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 SB 1011 (Monning), Page 2 (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. SB 1011 (Monning), Page 3 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 SB 1011 (Monning), Page 4 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 SB 1011 (Monning), Page 5 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; SB 1011 (Monning), Page 6 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, SB 1011 (Monning), Page 7 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 SB 1011 (Monning), Page 8 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