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