BILL ANALYSIS Ó AB 822 Page 1 Date of Hearing: April 8, 2015 ASSEMBLY COMMITTEE ON INSURANCE Tom Daly, Chair AB 822 (Cooley) - As Amended April 6, 2015 SUBJECT: California Insurance Guarantee Association: Statute of Limitations SUMMARY: Establishes a statutory 1-year statute of limitations for filing a claim against the California Insurance Guarantee Association (CIGA). Specifically, this bill: 1)Declares that nothing in the law governing CIGA requires that there be a final adjudication of claims in the proceedings associated with the insolvent insurer's estate before a "covered claim" may be submitted to CIGA. 2)Declares that nothing in the law governing CIGA requires a claim to first be adjudicated and approved by a liquidator of the estate of an insolvent insurer before CIGA pays and discharges a covered claim. 3)Specifies that once CIGA has issued a written denial of a claim, the person asserting the claim has one year within which to bring an action against CIGA challenging the denial. AB 822 Page 2 4)Provides that, if the denial is based on the failure to exhaust "other insurance" then the claim must be reasserted within 6 months after all other insurance has been exhausted. EXISTING LAW: 1)Provides for the establishment of CIGA by all insurers admitted (licensed) to transact property-casualty insurance in California. 2)Specifies how CIGA is to be organized and governed, subject to the supervision of the Insurance Commissioner (commissioner). 3)Provides that if an insurer admitted to transact property-casualty insurance in California becomes insolvent, those California claimants whose claim(s) would have been paid by that insolvent insurer may file a claim against CIGA. 4)Provides that CIGA may only pay "covered claims", which are described in statute in some detail, and which cover most, but not all, theoretical claims that the insolvent insurer might have had to pay. 5)Specifies that CIGA shall not pay a "covered claim" if there is "other insurance" that is also obligated to pay that same claim. 6)Provides that California policyholders pay an assessment on insurance policies (up to 2%, subject to some qualifications) in order to fund CIGA's claims-paying obligations. AB 822 Page 3 7)Provides that if an insurer that is a California domestic insurer becomes insolvent, the commissioner is in charge of handling the insolvency, in concert with other states where the California domestic insurer is admitted to transact insurance. 8)Provides that if an insurer that is domiciled in another state, but admitted to transact insurance in California, becomes insolvent, the insurance regulator in the insurer's home state is primarily in charge of handling the insolvency of that insurer. FISCAL EFFECT: Undetermined. COMMENTS: 1)Purpose. According to the author, this bill is intended to address what are probably unintended consequences of a recent Court of Appeal decision. In Snyder v. CIGA (229 Cal.App.4th 1196, 177 Cal.Rptr.3d 853), the Court was considering a complex and long-standing litigation that impacted asbestos claims being paid from a trust established to fund long-term liabilities of companies that used asbestos (arguably) before its toxicity was understood. In that case, the Court was forced to deal with several issues, and in the context of ruling that the claim against CIGA was not barred by a statute of limitations, it stated "A more difficult question is when the limitations period begins to run for submitting a claim for coverage. Neither the statute nor any regulation specifies the point at which a claim must be submitted to CIGA. California differs from other states in this regard." Unfortunately, and independent of the long-term nature of the Snyder litigation, the implication of the Court's ruling is that no claim against CIGA becomes ripe until the underlying insolvent insurer's estate is finally resolved - which in many AB 822 Page 4 cases is years if not decades after claims have arisen or the insurer was seized as insolvent by its home state regulator. AB 822 is designed to establish a clear and reasonable bright-line rule for when a claimant must file a claim against CIGA. 2)Background. AB 822 addresses the interaction of two related but distinct consumer protection laws. One of the primary insurance consumer protection roles of the commissioner is ensuring the solvency of insurers. When an insurer fails, consumers are at risk of not being paid at all. As a result, there are two parallel and complex regulatory interests: 1) how are insolvent insurers handled, and 2) how are people who are owed money from those insurers protected. An insolvent insurer does not typically have "zero" money. What makes it insolvent is that it does not have enough money to pay its short-term and long-term obligations. California law, and the highly similar laws of the other states and United States jurisdictions, have an elaborate procedure for ensuring that 1) the maximum amount of money is preserved for paying claims (e.g., assets are liquidated rationally, not in a "fire-sale"; reinsurance is collected; receivables are pursued), and 2) the highest priority claimants have first claim on that money (e.g., insurance policyholder claims have a higher priority than general creditors). The guarantee association structure, on the other hand, is intended to make sure that people or companies who have claims against the insolvent insurer, to the extent possible and authorized by statute, get paid in the short term, as opposed to many years in the future when all of the complexities of the insolvent insurer's estate can be finally worked out. In this regard, CIGA pays claims up front, and then asserts its rights to get repaid at some future date depending on how many pennies on the dollar are left in the insolvent insurer's AB 822 Page 5 estate. 3)Snyder. The Court in Snyder faced a complex and long-standing litigation, and the exposures associated with asbestos are also long-term. Thus, ensuring the reasonable rights of all parties to that litigation was a difficult task. However, in judging the equities of the parties in that case, the Court used language that is troublesome for typical parties involved in typical insurer insolvencies. Specifically, the Court stated that "An insured's right to recover from CIGA does not arise and cannot be determined until it is known what recovery the insured will obtain in the insolvency proceedings." The Court went on to state that "Nonetheless, because the claim is not ripe for determination until the actual recovery in the insolvency proceedings is known, a fair argument can be made that the cause of action against CIGA does not accrue until that uncertainty has been resolved." The policy issues posed by the Snyder language are 1) whether or not it is reasonable to make a claimant wait for years until an insolvent insurer's estate is finally resolved before a claim can be filed against CIGA, and 2) whether or not it is fair to California policyholders (who fund CIGA) that claimants may hold back filing claims for years/decades and then file after no one involved in the matter is available to provide testimony or evidence as to whether the claim is valid or not. At least with respect to the first issue, making claimants wait to be paid is contrary to the main purpose of CIGA - which is to get "covered claims" paid expeditiously despite the insurer being insolvent. AB 822 answers these questions by stating that the final determination of the insolvent insurer's estate is not the relevant time frame, and that once CIGA issues a written denial of a claim, a claimant has 1-year to challenge that denial in court. 4)Law of the case. Nothing in AB 822 will impact the parties to the Snyder case. The decision that those claimants are not AB 822 Page 6 prevented from filing their challenge against CIGA by a statute of limitations is a final determination on that issue. AB 822 would apply only prospectively to new cases. REGISTERED SUPPORT / OPPOSITION: Support Association of California Insurance Companies Personal Insurance Federation of California California Insurance Guarantee Association Opposition None received Analysis Prepared by:Mark Rakich / INS. / (916) 319-2086 AB 822 Page 7