BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  SB 1011
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          SENATE THIRD READING
          SB 1011 (Monning)
          As Amended  June 26, 2014
          Majority vote 

           SENATE VOTE  :36-0  
           
           INSURANCE           13-0                                        
           
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          |Ayes:|Perea, Hagman, Allen,     |     |                          |
          |     |Bradford,                 |     |                          |
          |     |Ian Calderon, Cooley,     |     |                          |
          |     |Dababneh, Frazier, Beth   |     |                          |
          |     |Gaines, Gonzalez, Olsen,  |     |                          |
          |     |V. Manual Pérez,          |     |                          |
          |     |Wieckowski                |     |                          |
          |-----+--------------------------+-----+--------------------------|
          |     |                          |     |                          |
           ----------------------------------------------------------------- 
           SUMMARY  :  Authorizes certain 501(c)(3) nonprofit organizations  
          to provide self-insurance to its members through a pooling of  
          risk against damage to property and the losses related to the  
          loss of use of property.  Specifically,  this bill  :   

          1)Authorizes existing nonprofit self-insurance pooling  
            organizations that provide liability coverage to also provide  
            property coverage to their members.

          2)Requires that the members of these self-insurance pooling  
            arrangements be provided a written notice that the nonprofit  
            organization is not regulated by the Insurance Commissioner  
            (IC), and that the California Insurance Guarantee Association  
            (CIGA) does not guarantee payment in the event the nonprofit  
            becomes insolvent.

           EXISTING LAW  :

          1)Provides generally that the regulation of insurance in  
            California is the responsibility of the IC, as head of the  
            Department of Insurance (DOI). 

          2)Establishes a range of consumer protections for policyholders  
            and others who are the beneficiaries of insurance policies,  








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            including an Unfair Practices Act, financial solvency  
            regulation, statutory guarantees that covered claims will be  
            paid in the event that the insurer obligated to make payment  
            has become insolvent, and property-casualty rate regulation  
            (as enacted by initiative statute - Proposition 103 at the  
            November 1988 General Election), and empowers the IC to  
            enforce these laws.

          3)Provides various exceptions to the general rule that all  
            "insurance" is regulated by the IC pursuant to these laws.  As  
            relevant to this bill, the Corporations Code expressly states  
            that certain nonprofit organizations may join together to  
            provide specified liability protection in a self-insurance  
            risk pool provided that: 

             a)   At least two or more qualified nonprofits join together;

             b)   The nonprofits are exempt from taxation pursuant to  
               federal Internal Revenue Code Section 501(c)(3);

             c)   The nonprofits are not hospitals, but are organized  
               chiefly to provide or fund health or human services;

             d)   All members of the pool agree to pay premiums or  
               contributions that ensure a financially sound pool;

             e)   The risk pool be organized as a public benefit  
               corporation pursuant to California law.

          4)Provides that a pool established pursuant to these  
            Corporations Code provisions may not provide coverage for  
            punitive or exemplary damages due to a judgment against an  
            employee of a member organization.

          5)Specifies that an organization established pursuant to these  
            Corporations Code provisions shall not be considered insurance  
            nor subject to the Insurance Code.

           FISCAL EFFECT  :  Unknown.  This bill is keyed non-fiscal by the  
          Legislative Counsel.  (See discussion of premium taxes, below.)

           COMMENTS  :   

          1)Purpose of this bill.  According to the author, the  








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            property-casualty liability insurance crisis of the 1980s  
            affected many potential policyholders, but 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 Corporations Code Section 5005.1, which authorized a  
            new form of group self-insurance specific to 501(c)(3)  
            entities that provide or fund health or human services,  
            sometimes referred to as a "nonprofit risk pool."  Under that  
            law, these organizations are allowed to band together to share  
            their risk collectively, pool their resources to cover  
            potential liabilities, and develop techniques and programs for  
            loss mitigation and avoidance.  These organizations have  
            successfully self-insured liability and commercial auto  
            coverage, including coverage for vehicle property damage, for  
            25 years.

          2)Background.  Risk pools authorized by Corporations Code  
            Section 5005.1 are a form of group self-insurance where  
            nonprofit organizations 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.  California law treats these risk pools as a form  
            of self-insurance not subject to the Insurance Code or  
            regulation by the DOI.  Thus, the DOI does not apply the  
            Proposition 103 rate regulation rules to these pools, does not  
            engage in market conduct examinations, financial solvency  
            oversight, and other standard insurance regulatory activities.  
             Additionally, these pools do not participate in CIGA, which  
            pays defined claims in the event a licensed property-casualty  
            insurer becomes insolvent.  Nonetheless, there is no  
            opposition on file.

          Although not explicitly required in statute, in practice the  
            existing nonprofit risk pools are organized as public benefit  
            corporations subject to oversight 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.  Ultimately, these organizations are  








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            member operated for the benefit of members, and do not have  
            the same arms-length relationship that commercial insurers  
            have with policyholders.

          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, provides liability coverage directly, and makes property  
            insurance available to its members through an arrangement with  
            an admitted insurer.  

          3)Other services provided by risk pools.  NIAC and some of its  
            members state that it provides many benefits to members above  
            and beyond liability coverage, and it is expected to do the  
            same with property coverage.  For example, in 2013 alone, NIAC  
            provided training for 945 employed and volunteer drivers.   
            NIAC provided statistics showing that it performed 651  
            consultations to 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.

          4)1980's liability insurance crisis.  As a result of the  
            substantial withdrawal of commercial liability insurers from  
            the market in the 1980's, a number of novel and creative  
            alternatives were established both at the state and federal  
            level.  The health and human services nonprofit self-insurance  
            pooling statute was one of those efforts to mitigate the harm  
            caused by that market withdrawal.  By all measures, this  
            alternative has proven successful.  But there is no evidence  
            that a property insurance crisis exists currently.  As a  
            result, it might be questioned whether there is a need to  
            establish a carve-out from standard insurance law when there  
            is not a failing market necessitating that carve-out.  On the  
            other hand, the members of current nonprofit self-insurance  
            risk pools have a high degree of confidence in their  








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            organization, and support allowing their organization to take  
            care of a broader range of their insurance needs.  
           
          5)Increased exposure.  According to the sponsor, NIAC members  
            are currently paying approximately $12 million on property  
            insurance premiums to a commercial insurer through the NIAC  
            program.  Its self-insured liability exposure is approximately  
            $60 million.  Thus, there is approximately a 20% increase in  
            exposure that is contemplated by this bill.  However, it is  
            well accepted that liability insurance is a higher risk, more  
            volatile line of insurance than property insurance.  Thus, an  
            organization that successfully manages $60 million of  
            liability insurance might be considered a sound entity to  
            manage $12 million of property insurance.  In fact, the  
            Assembly Insurance Committee has received numerous letters  
            from NIAC member nonprofit organizations attesting to their  
            satisfaction with the broad range of services provided by  
            NIAC, and expressing the view that NIAC understands the  
            uniqueness and special needs of nonprofit organizations better  
            than commercial insurers.  These nonprofit organization  
            supporters believe they will get better service for lower  
            costs if this bill is enacted.

          6)Existing property coverage.  While it was a liability  
            insurance crisis that led to the authorization of these  
            charitable risk pools, this bill is not the first measure  
            subsequent to the pools' creation to authorize them to provide  
            more than liability coverage.  In 1990, legislation expanded  
            the scope of authorized coverage from liability only to also  
            include automobile property damage losses.  That was a lesser  
            expansion than is being proposed by this bill, but it may  
            serve as precedent on the question of whether expansions of  
            authorized coverage beneficial to the member nonprofits might  
            be appropriate.

          7)Premium tax loss.  If all of NIAC's members that currently use  
            the NIAC commercial insurance arrangement terminate their  
            commercial insurance and obtain their property coverage  
            through the risk-pool, there will be a loss of premium tax  
            revenue.  The loss to the General Fund could approach  
            $300,000.  The issue is whether a potential loss of premium  
            tax revenue is a valid reason to deny these nonprofits access  
            to self-insurance services that these organizations argue  
            better serve their needs.








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          8)Prior Legislation:

             a)   AB 3545 (Lancaster), Chapter 342, Statutes of 1980,  
               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)   AB 2639 (Lancaster), Chapter 717, Statutes of 1990,  
               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)   SB 38 (Lockyer), Chapter 954, Statutes of 1990, exempted  
               nonprofit risk pools from the taxes imposed by the Bank and  
               Corporation Tax Law.

             d)   AB 3024 (Transportation Committee), Chapter 758,  
               Statutes of 2002, 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.


           Analysis Prepared by  :    Mark Rakich / INS. / (916) 319-2086


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