BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | SB 1011| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- THIRD READING Bill No: SB 1011 Author: Monning (D) Amended: 4/22/14 Vote: 21 SENATE INSURANCE COMMITTEE : 11-0, 4/9/14 AYES: Monning, Gaines, Corbett, Correa, DeSaulnier, Lieu, Mitchell, Nielsen, Roth, Torres, Vidak SUBJECT : Nonprofit corporations: self-insurance SOURCE : Nonprofits Insurance Alliance of California DIGEST : This bill authorizes certain 501(c)(3) nonprofit organizations to insure themselves against damage to property and the losses related to the loss of use of property through a risk pool arrangement. ANALYSIS : 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; CONTINUED SB 1011 Page 2 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. 1.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. 2.Defines "authorized corporation" as any corporation that is organized chiefly to provide or fund health or human services (except hospitals) and qualifies as exempt from taxation under Section 501(c)(3) of the U.S. Internal Revenue Code. 3.Provides that the pooling arrangement shall not be considered insurance nor be subject to regulation under the Insurance Code. 4.Requires initial pooled resources of at least $250,000. 5.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: 1.Authorizes certain 501(c)(3) nonprofit organizations to insure themselves against damage to property and the losses related to the loss of use of property through a risk pool arrangement. 2.Requires a disclosure stating that all corporations participating in a pooling arrangement will 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. Background CONTINUED SB 1011 Page 3 Risk pools authorized by the Corporations Code 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 and are not subject to a standard administrative enforcement processes, including solvency regulation or claims handling review. Although not explicitly required in statute, in practice, all known existing nonprofit risk pools are organized as public benefit corporations regulated by the Attorney General. 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). 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, 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. FISCAL EFFECT : Appropriation: No Fiscal Com.: No Local: CONTINUED SB 1011 Page 4 No SUPPORT : (Verified 4/22/14) Nonprofits Insurance Alliance of California (source) Alegria Community Living Boys & Girls Clubs of Central Sonoma County California Association of Nonprofits Child Advocates of Placer County Community Bridges/Puentes de la Comunidad, Aptos Coro Center for Civic Leadership and Unite to Light Lassen Family Services Novato Youth Center San Diego Center for Children Terra Nova Counseling, Citrus Heights The Peg Taylor Center for Adult Day Health Care, Chico Turning Point of Central California, Visalia Victor Treatment Centers & Victor Community Support Services, Chico ARGUMENTS IN SUPPORT : 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. 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 CONTINUED SB 1011 Page 5 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. This bill permits 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. This bill 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. AL:nl 4/23/14 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END **** CONTINUED