BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | AB 2710|
|Office of Senate Floor Analyses | |
|(916) 651-1520 Fax: (916) | |
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CONSENT
Bill No: AB 2710
Author: Cooley (D)
Amended: 6/13/16 in Senate
Vote: 21
SENATE INSURANCE COMMITTEE: 8-0, 6/22/16
AYES: Roth, Gaines, Berryhill, Glazer, Hall, Hernandez,
Mitchell, Wieckowski
NO VOTE RECORDED: Liu
ASSEMBLY FLOOR: 77-0, 4/11/16 - See last page for vote
SUBJECT: Insurance: California Insurance Guarantee
Association: premium charges
SOURCE: California Insurance Guarantee Association
DIGEST: This bill 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.
ANALYSIS:
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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 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
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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 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
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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;"
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;
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6) Applies the new methodology to assessments collected on or
after January 1, 2017;
7) Makes other technical and clarifying changes.
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.
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
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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 clarifies 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 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
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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
eliminates 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.
FISCAL EFFECT: Appropriation: No Fiscal
Com.:NoLocal: No
SUPPORT: (Verified6/27/16)
California Insurance Guarantee Association (source)
OPPOSITION: (Verified6/27/16)
None received
ARGUMENTS IN 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
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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.
ASSEMBLY FLOOR: 77-0, 4/11/16
AYES: Achadjian, Alejo, Travis Allen, Atkins, Baker, Bigelow,
Bloom, Bonilla, Bonta, Brough, Brown, Burke, Calderon, Campos,
Chang, Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh,
Dahle, Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher,
Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gordon,
Gray, Grove, Hadley, Harper, Roger Hernández, Holden, Irwin,
Jones, Jones-Sawyer, Kim, Lackey, Levine, Linder, Lopez, Low,
Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin,
Nazarian, Obernolte, O'Donnell, Olsen, Patterson, Quirk,
Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark
Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams,
Wood
NO VOTE RECORDED: Gonzalez, Rendon
Prepared by:Erin Ryan / INS. / (916) 651-4110
6/29/16 15:45:40
**** END ****
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