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 | | ----------------------------------------------------------------- UNFINISHED BUSINESS Bill No: SB 1011 Author: Monning (D) Amended: 8/11/14 Vote: 21 SENATE INSURANCE COMMITTEE : 11-0, 4/9/14 AYES: Monning, Gaines, Corbett, Correa, DeSaulnier, Lieu, Mitchell, Nielsen, Roth, Torres, Vidak SENATE FLOOR : 36-0, 5/1/14 AYES: Anderson, Berryhill, Block, Cannella, Corbett, Correa, De León, DeSaulnier, Evans, Fuller, Gaines, Galgiani, Hancock, Hernandez, Hill, Hueso, Huff, Jackson, Knight, Lara, Leno, Lieu, Liu, Mitchell, Monning, Morrell, Nielsen, Padilla, Pavley, Roth, Steinberg, Torres, Vidak, Walters, Wolk, Wyland NO VOTE RECORDED: Beall, Calderon, Wright, Yee ASSEMBLY FLOOR : 79-0, 8/14/14 - See last page for vote 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, organizes as a nonprofit benefit corporation, be in existence for purposes of covering tort liability for no less than five years, and have accumulated net assets of not less than $5,000,000. The bill also requires the CONTINUED SB 1011 Page 2 pooling arrangement to include in every application, on or after January 1, 2016, a notice that states, among other things, that the risk pooling contract is not subject to all of the California insurance laws and is not subject to regulation by the Insurance Commissioner. Assembly Amendments require that the pooling arrangement be organized as a nonprofit public benefit corporation and require that all corporations participating in the pooling arrangement, be in existence for purposes of covering tort liability for no less than five years, and have accumulated net assets of not less than $5,000,000. Amendments also require the pooling arrangement to include in every application, on or after January 1, 2016, a specified notice regarding the regulation of the pool. 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; 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 SB 1011 Page 3 (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, organized as a nonprofit public benefit corporation. 2.Specifies that the pool be in existence for purposes of covering tort liability for no less than five years, and have accumulated net assets of not less than $5,000,000. 3.Requires the pooling arrangement to include in every application form for membership and every risk pooling contract issued or renewed on or after January 1, 2016, in boldface 10-point type on the front page, a notice that states, among other things, that the risk pooling contract is not subject to all of the California insurance laws and is not subject to regulation by the Insurance Commissioner. Background 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 SB 1011 Page 4 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 can 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: No SUPPORT : (Verified 8/13/14) Nonprofits' Insurance Alliance of California (source) Alegria Community Living Bill Wilson Center, Santa Clara Boys & Girls Clubs of Central Sonoma County Boys & Girls Clubs of Fresno County SB 1011 Page 5 Boys & Girls Clubs of Garden Grove California Association of Nonprofits Child Advocates of Placer County Children's Services Network, Fresno Community Bridges/Puentes de la Comunidad, Aptos Community Action Partnership of Orange County Cooper Fellowship, Inc. - Santa Ana Diane Cooper-Puckett, Executive Director, The Peg Taylor Center for Adult Day Health Care - Chico Grandparents as Parents - Canoga Park La Clínica, Oakland Lassen Family Services Lilliput Children's Services, Citrus Heights NEO Law Group Novato Youth Center San Diego Center for Children Shields for Families - Los Angeles Suzanne Cross, Board Member, Coro Center for Civic Leadership and Unite to Light Terra Nova Counseling - Citrus Heights Turning Point of Central California - Visalia Venice Community Housing Corporation 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 SB 1011 Page 6 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 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. ASSEMBLY FLOOR : 79-0, 08/14/14 AYES: Achadjian, Alejo, Allen, Ammiano, Bigelow, Bloom, Bocanegra, Bonilla, Bonta, Bradford, Brown, Buchanan, Ian Calderon, Campos, Chau, Chávez, Chesbro, Conway, Cooley, Dababneh, Dahle, Daly, Dickinson, Donnelly, Eggman, Fong, Fox, Frazier, Beth Gaines, Garcia, Gatto, Gomez, Gonzalez, Gordon, Gorell, Gray, Grove, Hagman, Hall, Harkey, Roger Hernández, Holden, Jones, Jones-Sawyer, Levine, Linder, Logue, Lowenthal, Maienschein, Mansoor, Medina, Melendez, Mullin, Muratsuchi, Nazarian, Nestande, Olsen, Pan, Patterson, Perea, John A. Pérez, V. Manuel Pérez, Quirk, Quirk-Silva, Rendon, Ridley-Thomas, Rodriguez, Salas, Skinner, Stone, Ting, Wagner, Waldron, Weber, Wieckowski, Wilk, Williams, Yamada, Atkins NO VOTE RECORDED: Vacancy AL:nl 8/15/14 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END ****