BILL ANALYSIS Ó
SENATE COMMITTEE ON INSURANCE
Senator Richard Roth, Chair
2015 - 2016 Regular
Bill No: SB 604 Hearing Date: April 22,
2015
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|Author: |Hall |
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|Version: |February 27, 2015 |
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|Urgency: |No |Fiscal: |No |
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|Consultant:|Erin Ryan |
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Subject: California Insurance Guarantee Association:
definitions
SUMMARY Includes as a "covered claim" for the purposes of California
Insurance Guarantee Association (CIGA) liability a workers'
compensation 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, when the
workers' compensation insurer of the general employer becomes
insolvent.
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 other
property casualty insurance, to participate in CIGA as a
condition of doing business;
3. Defines "covered claims," and expressly limits CIGA's authority
to make payments to only those claims that are specifically
enumerated;
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4. Specifically provides that a "covered claim" does not include a
claim to the extent it is covered by any other insurance;
(§1063.1(c)(9))
5. Requires CIGA to allocate levy assessments and claims payments
and costs based on the three categories of insurance;
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;
7. Authorizes CIGA to issue up to $1.5 billion in bonds by January
1, 2023 to pay workers' compensation claims and efficiently
manage its cash flow needs, as specified;
8. Allows CIGA to levy an assessment on workers' compensation
insurers, based upon direct premium collected, for the purpose
of paying off the bonds;
9. Provides that the requirements for workers' compensation
coverage are met when an employer utilizing employees on a
temporary or contract basis (special employer) enters into a
valid and enforceable agreement with the other employer (general
employer) who agrees to obtain, and has, in fact, obtained
workers' compensation coverage for those employees. (Labor Code
§3602(d)(1))
This bill
1. Specifies 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.
COMMENTS
1. Purpose of the bill To prevent self-insured governmental
entities from having to pay workers' compensation claims of
temporary contracted employees when the workers'
compensation insurer of the general employer becomes
insolvent.
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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 the 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, and those surcharges are
limited by statute to a maximum of 2%.
The purpose of CIGA is to pay "covered claims" of member
insurance companies that have become insolvent. 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 "to the extent that it is
covered by any other insurance of a class covered by this
article and available to the claimant or insured."
(Insurance Code §1063.1(c)(9)(A)) This requires a factual
determination on a number of issues. If another insurer is
jointly and severally liable for a claim, for example if a
worker suffers a cumulative injury and the employer has
switched workers' compensation insurers, or there are
different employers, the non-insolvent insurer must bear the
entire claim. This provision has caused quite a bit of
unhappiness among insurers and those who are self-insured,
and frequently leads to litigation over coverage and CIGA's
liability for claims payments. Self-insurers, whether public
or private, have been determined many times to constitute
"other insurance" for purposes of §1063.1.
Special and General Employers In considering whether a
claim is "covered" or that other insurance is available, in
the case of temporary or contract employees, CIGA and the
courts have distinguished between special and general
employment status. CIGA can assert availability of "other
insurance" if special employer status is found. Generally
speaking, a special employer exerts control over the
employee in the course of the temporary or contract
employment. For example, a special employer exerts direct
control over the work the employee does and sets the
employee's hours. In the general employer situation, the
temporary agency or contractor retains control over the
employee, directing the employee at work and setting the
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hours. In the case of the bill's sponsor Los Angeles
County, some of the positions filled by employees that led
to workers' compensation claims determined by CIGA to not be
"covered claims" included laundry service, cook and clerical
workers working in county facilities. If these positions
were filled by permanent employees, their workers'
compensation claims would clearly be covered by the County.
CIGA determined these claims, on a case by case basis, to
involve special employment status, and therefore "other
insurance" (the County's self-insurance) was available. In
the case of the County of Los Angeles v. Workers'
Compensation Appeals Board, PDQ Personnel Services, Inc.,
insured by Superior National Insurance Company, and CIGA
before the Court of Appeal (77 Cal. Comp. Cases 644) the
court denied writ, upholding the decision by the Workers'
Compensation Appeals Board (WCAB) in its rejection of the
County's argument that it "contracted away" its liability
for benefits by requiring temporary agency PDQ Services to
obtain workers' compensation insurance for temporary county
employees hired through PDQ. The WCAB held that the
liability of general and special employers for compensation
benefits is joint and several, and that the County is
available as "other insurance" within the meaning of
Insurance Code §1063.1(c)(9).
In the PDQ case noted above, the County had obtained an
indemnity agreement from the temporary agency, and the WCAB
cited that as additional evidence that the county was aware
it could be held liable for benefits for the temporary
employees. Collecting could be difficult however, if the
company providing the employees is a small or medium size
business. Alternatively, the special employer could require
or ensure that the general employer's workers' compensation
insurer is highly rated.
It should be noted that several of the claims Los Angeles
County is contesting with CIGA involve Superior National, a
major workers' compensation insurer that became insolvent in
2000, along with 26 other workers' compensation insurers
over the next three years. Many large carriers had
underpriced their insurance policies after rates were
de-regulated in 1995, and subsequently experienced high loss
ratios, rising health costs and benefits increases.
Approximately 25% of the private workers' compensation
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carriers failed, creating stress on the entire system.
Prior to 2000, CIGA was handling about 6,500 total claims
(4,100 workers' compensation claims), had 11 claims staff
and two third party administrators. From 2000-2003, CIGA
took on more than 185,000 claims (140,000 workers'
compensation claims). The projected total liability for
claims from Superior National and Fremont, the two largest
companies, is more than $3.5 billion. According to CIGA, it
still has a workers' compensation deficit of approximately
$2.3 billion as a result of the insolvencies in the early
2000s.
3. Support According to the author, SB 604 will clarify that
in the event a self-insured governmental entity contracts
with a general employer whose workers' compensation carrier
becomes insolvent, CIGA would be responsible for the
workers' compensation liability. SB 604 will protect the
legal interests of self-insured government entities and the
fiscal integrity of taxpayer monies by ensuring that
employers are not exposed to duplicate workers' compensation
liabilities.
The Los Angeles County Board of Supervisors sponsored SB 604
to clarify that self-insured employers are not liable for
the costs associated with unpaid workers' compensation
claims of contracted temporary services agencies whose
insurer becomes insolvent. A contrary interpretation
contradicts the purpose of the CIGA supplemental surcharge
fee, which is to cover organizations and their employees
from the insolvency of insurance companies. A recent court
case that held a self-insured employer may be held liable to
CIGA for costs associated with job-related injuries incurred
by a contractor's employee nullifies the protections of CIGA
and exposes self-insured governmental agencies to incur
millions of dollars in duplicate workers' compensation
liabilities.
CSAC Excess Insurance Authority supports SB 604 because
public entities entering into a contract for services with
such employer should not be held liable for injuries
sustained by an employee of the independent contractor
if/when their carrier becomes insolvent.
4. Opposition CIGA opposes this bill because it seeks to
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create an exception for a self-insured public entity from
statutes and numerous court decisions that hold a special
employer liable when the general employer's workers'
compensation insurer fails. If this bill were enacted, the
liability for these benefits would be transferred to all
employers insured for workers' compensation. Since most
large employers are self-insured for workers' compensation
the liability would fall on all of the small and medium
sized employers whose workers' compensation premiums are
surcharged by CIGA. Since there are several ways that the
public entity can protect themselves from this liability, SB
604 is nothing more than a tax on small and medium sized
employers in California.
Pacific Compensation Insurance Company opposes SB 604
because it would fundamentally alter the way in which claims
against insolvent insurance companies are paid for when
there is also liability for claims payments by self-insured
public entities. The Association of California Insurance
Companies opposes SB 604 because the proponents want a
special provision that would transfer the cost of losses all
other participants in the workers' compensation system
similarly situated have to bear. Those additional losses to
CIGA would then have to be recouped from assessments on
insurers that are surcharged back to all businesses in the
state that are insured for workers' compensation.
5. Questions This bill would treat the workers' compensation
claims of temporary or contract workers for self-insured
public entities differently than similar claims for
temporary or contract workers at self-insured private
companies. Is this appropriate? If the committee chooses to
expand CIGA's responsibility for these claims, should it
extend to both public and private self-insured entities? How
would this affect CIGA's liabilities? Should the status of
the governmental entity as self-insured be the determining
factor? What if the governmental entity is insured, such as
through the State Compensation Insurance Fund-should it
still be liable, possibly facing higher premiums as a
result? The bill as drafted is not limited to apply only to
future claims. Would this open CIGA up to actions by public
entities to recoup claims payments made in prior years? Even
claims that have been fully litigated? Should the bill be
limited to only apply to prospective workers' compensation
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claims?
6. Suggested Amendment Amend the bill to apply to claims
filed on or after the effective date.
7. Prior and Related Legislation AB 822 (Cooley) establishes
a 1-year statute of limitations for filing a claim against
CIGA.
POSITIONS
Support
County of Los Angeles (sponsor)
Acclamation Insurance Management
Allied Managed Care
Association of California School Administrators
California Black Chamber of Commerce
California Coalition on Workers' Compensation
California Professional Association of Specialty Contractors
California Special Districts Association
California State Association of Counties
CSAC Excess Insurance Authority
League of California Cities
Rural Counties Representatives of California
Urban Counties Caucus
Oppose
American Insurance Association
Association of California Insurance Companies
California Insurance Guarantee Association
Pacific Compensation Insurance Company
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