the books and records so long as the access does not violate or conflict with the attorney-client privilege recognized under state law.

(7) An amount actuarially calculated to pay providing attorneys for services to be performed in one year, and an amount that could reasonably reimburse plan members for unearned fees paid by plan members shall be held in a fiduciary capacity that may not be attached by creditors and may not be used as an asset of the corporation and shall be deposited promptly and maintained in a separate account from operating funds. Records shall be kept of all deposits and receipts for a period of not less than six years.

(8) Compensation paid to a providing attorney shall not be contingent on claims experience. This section shall not prevent the compensation of a providing attorney from being based on membership fees collected or the number of claims paid or processed, or from sharing in a fund based on services performed.

NEW SECTION. Sec. 6. SERVICE OF PROCESS. The commissioner shall be deemed the agent for receiving service of process for any plan or any legal service organization doing business in this state.

NEW SECTION. Sec. 7. ANNUAL REPORT. Each legal service organization shall provide annually to the commissioner, in as much detail as the commissioner may require:

(1) A verified financial statement detailing the legal service organization's assets, liabilities, unearned premium reserve, loss records, and such other items as the commissioner may reasonably require so long as the reporting does not violate or conflict with the attorney-client privilege recognized under state law; and

(2) A list of the names and addresses of the organizations providing attorneys licensed in this state.

NEW SECTION. Sec. 8. REGISTRATION OF REPRESENTATIVES. Every legal service organization holding a certificate of registration issued under this chapter shall register each sales or marketing representative by listing the representatives and their geographic location on January 1 and July 1 of each year.

NEW SECTION. Sec. 9. FINANCIAL REQUIREMENTS. (1) No legal service plan may be issued, sold, or offered for sale in this state unless the organization is insured under an insurance contract that provides indemnification to providing attorneys at the rates specified in the plan for the services contracted for by the plan, or reimbursement for services performed under a service contract at the rates specified in the plan, in the event of default or insolvency of the plan or organization. Any such insurance shall be issued only by an insurer authorized to do business in this state.

(2) As an alternative to subsection (1) of this section and prior to solicitation in this state, an organization offering an access plan may instead comply with either (a) or (b) of this subsection for each access plan, as follows:

(a) The organization offering an access plan shall post a security bond in an amount as determined under (c) of this subsection for the protection of plan members and other affected persons including providing attorneys; or

(b) The organization shall provide evidence to the commission of deposit of a sum as determined under (c) of this subsection in a bank authorized to do business in this state and insured by the federal deposit insurance corporation or savings and loan association insured by the federal savings and loan insurance corporation and held in trust pursuant to this section.

(c) The initial security bond or other deposit required for an access plan for at least the first full year of operation shall be in the amount of twenty thousand dollars. The amount of deposit shall be adjusted annually and shall be in an amount equal to ten percent of the gross written fees collected from plan members in the preceding calendar year, to a maximum of one hundred thousand dollars.

(3) As an alternative to subsection (1) of this section and prior to solicitation in this state, an organization offering a comprehensive plan may instead comply with either (a) or (b) of this subsection for each comprehensive plan as follows:

(a) The organization offering any comprehensive plan shall post a security bond in an amount as determined under (c) of this subsection for the protection of plan members and other affected persons including providing attorneys; or

(b) Provide evidence to the commissioner of a deposit of an amount as determined under (c) of this subsection in a bank authorized to do business in this state and insured by the federal deposit insurance corporation or savings and loan association insured by the federal savings and loan insurance corporation and held in trust pursuant to this section.

(c) The initial security bond or other deposit required for a comprehensive plan for at least the first full year of operation shall be in the amount of twenty-five thousand dollars. The amount of deposit shall be adjusted annually and shall be in an amount equal to twenty percent of the gross written fees collected from plan members in the preceding calendar year, to a maximum of one hundred seventy-five thousand dollars.

(4) Any cash deposit or other form of property used as security shall be held in trust, shall remain unencumbered, and shall have at all times a market value of at least ninety-five percent of the amount specified. Any bond issued in lieu of security shall be capable of cancellation only upon thirty days advance written notice filed with the commissioner. Securities or bonds deposited pursuant to this section shall be for the benefit of and subject to action thereon in the event of insolvency of the plan by any person sustaining actionable injury due to failure of the plan to faithfully perform its obligations to its members.

(5) Costs and actual attorneys' fees may be awarded to the prevailing party in addition to any other recovery and may be included in the judgment in an action against a legal service organization or against a security bond, deposit, or provider of indemnification as described in this section.

NEW SECTION. Sec. 10. UNFAIR PRACTICES. (1) No organization or representative of a plan, including sales or marketing representatives, may engage in unfair methods of competition or in such unfair or deceptive acts or practices in the conduct of its business as the commissioner may from time to time define.

(2) The commissioner may order such a person or legal service organization to cease and desist from such acts if the commissioner has cause to believe that the person or legal service organization is violating this section or rules adopted under this section or is engaged in an unfair or deceptive act or practice. If the person or organization violates the order, the commissioner may thereafter levy a fine of not more than one thousand dollars for each violation committed, and may take such other additional action as is permitted under this title for violation of a rule.

NEW SECTION. Sec. 11. RULES. The commissioner may adopt reasonable rules effecting any provision of this chapter.

NEW SECTION. Sec. 12. PENALTIES. (1) Failure to obtain or maintain the certificate of registration required by this chapter, or to comply with any of the requirements of this chapter, shall subject the plan or the organization to a civil fine of not more than ten thousand dollars per violation.

(2) In addition to actions permitted by the commissioner under section 4 of this act and upon a determination that the organization or any representative, including a sales or marketing representative, of a plan has violated any of the requirements of this chapter or that the plan has been carried out by persons who are incompetent or untrustworthy or so lacking in managerial experience as to make the operation of the plan hazardous to the plan member, the commissioner may, after hearing or upon stipulation:

(a) Revoke, suspend, or refuse to renew the plan's certificate of registration;

(b) Impose a civil fine of not more than ten thousand dollars per violation against the organization, or any person who offers, provides, markets, or otherwise does business in this state on behalf of any such plan or organization;

(c) Order such legal service organization or any person who offers, provides, markets, or otherwise does business in this state on behalf of any such plan or organization, to cease and desist the action violating the requirement; or

(d) Any combination of the above.

(3) Any penalty or other punitive action taken pursuant to this chapter shall be subject to the right of the organization or any affected person to a hearing as provided in RCW 48.04.010 or by an order on hearing made as provided in RCW 34.04.120 effective not fewer than ten days after the date of the giving of the order, subject to the right of the organization or affected person to appeal to the superior court.

NEW SECTION. Sec. 13. CAPTIONS. Section captions as used in this chapter constitute no part of the law.

NEW SECTION. Sec. 14. Sections 1 through 13 of this act shall constitute a new chapter in Title 48 RCW.

NEW SECTION. Sec. 15. If any provision of this act or its application to any person or circumstance is held invalid, the remainder of the act or the application of the provision to other persons or circumstances is not affected.

NEW SECTION. Sec. 16. This act shall take effect April 1, 1989.