BILL ANALYSIS                                                                                                                                                                                                    Ó






                             SENATE INSURANCE COMMITTEE
                          Senator William W. Monning, Chair


          SB 1011 (Monning)        Hearing Date:  April 9, 2014 

          As Introduced  February 13, 2014
          Fiscal:             No
          Urgency:       No
          

           SUMMARY  Would authorize certain 501(c)(3) nonprofit  
          organizations to insure itself against damage to property and  
          the losses related to the loss of use of property through a risk  
          pool arrangement.
          
           
          DIGEST
            
          Existing law
            
           1.  Permits an authorized nonprofit organization that has joined  
              with two or more other authorized corporations in an arrangement  
              providing for the pooling of self-insured claims or losses to  
              insure: 

               a.     Itself against all or any part of any tort liability;

               b.     Any employee of the corporation against all or any part  
                 of his or her liability for injury resulting from an act or  
                 omission in the scope of employment;

               c.     Any board member, officer, or volunteer of the  
                 corporation against any liability that may arise from any act  
                 or omission in the scope of participation with the  
                 corporation; and

               d.     Itself against any loss arising from physical damage to  
                 motor vehicles owned or operated by the corporation.

           2.  Excludes liabilities covered by workers' compensation insurance  
              from the types coverage that may be provided, as well as  
              coverage for employees against punitive or exemplary damages.

           3.  Defines "authorized corporation" as any corporation that is  
              organized chiefly to provide or fund health or human services  




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              (except hospitals) and qualifies as exempt from taxation under  
              Section 501(c)(3) of the U.S. Internal Revenue Code.

           4.  Provides that the pooling arrangement shall not be considered  
              insurance nor be subject to regulation under the Insurance Code.

           5.  Requires initial pooled resources of at least two hundred fifty  
              thousand dollars ($250,000).

           6.  Requires all participating corporations to agree to pay  
              premiums or make other mandatory financial contributions or  
              commitments necessary to ensure a financially sound risk pool.
           

          This bill

           Would expand the types of coverage that a member of a qualified  
          risk pool may insure itself against to include the loss or  
          damage to property of every kind, including, but not limited to,  
          losses and expenses related to the loss of property.


           COMMENTS

          1.  Purpose of the bill .  According to the author, during the  
              1980s, the property and casualty insurance markets  
              experienced a severe shortage of affordable liability  
              coverage.  Nonprofit organizations were particularly  
              vulnerable because many of their exposures are unique and  
              unfamiliar to commercial insurers.  Faced with huge  
              increases in liability insurance premiums, nonprofit  
              organizations were forced to drastically cut services and  
              staff, use scarce reserves, raise fees, and even close their  
              doors.  In 1986, the Legislature responded by enacting  
              California Corporations Code Section 5005.1 and authorizing  
              a new form of group self-insurance specific to 501(c)(3)  
              entities that provide or fund health and human services,  
              sometimes referred to as a "nonprofit risk pool."  Under  
              that law, these organizations could band together to share  
              their risk collectively, pool their resources to cover  
              potential liabilities, and develop techniques and programs  
              to avoid losses altogether.  These organizations have  
              successfully self-insured liability and commercial auto  
              coverage, including coverage for vehicle property damage,  
              for 25 years.





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              Typically, property and casualty insurance for small to  
              mid-sized organizations is provided together in a package  
              policy.  However, a nonprofit risk pool, must establish a  
              complex fronting agreement with a commercial insurer to be  
              able to offer property insurance.  This bifurcation makes  
              meeting the needs of risk pool members more expensive and  
              unnecessarily cumbersome for the nonprofits and their  
              insurance advisors, and restricts the nonprofit risk pool  
              from prudently diversifying the risks of liability with  
              property damage coverage. 

              SB 1011 would permit nonprofit risk pools to self-insure for  
              property damage in addition to liability, eliminate the  
              unnecessary troubles and costs related to the fronting  
              arrangement, and allow the risk pool to pass the savings on  
              to its nonprofit members.  Nonprofit risk pools have  
              demonstrated that they can self-insure the more difficult  
              coverage, liability.  SB 1011 is the logical next step to  
              allow them to efficiently meet their member's needs and an  
              easy way to put more resources back in the hands of  
              charitable nonprofits that offer critical services to their  
              clients.


           2.  Background  .  Risk pools authorized by Corporations Code  
              Section 5005.1 are a form of group self-insurance where  
              nonprofit corporations join together in an arrangement  
              providing for the pooling of self-insured claims or losses,  
              sometimes referred to as nonprofit risk pools or charitable  
              risk pools.  

              In response to the liability insurance crisis that seriously  
              threated many nonprofit organizations in the 1980s, the  
              Legislature authorized nonprofits to self-insure through  
              risk pools and collectively manage liability risks.  Sharing  
              risk in larger groups that have more predictable and stable  
              claims can be far less risky than individual self-insurance  
              with small entities that are vulnerable to insolvency if  
              they experience catastrophic claims.

              California law treats these risk pools as a form of  
              self-insurance not subject to the Insurance Code or  
              regulation by the Department of Insurance.  Additionally,  
              these pools do not participate in the California Insurance  
              Guarantee Association (CIGA) and are not subject to a  
              standard administrative enforcement processes, including  




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              solvency regulation or claims handling review.

              Although not explicitly required in statute, in practice all  
              known existing nonprofit risk pools are organized as a  
              public benefit corporation regulated by the Attorney  
              General.  (Corp. Code §§ 5250, 5223.)  Any person with a  
              grievance could file a complaint with the Attorney General  
              who has the power to investigate and bring an action to  
              enforce applicable law.  Directors and officers must act in  
              the best interest of the nonprofit and may be liable for  
              breaches of duty (which is why directors and officers  
              insurance is often critical to recruiting qualified board  
              members).  (Corp. Code §§ 5230, 5231, and 5233.) 

              There are two known nonprofit risk pools in California.   
              NonProfits United, administers a vehicle insurance pool that  
              only provides commercial automobile coverage.  Nonprofits  
              Insurance Alliance of California (NIAC), the sponsor of the  
              bill, is the only known nonprofit risk pool that provides  
              liability coverage directly and property insurance through a  
              fronting agreement with an admitted insurer.  Members of  
              both risk pools elect their respective boards of directors  
              and require that at least a majority of the board be  
              selected from the membership.

              SB 1011 would permit risk pools to offer coverage for  
              property damage and losses related to the loss of use of  
              damaged property.  Risk pools may already offer limited  
              property coverage for vehicles owned and operated by risk  
              pool members; this bill would expand the types of property  
              insurance to include loss or damage to buildings, furniture,  
              computers, equipment, etc.  Although "property insurance" is  
              not directly defined in the Insurance Code, the language in  
              this bill is similar to that in Insurance Code Section 1625  
              that defines the scope of coverage that a property  
              broker-agent may transact.

           3.  Arguments in Support  .


                  a.        The sponsor, NIAC, states that it provides  
                    many benefits to its members above and beyond  
                    liability coverage, and hopes to do the same with  
                    property coverage.  For example in 2013 alone, NIAC  
                    provided training for 945 employed and volunteer  
                    drivers.  NIAC also provided 651 consultations to  




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                    nonprofits on matters of general risk management and  
                    loss control, and offered dozens of risk management  
                    webinars to 831 nonprofit executives on topics such as  
                    Essential Elements of a Fleet Safety Program,  
                    Conducting Harassment Investigations, the Interactive  
                    Process under the Americans with Disabilities Act,  
                    Risk Management for Volunteer Programs, Wage and Hour  
                    Compliance for California Employers, and Developing a  
                    Risk-Aware Culture.  All of these services were free  
                    of charge to members.  Additionally, NIAC notes that  
                    it has returned over $31 million to its members since  
                    it began the dividend program.


                  b.        NIAC also explains that most nonprofits have  
                    some property that needs to be insured if they are to  
                    operate responsibly.  Forcing them and their brokers  
                    to seek property coverage outside of NIAC is both  
                    inefficient and more expensive; nonprofits are often  
                    required to pay a minimum premium for property  
                    insurance simply to insure a small amount of property.  
                     NIAC states that being able to provide property and  
                    liability together would go far towards its goal of  
                    reducing the cost of risks faced by its nonprofit  
                    members. 


                  c.        Letters from NIAC members to the author have  
                    estimated savings over the life of their membership  
                    due to the lower cost of coverage, loss mitigation  
                    program, and ancillary member benefits.  Several  
                    members anticipate additional savings and convenience  
                    if SB 1011 is enacted.  NIAC members who estimated  
                    savings include the following:


                        i.             La Clinica, a member for four years  
                         and a self-described "safety net healthcare  
                         organization providing culturally and  
                         linguistically appropriate services to low-income  
                         and diverse populations" estimates that it has  
                         saved $115,000;


                        ii.            Novato Youth Center, a member since  
                         1990, estimates that it has saved $32,000;




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                        iii.           Child Advocates of Placer County, a  
                         member since 2004, estimates that it has saved  
                         $5,000; 


                        iv.            TerraNova Counseling, a member  
                         since 1994, estimates that it has saved $35,922;  
                         and


                        v.             Turning Point of Central  
                         California, a member for over 20 years, provides  
                         social services for disadvantaged citizens and  
                         the mentally ill in seven counties and estimates  
                         that it has saved $100,000.


                  d.        The California Association of Nonprofits  
                    (CalNonprofits) supports SB 1011 because it would have  
                    a direct, positive impact on their members' abilities  
                    to serve California's communities.  Additionally, the  
                    measure would allow NIAC to collect better data on  
                    risk for nonprofits, which would in turn allow a risk  
                    pool and CalNonprofit affiliates that provide advice  
                    related to insurance to better advise their clients on  
                    risk mitigation. 

           4.  Arguments in Opposition  

              None received.

           5.  Suggested Amendments .  Typically, consumers are notified if  
              an insurance-related entity providing coverage against  
              losses is not covered by a guaranty fund or regulated by the  
              Insurance Commissioner.  The committee may wish to consider  
              amendments that would require that all nonprofits  
              participating in a pooling arrangement be given written  
              notice that the pool is not regulated by the Insurance  
              Commissioner and that the state insurance insolvency  
              guaranty funds are not available to safeguard its risk.
           
          6.  Prior and Related Legislation  

                  a.        Chapter 342, Statutes of 1986 (AB 3545,  




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                    Lancaster) authorized certain 501(c)(3) organizations  
                    to join together to form a risk pool for the purposes  
                    of self-insuring against tort and other forms of  
                    liability.  

                  b.        Chapter 717, Statutes of 1990 (AB 2639,  
                    Lancaster) expanded the types of coverage provided  
                    through a nonprofit risk pool to include physical  
                    damage to motor vehicles owned and operated by a  
                    member. 

                  c.        Chapter 954, Statutes of 1996 (SB 38, Lockyer)  
                    exempted nonprofit risk pools from the taxes imposed  
                    by the Bank and Corporation Tax Law.

                  d.        Chapter 758, Statutes of 2002 (AB 3024,  
                    Committee on Transportation) added proof of coverage  
                    provided by a charitable risk pool (aka nonprofit risk  
                    pool) to the list of acceptable evidence of financial  
                    responsibility required under Vehicle Code Section  
                    34630.
          
                  e.        Chapter 384, Statutes of 2010 (AB 2327,  
                    Harkey) authorized affordable housing risk retention  
                    pools to offer coverage against any loss arising from  
                    physical damage to property, as well as the same sort  
                    so coverage provided by nonprofit risk pools.
           

          POSITIONS
          
          Support
           
          Nonprofits Insurance Alliance of California (sponsor)
          Alegria Community Living
          Boys & Girls Clubs of Central Sonoma County
          California Association of Nonprofits (CalNonprofits)
          Child Advocates of Placer County
          Community Bridges/Puentes de la Comunidad, Aptos
          Diane Cooper-Puckett, Executive Director, The Peg Taylor Center  
               for Adult Day Health Care, Chico
          Lassen Family Services
          Novato Youth Center
          San Diego Center for Children
          Suzanne Cross, Board Member, Coro Center for Civic Leadership  
               and Unite to Light




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          Terra Nova Counseling, Citrus Heights
          Turning Point of Central California, Visalia
          Victor Treatment Centers & Victor Community Support Services,  
               Chico
           
          Oppose
               
          None received.

          Consultant:   Hugh Slayden (916) 651-4102