Senate Bill No. 604

Introduced by Senator Hall

February 27, 2015

An act to amend Section 1063.1 of the Insurance Code, relating to the California Insurance Guarantee Association.

LEGISLATIVE COUNSEL’S DIGEST

SB 604, as introduced, Hall. California Insurance Guarantee Association: definitions.

Existing law establishes the California Insurance Guarantee Association to provide coverage against losses arising from the failure of an insolvent property, casualty, or workers’ compensation insurer to discharge its obligations under its insurance policies. Existing law requires the association to pay and discharge all “covered claims,” which includes the obligations of the insolvent insurer.

This bill would additionally provide that a “covered claim” includes a claim filed by an employee of a general employer that has entered into a contractual relationship with a special employer that is a self-insured governmental entity. The bill would provide that in that case, if certain criteria are met, the contractual agreement would be conclusive proof that the special employer never intended to provide workers’ compensation insurance for the employees of the general employer.

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

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

SECTION 1.  

Section 1063.1 of the Insurance Code is amended
to read:

1063.1.  

As used in this article:

(a) “Member insurer” means an insurer required to be a member
of the association in accordance with subdivision (a) of Section
1063, except and to the extent that the insurer is participating in
an insolvency program adopted by the United States government.

(b) “Insolvent insurer” means an insurer that was a member
insurer of the association, consistent with paragraph (11) of
subdivision (c), either at the time the policy was issued or when
the insured event occurred, and against which an order of
liquidation with a finding of insolvency has been entered by a court
of competent jurisdiction, or, in the case of the State Compensation
Insurance Fund, if a finding of insolvency is made by a duly
enacted legislative measure.

(c) (1) “Covered claims” means the obligations of an insolvent
insurer, including the obligation for unearned premiums, that satisfy
all of the following requirements:

(A) Imposed by law and within the coverage of an insurance
policy of the insolvent insurer.

(B) Which were unpaid by the insolvent insurer.

(C) Which are presented as a claim to the liquidator in the state
of domicile of the insolvent insurer or to the association on or
before the last date fixed for the filing of claims in the domiciliary
liquidating proceedings.

(D) Which were incurred prior to the date coverage under the
policy terminated and prior to, on, or within 30 days after the date
the liquidator was appointed.

(E) For which the assets of the insolvent insurer are insufficient
to discharge in full.

(F) In the case of a policy of workers’ compensation insurance,
to provide workers’ compensation benefits under the workers’
compensation law of this state.

(G) In the case of other classes of insurance if the claimant or
insured is a resident of this state at the time of the insured
occurrence, or the property from which the claim arises is
permanently located in this state.

(2) “Covered claims” also includes the obligations assumed by
an assuming insurer from a ceding insurer where the assuming
insurer subsequently becomes an insolvent insurer if, at the time
of the insolvency of the assuming insurer, the ceding insurer is no
longer admitted to transact business in this state. Both the assuming
insurer and the ceding insurer shall have been member insurers at
the time the assumption was made. “Covered claims” under this
paragraph shall be required to satisfy the requirements of
subparagraphs (A) to (G), inclusive, of paragraph (1), except for
the requirement that the claims be against policies of the insolvent
insurer. The association shall have a right to recover any deposit,
bond, or other assets that may have been required to be posted by
the ceding company to the extent of covered claim payments and
shall be subrogated to any rights the policyholders may have
against the ceding insurer.

(3) “Covered claims” does not include obligations arising from
the following:

(A) Life, annuity, health, or disability insurance.

(B) Mortgage guaranty, financial guaranty, or other forms of
insurance offering protection against investment risks.

(C) Fidelity or surety insurance including fidelity or surety
bonds, or any other bonding obligations.

(D) Credit insurance.

(E) Title insurance.

(F) Ocean marine insurance or ocean marine coverage under
an insurance policy including claims arising from the following:
the Jones Act (46 U.S.C. Secs. 30104 and 30105), the Longshore
and Harbor Workers’ Compensation Act (33 U.S.C. Sec. 901 et
seq.), or any other similar federal statutory enactment, or an
endorsement or policy affording protection and indemnity
coverage.

(G) Any claims servicing agreement or insurance policy
providing retroactive insurance of a known loss or losses, except
a special excess workers’ compensation policy issued pursuant to
subdivision (c) of Section 3702.8 of the Labor Code that covers
all or any part of workers’ compensation liabilities of an employer
that is issued, or was previously issued, a certificate of consent to
self-insure pursuant to subdivision (b) of Section 3700 of the Labor
Code.

(4) “Covered claims” does not include any obligations of the
insolvent insurer arising out of any reinsurance contracts, nor any
obligations incurred after the expiration date of the insurance policy
or after the insurance policy has been replaced by the insured or
canceled at the insured’s request, or after the insurance policy has
been canceled by the liquidator, nor any obligations to a state or
to the federal government.

(5) “Covered claims” does not include any obligations to
insurers, insurance pools, or underwriting associations, nor their
claims for contribution, indemnity, or subrogation, equitable or
otherwise, except as otherwise provided in this chapter.

An insurer, insurance pool, or underwriting association may not
maintain, in its own name or in the name of its insured, a claim or
legal action against the insured of the insolvent insurer for
contribution, indemnity, or by way of subrogation, except insofar
as, and to the extent only, that the claim exceeds the policy limits
of the insolvent insurer’s policy. In those claims or legal actions,
the insured of the insolvent insurer is entitled to a credit or setoff
in the amount of the policy limits of the insolvent insurer’s policy,
or in the amount of the limits remaining, where those limits have
been diminished by the payment of other claims.

(6) “Covered claims,” except in cases involving a claim for
workers’ compensation benefits or for unearned premiums, does
not include a claim in an amount of one hundred dollars ($100) or
less, nor that portion of a claim that is in excess of any applicable
limits provided in the insurance policy issued by the insolvent
insurer.

(7) “Covered claims” does not include that portion of a claim,
other than a claim for workers’ compensation benefits, that is in
excess of five hundred thousand dollars ($500,000).

(8) “Covered claims” does not include any amount awarded as
punitive or exemplary damages, nor any amount awarded by the
Workers’ Compensation Appeals Board pursuant to Section 5814
or 5814.5 of the Labor Code because payment of compensation
was unreasonably delayed or refused by the insolvent insurer.

(9) “Covered claims” does not include (A) a claim to the extent
it is covered by any other insurance of a class covered by this
article available to the claimant or insured or (B) a claim by a
person other than the original claimant under the insurance policy
in his or her own name, his or her assignee as the person entitled
thereto under a premium finance agreement as defined in Section
673 and entered into prior to insolvency, his or her executor,
administrator, guardian, or other personal representative or trustee
in bankruptcy, and does not include a claim asserted by an assignee
or one claiming by right of subrogation, except as otherwise
provided in this chapter.

(10) “Covered claims” does not include any obligations arising
out of the issuance of an insurance policy written by the separate
division of the State Compensation Insurance Fund pursuant to
Sections 11802 and 11803.

(11) “Covered claims” does not include any obligations of the
insolvent insurer arising from a policy or contract of insurance
issued or renewed prior to the insolvent insurer’s admission to
transact insurance in the State of California.

(12) “Covered claims” does not include surplus deposits of
subscribers as defined in Section 1374.1.

(13) “Covered claims” shall also include obligations arising
under an insurance policy written to indemnify a permissibly
self-insured employer pursuant to subdivision (b) or (c) of Section
3700 of the Labor Code for its liability to pay workers’
compensation benefits in excess of a specific or aggregate retention.
However, for purposes of this article, those claims shall not be
considered workers’ compensation claims and therefore are subject
to the per-claim limit in paragraph (7), and any payments and
expenses related thereto shall be allocated to category (c) for claims
other than workers’ compensation, homeowners, and automobile,
as provided in Section 1063.5.

These provisions shall apply to obligations arising under a policy
as described herein issued to a permissibly self-insured employer
or group of self-insured employers pursuant to Section 3700 of
the Labor Code and notwithstanding any other provision of this
code, those obligations shall be governed by this provision in the
event that the Self-Insurers’ Security Fund is ordered to assume
the liabilities of a permissibly self-insured employer or group of
self-insured employers pursuant to Section 3701.5 of the Labor
Code. The provisions of this paragraph apply only to insurance
policies written to indemnify a permissibly self-insured employer
or group of self-insured employers under subdivision (b) or (c) of
Section 3700 of the Labor Code, for its liability to pay workers’
compensation benefits in excess of a specific or aggregate retention,
and this paragraph does not apply to special excess workers’
compensation insurance policies unless issued pursuant to authority
granted in subdivision (c) of Section 3702.8 of the Labor Code,
and as provided for in subparagraph (G) of paragraph (3). In
addition, this paragraph does not apply to any claims servicing
agreement or insurance policy providing retroactive insurance of
a known loss or losses as are excluded in subparagraph (G) of
paragraph (3).

Each permissibly self-insured employer or group of self-insured
employers, or the Self-Insurers’ Security Fund, shall, to the extent
required by the Labor Code, be responsible for paying, adjusting,
and defending each claim arising under policies of insurance
covered under this section, unless the benefits paid on a claim
exceed the specific or aggregate retention, in which case:

(A) If the benefits paid on the claim exceed the specific or
aggregate retention, and the policy requires the insurer to defend
and adjust the claim, the California Insurance Guarantee
Association (CIGA) shall be solely responsible for adjusting and
defending the claim, and shall make all payments due under the
claim, subject to the limitations and exclusions of this article with
regard to covered claims. As to each claim subject to this
paragraph, notwithstanding any other provisions of this code or
the Labor Code, and regardless of whether the amount paid by
CIGA is adequate to discharge a claim obligation, neither the
self-insured employer, group of self-insured employers, nor the
Self-Insurers’ Security Fund shall have any obligation to pay
benefits over and above the specific or aggregate retention, except
as provided in this subdivision.

(B) If the benefits paid on the claim exceed the specific or
aggregate retention, and the policy does not require the insurer to
defend and adjust the claim, the permissibly self-insured employer
or group of self-insured employers, or the Self-Insurers’ Security
Fund, shall not have any further payment obligations with respect
to the claim, but shall continue defending and adjusting the claim,
and shall have the right, but not the obligation, in any proceeding
to assert all applicable statutory limitations and exclusions as
contained in this article with regard to the covered claim. CIGA
shall have the right, but not the obligation, to intervene in any
proceeding where the self-insured employer, group of self-insured
employers, or the Self-Insurers’ Security Fund is defending a claim
and shall be permitted to raise the appropriate statutory limitations
and exclusions as contained in this article with respect to covered
claims. Regardless of whether the self-insured employer or group
of self-insured employers, or the Self-Insurers’ Security Fund,
asserts the applicable statutory limitations and exclusions, or
whether CIGA intervenes in a proceeding, CIGA shall be solely
responsible for paying all benefits due on the claim, subject to the
exclusions and limitations of this article with respect to covered
claims. As to each claim subject to this paragraph, notwithstanding
any other provision of the Insurance Code or the Labor Code and
regardless of whether the amount paid by CIGA is adequate to
discharge a claim obligation, neither the self-insured employer,
group of self-insured employers, nor the Self-Insurers’ Security
Fund, shall have an obligation to pay benefits over and above the
specific or aggregate retention, except as provided in this
subdivision.

(C) In the event that the benefits paid on the covered claim
exceed the per-claim limit in paragraph (7), the responsibility for
paying, adjusting, and defending the claim shall be returned to the
permissibly self-insured employer or group of employers, or the
Self-Insurers’ Security Fund.

These provisions shall apply to all pending and future
insolvencies. For purposes of this paragraph, a pending insolvency
is one involving a company that is currently receiving benefits
from the guarantee association.

begin insert

(14) “Covered claims” shall include any claims filed by an
employee of a general employer that has entered into a contractual
relationship with a special employer who is a self-insured
governmental entity and has satisfied the provisions of paragraph
(1) of subdivision (d) of Section 3602 of the Labor Code. In no
event is the self-insurance of a special employer governmental
entity to be considered other insurance for purposes of this article
if the provisions of paragraph (1) of subdivision (d) of Section
3602 of the Labor Code are required by contractual agreement
between the general employer and the special employer. The
contractual agreement shall be conclusive proof that the special
employer never had the intent to provide workers’ compensation
insurance for the employees of the general employer.

end insert

(d) “Admitted to transact insurance in this state” means an
insurer possessing a valid certificate of authority issued by the
department.

(e) “Affiliate” means a person who directly or indirectly, through
one or more intermediaries, controls, is controlled by, or is under
common control with an insolvent insurer on December 31 of the
year next preceding the date the insurer becomes an insolvent
insurer.

(f) “Control” means the possession, direct or indirect, of the
power to direct or cause the direction of the management and
policies of a person, whether through the ownership of voting
securities, by contract other than a commercial contract for goods
or nonmanagement services, or otherwise, unless the power is the
result of an official position with or corporate office held by the
person. Control is presumed to exist if a person, directly or
indirectly, owns, controls, holds with the power to vote, or holds
proxies representing, 10 percent or more of the voting securities
of any other person. This presumption may be rebutted by showing
that control does not in fact exist.

(g) “Claimant” means an insured making a first party claim or
a person instituting a liability claim. However, no person who is
an affiliate of the insolvent insurer may be a claimant.

(h) “Ocean marine insurance” includes marine insurance as
defined in Section 103, except for inland marine insurance, as well
as any other form of insurance, regardless of the name, label, or
marketing designation of the insurance policy, that insures against
maritime perils or risks and other related perils or risks, that are
usually insured against by traditional marine insurance such as
hull and machinery, marine builders’ risks, and marine protection
and indemnity. Those perils and risks insured against include,
without limitation, loss, damage, or expense or legal liability of
the insured arising out of or incident to ownership, operation,
chartering, maintenance, use, repair, or construction of a vessel,
craft, or instrumentality in use in ocean or inland waterways,
including liability of the insured for personal injury, illness, or
death for loss or damage to the property of the insured or another
person.

(i) “Unearned premium” means that portion of a premium as
calculated by the liquidator that had not been earned because of
the cancellation of the insolvent insurer’s policy and is that
premium remaining for the unexpired term of the insolvent
insurer’s policy. “Unearned premium” does not include any amount
sought as return of a premium under a policy providing retroactive
insurance of a known loss or return of a premium under a
retrospectively rated policy or a policy subject to a contingent
surcharge or a policy in which the final determination of the
premium cost is computed after expiration of the policy and is
calculated on the basis of actual loss experienced during the policy
period.