BILL ANALYSIS Ó
SENATE INSURANCE COMMITTEE
Senator Ronald Calderon, Chair
AB 228 (Fuentes) Hearing Date: June 22, 2011
As Amended: June 16, 2011
Fiscal: Yes
Urgency: No
SUMMARY Would confer limited authority to SCIF to provide
specified California employers workers' compensation coverage
for their non-California employees as an accommodation alongside
their California-based employees via a contractual arrangement
between SCIF and a qualified admitted insurer in another state;
in 3 years the DOI will report on its evaluation of the new
authority.
DIGEST
Existing law
1. Provides that liability for an injured worker covered under the
workers' compensation system is determined "irrespective of the
fault of any party" and specifies that coverage is based on
defined employment relationships so every employer in California
must either carry workers' compensation insurance or obtain a
certificate of self-insurance;
2. Authorizes insurance to be obtained privately, through private
insurance carriers licensed and admitted to provide workers'
compensation insurance in California or through the state's own
insurance fund, the State Compensation Insurance Fund (SCIF), a
quasi-governmental entity;
Establishes the State Compensation Insurance Fund as a non-profit,
public enterprise fund that operates like a mutual insurance
carrier. Its primary product is workers' compensation insurance
but the company also offers claims management, coordinated care
plans, and loss control services to policyholders. Employers can
purchase coverage directly from the insurer or through
independent brokers. Unused premium, in excess of operating
expenses, claims costs and expenses, and necessary surplus are
returned in the form of dividends to policyholders.
AB 228 (Fuentes), Page 2
3. Provides that as an insurance provider, SCIF is administered by
an independent board of directors for the primary purpose of
providing workers compensation insurance to California
businesses.
4. Confers on SCIF the power to transact workers' compensation
insurance required or authorized by law of this state to the
same extent as any other insurer and provides that the fund
shall be subject to the powers and authority of the Insurance
Commissioner to the same extent as any other insurer transacting
workers' compensation insurance, except where specifically
exempted by reference.
5. Authorizes SCIF to insure a California employer against the
employer's liability for workers' compensation benefits, under
the law of any other state, for California employees temporarily
working outside of California on a specific assignment if the
fund insures the employer's other employees who work within
California.
This bill
1.Provides a restricted grant of authority authorizing SCIF to
provide specified California employers the ability to acquire
workers' compensation coverage for their non-California
employees as an accommodation alongside their California-based
employees by contract with an insurer in the other state. More
specifically the bill provides: as follows:
a. The fund is only authorized under this subdivision
to insure an employer's out of state employees for
workers compensation under the laws of another state if:
i. The employer's principal place of
business is in California;
ii. The majority of the employer's operations
and employees are located within California; and
iii. The fund insures the employer's employees
who work within California.
b. The fund is only authorized to transact insurance
pursuant to this subdivision by contract with an insurer
that is admitted to transact workers' compensation
insurance in California and also in the out-of-state
jurisdiction where the non-California employees are
AB 228 (Fuentes), Page 3
located.
c. The fund may only contract with an admitted insurer
for purposes of this subdivision if the insurer meets all
of the following criteria:
i. The insurer has an A minus (A-) rating or
better from A.M. Best Company.
ii. The insurer has substantial prior
experience in transacting workers' compensation
business on another insurer's behalf in a fronting
arrangement.
iii. The insurer has a minimum surplus of one
hundred million dollars ($100,000,000).
d. To provide for an independent review and assessment
of the impact of the limited grant of authority provided
for by this bill, the measure requires that on or before
March 1, 2015, the Department of Insurance shall provide
to the Assembly Committee on Insurance and the Senate
Committee on Insurance a report assessing the experience
of the fund in exercising the authority provided by this
Act.
The report is required to make recommendations concerning
its continuation, limitation, or expansion with special
attention to the extent of advantages this practice
offers California employers, the California workers'
compensation marketplace, and the impact of this class of
insurance, whether pro or con, on the fund, its
management, and the California marketplace.
e. The bill requires that costs incurred by the
Department of Insurance in the assessment, writing, and
publication of this report shall be borne by the fund and
provides that the report requirement shall be inoperative
on March 1, 2019, pursuant to Section 10231.5 of the
Government Code.
COMMENTS
1. Purpose of the bill According to the Author, "The State
Compensation Insurance Fund considers that as currently
written, "Insurance Codes §11780.5 and §11784 (d) are
ambiguous. Existing law says the fund can cover employees
AB 228 (Fuentes), Page 4
who are temporarily working out of state. However, nowhere
is the fund prohibited from covering employees who are
permanently working out of state. Existing law is unclear on
this point. Existing law is also unclear as to what type of
reinsurance the fund president is authorized to purchase. We
want to ensure that the authority of State Compensation
Insurance Fund to provide out of state coverage is clearly
articulated."
2. Background and Discussion:
a. California's State Compensation Insurance Fund is a
non-profit, public enterprise fund that operates like a
mutual insurance carrier on the basis of an express
Constitutional authorization and statutory guidance. Its
primary product is workers' compensation insurance but
the company also offers claims management, coordinated
care plans, and loss control services to policyholders.
Employers can purchase coverage directly from the insurer
or through independent brokers. Unused premium, in excess
of operating expenses, claims costs and expenses, and
necessary surplus are returned in the form of dividends
to policyholders.
b. Under its statutory authority, SCIF may transact
workers' compensation insurance required or authorized by
law of this state to the same extent as any other
insurer.
c. SCIF's current statutory authority gives it
permissive authority (may) to insure a California
employer's employees who are engaged in traveling
temporarily outside of the state. This constitutes a
limited grant of authority to insure certain employees of
California employers who are temporarily out of the
state. This statute, adopted in 1978, can be seen as a
grant of authority which is limited, but serves
nonetheless to confer a valuable accommodation to
California businesses.
d. AB 228 proposes an updated "statute of
accommodation" to permit SCIF to accommodate the desires
of its California business clients in circumstances where
those California-based companies have regular employees
located in states other than California.
AB 228 (Fuentes), Page 5
e. Since California Insurance Code Section 11778 states
SCIF "may transact workers' compensation insurance
?"authorized by law of this state to the same extent as
any other insurer", any limitations must appear in the
authorizing statute or it can, under CIC Section 11778,
conduct the its business on the same terms as any other
insurer.
f. It is expected that SCIF will function as the
intermediary for the California employer with rates on
the out of state employees subject to the other state's
oversight and all claims administration to be conducted
by the fronting carrier SCIF contracts with in accordance
with the laws of the other jurisdiction.
g. The proponents all support the bill as a beneficial
move in support of California employers and California's
business climate. Opponents raise questions of whether
the limited authorization in AB 228 as amended on June
16th may run counter to the underlying purposes of SCIF
and enable "unfair competition" to ensue, to the
detriment of private workers' compensation carriers.
h. Under the June 16th amendments, the DOI study which
is required to appraise this law's impact on SCIF and the
California marketplace will be able to focus its
assessment on real world effects and the desirability or
undesirability of this policy. By 2015, that study will
be less speculative that some of the arguments pro and
con on AB 228. DOI subject matter experts will have been
able to confer informally with their national
counterparts under the aegis of the NAIC's periodic
national meetings and they will be able to review the
facts arising from three years of real world marketplace
experience, including experience with changes in the
marketplace itself and the impact, whether good, bad or
indifferent, of AB 228's change on the capacity of SCIF
management to remain focused on the California
marketplace which is its primary responsibility.
i. As amended AB 228 is a carefully limited
authorization for SCIF to undertake entry into writing
workers' compensation risks for the employees of
California based businesses located outside California
using a fronting arrangement of a carrier admitted both
in California and the state of interest which has
AB 228 (Fuentes), Page 6
substantial workers' compensation fronting experience.
j. The bill as amended constitutes a limited entry into
this market with a DOI administered formal "look back"
study to be concluded by March 2015. If the Committee
wished to seek an additional circumscribing of this new
grant of authority, one possibility is simply to sunset
the new authority on December 31st 2015 or 2016 so as to
require its positive re-enactment once the study compiled
by the DOI's subject matter experts has been received and
reviewed by the Legislature.
3. Summary of Arguments in Support:
a. According to the Author, "Right now, a California
employer that is insured with State Compensation Insurance
Fund must obtain a separate policy to cover their employees
who work outside of California. Amending the insurance code
to authorize State Compensation Insurance Fund to offer out
of state coverage will reduce red tape, improve efficiency,
and remove obstacles to doing business in California."
b. As stated by the State Compensation Insurance Fund,
(SCIF), this bill's Sponsor:
"Instead of having to go through the application
process with two or more insurance companies, brokers
and their clients could get coverage for all of a
company's employees from State Fund in a one-stop shop
- saving California businesses time and money. This
legislation will significantly streamline the
insurance process for employers and brokers who are
interested in getting a quote from State Fund and
provide greater choice and stability to the businesses
of our state.
This is currently being done in many other states. Of
the 26 State Funds around the country, 16 currently
serve their state's employers by providing coverage
for out of state employees. "
c. The Insurance Brokers and Agents of the West (IBA West)
states "AB 228 will enhance competition in the California
workers' compensation marketplace and provide an option for
AB 228 (Fuentes), Page 7
California insurance agents and brokers to serve their
California clients"
d. The California Farm Bureau Federation states "With
California's current fiscal crisis and job loss the state
cannot afford to discourage business and job growth. Every
effort should be made to remove obstacles and additional
operating costs that cut into the ability to create jobs
and generate income.? AB 228 will accomplish that."
1. Summary of Arguments in Opposition:
a. The Association of California Insurance Companies
(ACIC) states in opposition:
"Allowing SCIF to expand its jurisdiction is a sharp
departure from its original mission, unfair to private
carriers because of the Fund's tax exempt status, and
would subject the Fund, and ultimately its California
policy holders, to assessments and regulations of
other states.
SCIF was created as a public enterprise to assure that
California had an "insurer of last resort" for
California employers. In exchange, it was given a
federal tax exempt status, an advantage not enjoyed by
any other private workers' compensation carrier.
Allowing SCIF to use its beneficial tax status that is
derived from its mandate in California is unfair to
private carriers and to other state funds."
2. Amendments:
a. None proposed. The 6/16 amendments reflect committee
requested amendments.
3. Prior and Related Legislation:
a. None
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
AB 228 (Fuentes), Page 8
State Compensation Insurance Fund (SCIF) (Sponsor)
Allen Lawrence & Associates, Inc.
Arroyo Insurance Services
BB & T Tanner Insurance Services
Bowermaster and Associates
B & B Premier Insurance Solutions
California Farm Bureau Federation
Cal Insurance & Associates, Inc.
Haggerty Insurance Services, Inc.
Hoffman Brown Company
Insurance Brokers and Agents of the West (IBA West)
Interwest Insurance Services
Invensure Insurance Brokers
Leavitt Barlocker Insurance
McGee & Thielen Insurance Brokers, Inc.
Northridge Insurance Agency, LLC
Thoits Insurance
USI Insurance Services of Northern California, Inc.
Opposition
Association of California Insurance Companies (ACIC)
Consultant: Ken Cooley (916) 651-4110