BILL ANALYSIS Ó
SENATE COMMITTEE ON INSURANCE
Senator Richard Roth, Chair
2015 - 2016 Regular
Bill No: AB 2710 Hearing Date: June 22,
2016
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|Author: |Cooley |
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|Version: |June 13, 2016 |
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|Urgency: |No |Fiscal: |No |
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|Consultant:|Erin Ryan |
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Subject: Insurance: California Insurance Guarantee
Association: premium charges
SUMMARY Clarifies the California Insurance Guarantee
Association's (CIGA) authority to pursue unpaid reimbursements
owed by an employer pursuant to a workers' compensation
deductible policy issued by an insolvent insurer; revises the
methodology used by CIGA to calculate assessments charged to
member insurers to pay the covered claims of insolvent member
insurers and reasonable costs of adjusting claims to discharge
its obligations; requires insurers to recoup the annual CIGA
assessment through a surcharge on policies in the year following
the CIGA assessment, rather than over a "reasonable length of
time; specifies the changes apply to assessments collected on or
after January 1, 2017; and makes other technical and clarifying
changes.
DIGEST
Existing law
1. Establishes CIGA to pay "covered claims" of insolvent member
insurers, as specified; (§1063 et. seq.)
2. Requires each insurer admitted to transact insurance in this
state in three specified classes of insurance, including
workers' compensation, auto and homeowners, and all claims other
than workers' compensation or homeowners' and automobile
insurance, to participate in CIGA as a condition of doing
AB 2710 (Cooley) Page 2
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business;
3. Specifies that CIGA 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 to appear,
defend and appeal a claim, receive a notice of, investigate,
adjust, compromise, settle and pay a covered claim, and
investigate, handle, and deny a non-covered claim;
4. Provides that CIGA shall have no cause of action against the
insureds of the insolvent insurer for any sums it has paid out,
except as provided by statute;
5. Requires CIGA to collect assessments from member insurers
sufficient to pay covered claims of insolvent insurers and
reasonable costs of adjusting the claims to discharge its
obligations;
6. Specifies that assessments for each category in #2 above shall
be used to pay claims and costs allocated in that category;
7. Provides that assessments are to be based on a percentage of
net direct written premium in the preceding calendar year
applicable to that category;
8. Provides that the assessment 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 Insurance
Commissioner (IC), but that it may be subsequently adjusted by
applying the same rate to the insurer's written premium as shown
on the annual statement for the second year following the year
on which the initial assessment charge was based;
9. Provides that the difference between the initial assessment
charge and the adjusted assessment charge shall be charged or
credited to the insurer as soon as practical, as specified;
10. Provides that any credit due in a specific category to a member
insurer as a result of the adjusted assessment calculation may
be refunded to the member, as specified;
11. Limits the assessment charged to any member insurer for any of
the three categories to not more than 2% of net direct written
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premiums, unless there are bonds outstanding in a particular
category requiring a separate assessment, in which case the
assessment may not exceed 1% of net direct written premium for
that category;
12. Provides that after all covered claims of the insolvent insurer
and administrative expenses have been paid, CIGA shall retain
any unused assessment to reduce future charges in the
appropriate category;
13. Requires member insurers to collect from insureds, over a
reasonable length of time, a sum reasonably calculated to recoup
the assessment by way of a surcharge on individual insurance
policies, and requires the surcharge to be separately stated on
the billing or policy declaration sent to the insured;
14. Requires CIGA to determine the rate of the surcharge and the
collection period for each category.
This bill
1. Clarifies that CIGA has the authority to pursue unpaid
reimbursements owed by an employer pursuant to a workers'
compensation policy with a deductible if the employer was
obligated to reimburse the insolvent insurer for benefits
payments and related expense, as specified;
2. Replaces the current process of adjusting insurers' annual
assessment over a two-year period and instead bases it on
the net direct written premium of each insurer as shown in
the insurer's latest annual financial statement on file with
the IC;
3. Specifies that CIGA shall adjust the member insurer's
annual statement by excluding premiums written for any lines
of insurance or types of coverage not within CIGA's
authority, including life insurance, annuities, title
insurance, mortgage guaranty and ocean marine;
4. Requires insurers to recoup the annual CIGA assessment
through a surcharge on policies in the year following the
CIGA assessment, rather than over a "reasonable length of
time;"
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5. Requires CIGA to reimburse insurers who report that
collections under the CIGA determined surcharge are less
than what they paid in the previous year's assessment for
the shortfall;
6. Applies the new methodology to assessments collected on or
after January 1, 2017;
7. Makes other technical and clarifying changes.
COMMENTS
1. Purpose of the bill To clarify CIGA's ability to pursue
unpaid reimbursements owed by an employer pursuant to a
workers' compensation deductible policy issued by an
insolvent insurer, and to simplify the process for CIGA to
collect annual assessments from member insurers.
2. Background CIGA was created by legislation in 1969 as an
association of insurers that makes payments to policyholders
of property/casualty, workers' compensation and
"miscellaneous" insurers when a member insurance company
becomes insolvent and is unable to do so. It is a statutory
entity that depends on the establishing legislation for its
existence and for a definition of the scope of its powers,
duties and protections. CIGA is funded by premium surcharges
upon applicable lines of insurance.
CIGA issues no policies, collects no premiums, makes no
profits, and assumes no contractual obligations to insureds.
Generally speaking, CIGA accepts the assets and liabilities
of companies and makes payments from the assets, earnings on
investments, and assessments levied on member insurance
companies. Since its inception, CIGA has never failed to
pay a claim. CIGA is unique as a regulated entity, even
among California's hybrid state/private entities such as the
California Earthquake Authority and the State Compensation
Insurance Fund, because by statute it is actually
established by insurance companies as an involuntary
association as a condition of those companies transacting
insurance business in California.
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The purpose of CIGA is to pay "covered claims" of member
companies that have failed. CIGA's total liability for any
single claim is $500,000, other than claims for workers'
compensation, which are not limited. CIGA does not have to
pay a claim if other insurance is available to pay the
claim.
CIGA also "stands in the shoes" of the insolvent insurer
when paying claims, investigating claims, and pursuing
reimbursement for any claims the insurer may have, including
against an employer under a workers' compensation deductible
policy. The workers' compensation insurer, unlike other
lines of insurance, retains the liability to pay claims from
dollar one and then seek reimbursement for any amount
falling within the deductible from the employer. Recently, a
Texas appellate court held that CIGA could not go after an
out-of-state employer for unpaid deductibles under policies
issued by a now-insolvent insurer. The court found that
statutes in Texas and Oklahoma allowed the insurance
guarantee associations in those states to collect on the
liabilities they had incurred under the policies issued by
the insurer in those states. The court, however, found that
under California statute, CIGA did not "stand in the shoes
(of the company) for purposes of enforcing the policy."
Like the other states, California's statute states that CIGA
"shall have the same rights as the insolvent insurer would
have had if not in liquidation", but the court noted that
California's statute also limited CIGA's authority through
the statement that CIGA "shall have no cause of action
against the insureds of the insolvent insurer for sums it
has paid out, except as provided by this article." As
California's Insurance Code did not specifically allow CIGA
to sue an insured for unpaid deductibles, the court found
CIGA did not have standing to pursue its claim for
reimbursement even though CIGA was legally entitled to the
deductible. This bill will clarify the statute so that in
future CIGA will expressly have the authority and standing
to pursue unpaid reimbursements owed by an employer under a
workers' compensation deductible policy.
CIGA maintains three separate funds that guarantee different
lines of insurance: property/casualty, workers'
compensation, and "other." The funds are assessed and
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maintained separately, with an assessment on
property/casualty insurance providing the resources to pay
claims of insolvent property/casualty insurers and
assessments on workers' compensation insurance providing the
resources to pay claims of insolvent workers' compensation
claims. CIGA only levies the assessment to cover its claims
and costs, and so has not always levied the maximum
allowable assessment. If one of the funds is under-funded,
CIGA can levy an additional assessment up to the maximum to
replenish it. CIGA also relies on distributions from
insolvent estates and investment income. The Conservation
and Liquidation Office of the Department of Insurance
actually controls and liquidates the insolvent insurers'
estates, and determines when or if CIGA receives any
distributions from the estate. CIGA cannot count on any such
proceeds until actually received. Estate recoveries usually
occur many years after CIGA has paid claimants and often
represent only a fraction of what it has paid for the
covered claims.
CIGA imposes an assessment on insurers "sufficient to
discharge its obligations" when needed. The amount of the
assessment on each insurer is determined annually based on
the insurer's net direct written premium. Insurers are
statutorily required to recoup the CIGA assessment by
passing it along as a surcharge to policyholders, and to
separately state the surcharge on premium billing notices.
Since the amount of "net written premium" for an individual
insurer is almost certain to vary from year to year, the
amount of the surcharge collected can vary from the
assessment. This requires the amount of the initial
assessment paid by the insurer to be adjusted by applying
the premium rate to the second year's annual statement. The
difference between the two calculations is then either
credited or charged to the insurer. If there is a credit, it
can be applied to future assessments or refunded to the
insurer in very limited circumstances. CIGA's board has
decided the process for calculation of adjusted premiums
over two years is administratively burdensome and not
necessary. This bill will eliminate several steps, and would
avoid calls for refunds of credit balances and eliminate
long term credit balance obligations to member insurers that
CIGA currently carries on its books.
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3. Support According to CIGA, it sponsored this bill because
the current process for funding CIGA has generated
significant confusion amongst its member insurers and
requires unnecessary work on behalf of both member insurers
and CIGA staff. SB 1451 will allow CIGA to collect an
initial premium coupled with surcharge collection ending
with a comparison to see if the member insurer either
collected more or less surcharge money than it paid in
premium to CIGA. The most recent amendments are in response
to a recent Texas Appellate Court decision which opined that
CIGA was not authorized to pursue an employer for the
deductible portion of a workers' compensation policy issued
by an insolvent insurer. The court decision reaffirmed that
CIGA could pursue the individuals under the policy, but CIGA
could not file suit to collect the money due if the insured
refused to pay, effectively recognizing a right without an
enforcement remedy and eviscerating CIGA's ability to
collect deductible reimbursements.
4. Opposition None received.
POSITIONS
Support
California Insurance Guarantee Association (Sponsor)
Oppose
None received
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