Amended in Senate June 13, 2016

Amended in Assembly March 31, 2016

Amended in Assembly March 17, 2016

California Legislature—2015–16 Regular Session

Assembly Bill No. 2710

Introduced by Assembly Member Cooley

February 19, 2016

An act to begin insert amend Section 1063.2 of, to end insert amend, renumber, and add Sections 1063.5 and 1063.14 of, and to repeal Sections 1063.45 and 1063.135 of, the Insurance Code, relating to insurance.

LEGISLATIVE COUNSEL’S DIGEST

AB 2710, as amended, Cooley. Insurance: California Insurance Guarantee Association: premium charges.

(1) Existing law creates the California Insurance Guarantee Association (CIGA) and requires all insurers admitted to transact specified insurance lines in this state to become members. Each time an insurer becomes insolvent, to the extent necessary to secure funds for payment of covered claims of that insolvent insurer and also for payment of reasonable costs of adjusting the claims, CIGA is required to collect premium payments from its member insurers sufficient to discharge its obligations, as specified.

This bill, among other things, would no longer require an insurer to become insolvent in order for CIGA to collect premium payments from the member insurers and would require CIGA to collect premiums in order to secure funds for the payment of its administrative expenses.

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(2) Under existing law, CIGA is required to be a party in interest in all proceedings involving a covered claim, and has the same rights as the insolvent insurer would have had if not in liquidation, but CIGA has no cause of action against the insureds of the insolvent insurer for any sums it has paid out, except as provided.

end insert begin insert

This bill would provide that the above-stated provision denying CIGA a cause of action against insureds does not limit CIGA’s right to pursue unpaid reimbursements owed by an employer pursuant to a workers’ compensation insurance policy with a deductible if the employer was obligated to reimburse the insurer for benefits payments and related expenses paid by the insurer or CIGA from a special deposit or from other CIGA funds pursuant to the terms of the policy and related agreements.

end insert begin delete

(2)

end delete

begin insert (3) end insert  Existing law requires that the rate of premium charged be a uniform percentage of net direct written premium, as defined, in the preceding calendar year applicable to specific categories of insurance. The rate of premium charges to each member insurer in the appropriate categories are initially based on the written premium of each insurer as shown in the latest year’s annual financial statement on file with the Insurance Commissioner and are later adjusted as provided. Existing law authorizes CIGA to refund any credit due in a specific category of insurance to a member insurer as a result of the adjusted premium calculation, as provided.

This bill would instead require CIGA, with regard to premium charges paid prior to January 1, 2017, to refund to a member insurer any credit due in a specific category as a result of the adjusted premium calculation.

This bill, with regard to premium charges paid on or after January 1, 2017, would delete the requirements that the rate of premium charges be initially based on the written premium of each insurer, that the premium charges be adjusted later as provided, and that the member insurer be eligible for a refund of any credit due to that member insurer as a result of the adjusted premium calculation, and would instead require that the rate of premium charges to each member insurer in the appropriate categories be based on the net direct written premium of each insurer as shown in the latest year’s annual financial statement on file with the commissioner. The bill would also make conforming changes.

begin delete

(3)

end delete

begin insert (4) end insert  Existing law authorizes CIGA to exempt or defer a member insurer from paying the premium charge if the payment would cause the member insurer’s financial statement to reflect an amount of capital or surplus less than the minimum amounts required for a certificate of authority by any jurisdiction in which the member insurer is authorized to transact insurance. Deferred premium charges are required to be paid when the payment will not reduce capital or surplus below required minimums. These payments are credited against future premium charges to those companies receiving larger premium charges by virtue of the deferment.

This bill would delete the requirement that the payments be credited against future premium charges to those companies receiving larger premium charges by virtue of the deferment.

begin delete

(4)

end delete

begin insert (5) end insert  Existing law requires CIGA’s plan of operations to contain provisions requiring each member insurer to recoup the premium charge paid to CIGA from its insureds over a reasonable length of time by way of a reasonably calculated surcharge on insurance policies to which the provisions of CIGA apply.

This bill would instead require each member insurer to recoup the premium charge from its insureds in the year following the charge. The bill, with regard to premium charges paid on or after January 1, 2017, among other things, would require the member insurer to file a report in accordance with the provisions of the plan of operation indicating the amount of surcharges it has collected, and would prohibit a member insurer electing to omit collecting surcharges from any of its insureds from being entitled to any reimbursement from CIGA, as specified.

Vote: majority. Appropriation: no. Fiscal committee: no. State-mandated local program: no.

The people of the State of California do enact as follows:

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begin insert SECTION 1. end insert   

end insert

begin insert Section 1063.2 of the end insert begin insert Insurance Code end insert begin insert is amended
to read: end insert

1063.2.  

(a) The association shall pay and discharge covered
begin delete claims end delete begin insert claims, end insert and in connection begin delete therewith end delete begin insert therewith, end insert pay for or
furnish loss adjustment services and defenses of claimants when
required by policy provisions. It may do so either directly by itself
or through a servicing facility or through a contract for reinsurance
and assumption of liabilities by one or more member insurers or
through a contract with the liquidator, upon terms satisfactory to
the association and to the liquidator, under which payments on
covered claims would be made by the liquidator using funds
provided by the association.

(b)  begin insert (1) end insert begin insert   end insert The association shall be a party in interest in all
proceedings involving a covered claim, and shall have the same
rights as the insolvent insurer would have had if not in liquidation,
including, but not limited to, the right begin delete to: (1) appear, defend, and
appeal a claim in a court of competent jurisdiction, (2) receive
notice of, investigate, adjust, compromise, settle, and pay a covered
claim, and (3) investigate, handle, and deny a noncovered claim.
The association shall have no cause of action against the insureds
of the insolvent insurer for any sums it has paid out, except as
provided by this article. end delete begin insert to all of the following: end insert

begin insert

(A) Appear, defend, and appeal a claim in a court of competent
jurisdiction.

end insert begin insert

(B) Receive notice of, investigate, adjust, compromise, settle,
and pay a covered claim.

end insert begin insert

(C) Investigate, handle, and deny a noncovered claim.

end insert begin insert

(2) The association shall have no cause of action against the
insureds of the insolvent insurer for any sums it has paid out,
except as provided by this article.

end insert begin insert

(3) Nothing in paragraph (2) limits the association’s right to
pursue unpaid reimbursements owed by an employer pursuant to
a workers’ compensation insurance policy with a deductible if the
employer was obligated to reimburse the insurer for benefits
payments and related expenses paid by the insurer or the
association from a special deposit or from other association funds
pursuant to the terms of the policy and related agreements.

end insert

(c) (1) If damages against uninsured motorists are recoverable
by the claimant from his or her own insurer, the applicable limits
of the uninsured motorist coverage shall be a credit against a
covered claim payable under this article. Any person having a
claim that may be recovered under more than one insurance
guaranty association or its equivalent shall seek recovery first from
the association of the place of residence of the insured, except that
if it is a first-party claim for damage to property with a permanent
location, he or she shall seek recovery first from the association
of the permanent location of the property, and if it is a workers’
compensation claim, he or she shall seek recovery first from the
association of the residence of the claimant. Any recovery under
this article shall be reduced by the amount of recovery from any
other insurance guaranty association or its equivalent. A member
insurer may recover in subrogation from the association only
one-half of any amount paid by that insurer under uninsured
motorist coverage for bodily injury or wrongful death (and nothing
for a payment for anything else), in those cases where the injured
person insured by such an insurer has proceeded under his or her
uninsured motorist coverage on the ground that the tortfeasor is
uninsured as a result of the insolvency of his or her liability insurer
(an insolvent insurer as defined in this article), provided that the
member insurer shall waive all rights of subrogation against the
tortfeasor. Any amount paid a claimant in excess of the amount
authorized by this section may be recovered by action, or other
proceeding, brought by the association.

(2) Any claimant having collision coverage on a loss that is
covered by the insolvent company’s liability policy shall first
proceed against his or her collision carrier. Neither that claimant
nor the collision carrier, if it is a member of the association, shall
have the right to sue or continue a suit against the insured of the
insolvent insurance company for that collision damage.

(d) The association shall have the right to recover from any
person who is an affiliate of the insolvent insurer and whose
liability obligations to other persons are satisfied in whole or in
part by payments made under this article the amount of any covered
claim and allocated claims expense paid on behalf of that person
pursuant to this article.

(e) Any person having a claim or legal right of recovery under
any governmental insurance or guaranty program begin delete which end delete begin insert that end insert is
also a covered claim, shall be required to first exhaust his or her
right under the program. Any amount payable on a covered claim
shall be reduced by the amount of any recovery under the program.

(f) “Covered claims” for unearned premium by lenders under
insurance premium finance agreements as defined in Section 673
shall be computed as of the earliest cancellation date of the policy
pursuant to Section 673.

(g) “Covered claims” shall not include any judgments against
or obligations or liabilities of the insolvent insurer or the
commissioner, as liquidator, or otherwise resulting from alleged
or proven torts, nor shall any default judgment or stipulated
judgment against the insolvent insurer, or against the insured of
the insolvent insurer, be binding against the association.

(h) “Covered claims” shall not include any loss adjustment
expenses, including adjustment fees and expenses, attorney’s fees
and expenses, court costs, interest, and bond premiums, incurred
prior to the appointment of a liquidator.

begin delete SECTION 1. end delete

begin insert SEC. 2. end insert   

Section 1063.5 of the Insurance Code is amended and
renumbered, to immediately precede Section 1063.5 of the
Insurance Code, to read:

1063.45.  

(a) (1) To the extent necessary to secure funds for
the association for payment of administrative expenses of the
association and covered claims of insolvent insurers and also for
payment of reasonable costs of adjusting the claims, the association
shall collect premium payments from its member insurers sufficient
to discharge its obligations.

(2) The association shall allocate its claim payments and costs,
incurred or estimated to be incurred, to one or more of the
following categories:

(A) Workers’ compensation claims.

(B) Homeowners’ claims and automobile claims, including all
of the following:

(i) Automobile material damage.

(ii) Automobile liability (both personal injury and death and
property damage).

(iii) Medical payments.

(iv) Uninsured motorist claims.

(C) Claims other than workers’ compensation, homeowners,
and automobile, as defined above.

(3) Separate premium payments shall be required for each
category.

(4) The premium payments for each category shall be used to
pay the claims and costs allocated to that category.

(b) (1) The rate of premium charged shall be a uniform
percentage of net direct written premium in the preceding calendar
year applicable to that category.

(2) The rate of premium charges to each member insurer in the
appropriate categories shall initially be based on the written
premium of each insurer as shown in the latest year’s annual
financial statement on file with the commissioner.

(3) The initial premium shall be adjusted by applying the same
rate of premium charge as initially used to each insurer’s written
premium as shown on the annual statement for the second year
following the year on which the initial premium charge was based.

(4) (A) The difference between the initial premium charge and
the adjusted premium charge shall be charged or credited to each
member insurer by the association as soon as practical after the
filing of the annual statements of the member insurers with the
commissioner for the year on which the adjusted premium is based.

(B) Any credit due in a specific category to a member insurer
as a result of the adjusted premium calculation shall be refunded
to the member insurer.

(c) (1) For purposes of this section, “net direct written
premiums” means the amount of gross premiums, less return
premiums, received in that calendar year upon business done in
this state, other than premiums received for reinsurance.

(2) In cases of a dispute as to the amount of the net direct written
premium between the association and one of its member insurers,
the written decision of the commissioner shall be final.

(d) (1) The premium charged to any member insurer for any
of the three categories or a category established by the association
shall not be more than 2 percent of the net direct premium written
in that category in this state by that member insurer per year,
starting on January 1, 2003, until December 31, 2007, and
thereafter shall be 1 percent per year, until January 1, 2015.

(2) Commencing January 1, 2015, the premium charged to any
member insurer for any of the three categories or a category
established by the association shall not be more than 2 percent of
the net direct written premium unless there are bonds outstanding
that were issued pursuant to Article 14.25 (commencing with
Section 1063.50) or Article 14.26 (commencing with Section
1063.70).

(3) If bonds issued pursuant to either article are outstanding,
the premium charged to a member insurer for the category for
which the bond proceeds are being used to pay claims and expenses
shall not be more than 1 percent of the net direct written premium
for that category.

(e) (1) The association may exempt or defer, in whole or in
part, the premium charge of any member insurer, if the premium
charge would cause the member insurer’s financial statement to
reflect an amount of capital or surplus less than the minimum
amounts required for a certificate of authority by any jurisdiction
in which the member insurer is authorized to transact insurance.
However, during the period of deferment, no dividends shall be
paid to shareholders or policyholders by the company whose
premium charge was deferred.

(2) Deferred premium charges shall be paid when the payment
will not reduce capital or surplus below required minimums.

(f) After all covered claims of the insolvent insurer and expenses
of administration have been paid, any unused premiums and any
reimbursements or claims dividends from the liquidator remaining
in any category shall be retained by the association and applied to
reduce future premium charges in the appropriate category.

(g) The commissioner may suspend or revoke the certificate of
authority to transact business in this state of a member insurer that
fails to pay a premium when due and after demand has been made.

(h) Interest at a rate equal to the current federal reserve discount
rate plus 21⁄2 percent per annum shall be added to the premium of
any member insurer that fails to submit the premium requested by
the association within 30 days after the mailing request. However,
in no event shall the interest rate exceed the legal maximum.

(i) This section shall apply only to premium charges paid prior
to January 1, 2017.

(j) This section shall remain in effect only until January 1, 2020,
and as of that date is repealed, unless a later enacted statute, that
is enacted before January 1, 2020, deletes or extends that date.

begin delete SEC. 2. end delete

begin insert SEC. 3. end insert   

Section 1063.5 is added to the Insurance Code, to read:

1063.5.  

(a) (1) To the extent necessary to secure funds for the
association for payment of the administrative expenses of the
association, covered claims of insolvent insurers, and for payment
of reasonable costs of adjusting the claims, the association shall
collect premium payments from its member insurers sufficient to
discharge its obligations.

(2) The association shall allocate its claim payments and costs,
incurred or estimated to be incurred, to one or more of the
following categories:

(A) Workers’ compensation claims.

(B) Homeowners’ claims and automobile claims, including all
of the following:

(i) Automobile material damage.

(ii) Automobile liability (both personal injury and death and
property damage).

(iii) Medical payments.

(iv) Uninsured motorist claims.

(C) Claims other than workers’ compensation, homeowners’,
and automobile, as defined above.

(3) Separate premium payments shall be required for each
category.

(4) The premium payments for each category shall be used to
pay the claims and costs allocated to that category.

(b) (1) The rate of premium charged shall be a uniform
percentage of net direct written premium in the preceding calendar
year applicable to that category.

(2) The rate of premium charges to each member insurer in the
appropriate categories shall be based on the net direct written
premium of each member insurer as shown in the latest year’s
annual financial statement on file with the commissioner.

(c) (1) For purposes of this section, “net direct written
premiums” means the amount of gross premiums, less return
premiums, received in that calendar year upon business done in
this state, other than premiums received for reinsurance.

(2) In cases of a dispute as to the amount of the net direct written
premium between the association and one of its member insurers,
the written decision of the commissioner shall be final.

(d) In charging premiums to member insurers, the association
shall adjust, if necessary, the net direct written premiums shown
on a member insurer’s annual statement by excluding any
premiums written for any lines of insurance or types of coverage
not covered by this article under paragraph (3) of subdivision (c)
of Section 1063.1.

(e) (1) The premium charged to any member insurer for any of
the three categories or a category established by the association
shall not be more than 2 percent of the net direct written premium
unless there are bonds outstanding that were issued pursuant to
Article 14.25 (commencing with Section 1063.50) or Article 14.26
(commencing with Section 1063.70).

(2) If bonds issued pursuant to either article are outstanding,
the premium charged to a member insurer for the category for
which the bond proceeds are being used to pay claims and expenses
shall not be more than 1 percent of the net direct written premium
for that category.

(f) (1) The association may exempt or defer, in whole or in
part, the premium charge of any member insurer, if the premium
charge would cause the member insurer’s financial statement to
reflect an amount of capital or surplus less than the minimum
amounts required for a certificate of authority by any jurisdiction
in which the member insurer is authorized to transact insurance.
However, during the period of deferment, no dividends shall be
paid to shareholders or policyholders by the company whose
premium charge was deferred.

(2) Deferred premium charges shall be paid when the payment
will not reduce capital or surplus below required minimums.

(g) After all covered claims of insolvent insurers and expenses
of administration have been paid, any unused premiums and any
reimbursements or claims dividends from liquidators remaining
in any category shall be retained by the association and applied to
reduce future premium charges in the appropriate category.

(h) The commissioner may suspend or revoke the certificate of
authority to transact business in this state of a member insurer that
fails to pay a premium when due and after demand has been made.

(i) Interest at a rate equal to the current federal reserve discount
rate plus 21⁄2 percent per annum shall be added to the premium of
any member insurer that fails to submit the premium requested by
the association within 30 days after the mailing request. However,
in no event shall the interest rate exceed the legal maximum.

(j) This section shall apply only to premium charges paid on or
after January 1, 2017.

begin delete SEC. 3. end delete

begin insert SEC. 4. end insert   

Section 1063.14 of the Insurance Code is amended
and renumbered, to immediately precede Section 1063.14 of the
Insurance Code, to read:

1063.135.  

(a) The plan of operation adopted pursuant to
subdivision (c) of Section 1063 shall contain provisions whereby
each member insurer is required to recoup in the year following
the premium charge a sum reasonably calculated to recoup the
premium charge paid by the member insurer under this article by
way of a surcharge on premiums charged for insurance policies to
which this article applies. Amounts recouped shall not be
considered premiums for any other purpose, including the
computation of gross premium tax or agents’ commission.

(b) The amount of any surcharge shall be separately stated on
either a billing or policy declaration sent to an insured. The
association shall determine the rate of the surcharge and the
collection period for each category and these shall be mandatory
for all member insurers of the association who write business in
those categories. Member insurers who collect surcharges in excess
of premiums paid pursuant to Section 1063.45 for an insolvent
insurer shall remit the excess to the association as an additional
premium within 30 days after the association has determined the
amount of the excess recoupment and given notice to the member
insurer of that amount. The excess shall be applied to reduce future
premium charges in the appropriate category.

(c) The plan of operation may permit a member insurer to omit
collection of the surcharge from its insureds when the expense of
collecting the surcharge would exceed the amount of the surcharge.
However, nothing in this section shall relieve the member insurer
of its obligation to recoup the amount of surcharge otherwise
collectible.

(d) This section shall apply only to premium charges paid prior
to January 1, 2017.

(e) This section shall remain in effect only until January 1, 2020,
and as of that date is repealed, unless a later enacted statute, that
is enacted before January 1, 2020, deletes or extends that date.

begin delete SEC. 4. end delete

begin insert SEC. 5. end insert   

Section 1063.14 is added to the Insurance Code, to
read:

1063.14.  

(a) (1) The plan of operation adopted pursuant to
subdivision (c) of Section 1063 shall contain provisions whereby
each member insurer is required to recoup in the year following
the premium charge a sum calculated to recoup the premium charge
paid by the member insurer under this article by way of a surcharge
on premiums charged for insurance policies to which this article
applies.

(2) Amounts recouped shall not be considered premiums for
any other purpose, including the computation of gross premium
tax or agents’ commission.

(b) (1) The amount of any surcharge shall be separately stated
on either a billing or policy declaration sent to an insured. The
association shall determine the rate of the surcharge and the
collection period for each category, and these shall be mandatory
for all member insurers of the association who write business in
those categories.

(2) Each member insurer shall file a report in accordance with
the provisions of the plan of operation indicating the amount of
surcharges it has collected.

(A) Member insurers who collect surcharges in excess of
premium charges paid in the preceding year pursuant to Section
1063.5 shall remit the excess to the association as an additional
premium within 30 days after the association has determined the
amount of the excess recoupment and given notice to the member
insurer of that amount. The excess shall be applied to reduce future
premium charges in the appropriate category.

(B) Member insurers who report surcharge collections that are
less than what they paid in the preceding year’s premium charge
shall receive reimbursement from the association for the shortfall
in surcharge collection.

(c) (1) The plan of operation may permit a member insurer to
omit collection of the surcharge from its insureds when the expense
of collecting the surcharge would exceed the amount of the
surcharge.

(2) A member insurer electing to omit collecting surcharges
from any of its insureds shall not be entitled to any reimbursement
from the association pursuant to subdivision (b).

(3) However, nothing in this section shall relieve the member
insurer of its obligation to recoup the amount of surcharge
otherwise collectible.

(d) This section shall apply only to premium charges paid on
or after January 1, 2017.