BILL ANALYSIS Ó SB 1011 Page 1 SENATE THIRD READING SB 1011 (Monning) As Amended August 11, 2014 Majority vote SENATE VOTE :36-0 INSURANCE 13-0 ----------------------------------------------------------------- |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, SB 1011 Page 2 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 SB 1011 Page 3 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 SB 1011 Page 4 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 SB 1011 Page 5 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. SB 1011 Page 6 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 FN: 0004526