BILL NUMBER: SB 30 CHAPTERED 07/28/93 BILL TEXT CHAPTER 228 FILED WITH SECRETARY OF STATE JULY 28, 1993 APPROVED BY GOVERNOR JULY 27, 1993 PASSED THE SENATE JULY 16, 1993 PASSED THE ASSEMBLY JULY 16, 1993 CONFERENCE REPORT NO. 1 PROPOSED IN CONFERENCE JULY 15, 1993 AMENDED IN ASSEMBLY MAY 5, 1993 AMENDED IN ASSEMBLY MAY 4, 1993 AMENDED IN SENATE APRIL 13, 1993 AMENDED IN SENATE MARCH 25, 1993 AMENDED IN SENATE MARCH 16, 1993 INTRODUCED BY Senator Johnston (Coauthor: Senator Leonard) DECEMBER 7, 1992 An act to amend Sections 11750.1, 11750.3, and 11751.1 of, to add Section 11752.8 to, and to repeal and add Article 2 (commencing with Section 11730) of Chapter 3 of Part 3 of Division 2 of, the Insurance Code, relating to workers' compensation. LEGISLATIVE COUNSEL'S DIGEST SB 30, Johnston. Workers' compensation. Existing law provides for the payment of workers' compensation benefits to employees injured in the course of employment. Existing law regulates workers' compensation insurance rates and, among other things, provides for minimum rates. This bill would repeal existing rate provisions, and instead would prohibit the use of rates that impair or threaten the solvency of an insurer or create a monopoly. The bill would require insurers to file rates. These provisions would become operative on January 1, 1995. This bill would require a specified notice to the policyholder for all policies issued or renewed for the first time between January 1, 1995, and January 1, 1996. THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS: SECTION 1. Article 2 (commencing with Section 11730) of Chapter 3 of Part 3 of Division 2 of the Insurance Code is repealed. SEC. 2. Article 2 (commencing with Section 11730) is added to Chapter 3 of Part 3 of Division 2 of the Insurance Code, to read: Article 2. State Rate Supervision 11730. The following definitions govern the construction and meaning of the terms used in this article: (a) "Advisory organization" means an entity licensed by the commissioner pursuant to Article 3 (commencing with Section 11750). (b) "Classification system" or "classification" means a plan, system, or arrangement for recognizing differences in exposure to hazards among industries, occupations, or operations of insurance policyholders. (c) "Expenses" means that portion of any rate attributable to acquisition, field supervision, collection expenses, general expenses, taxes, licenses, and fees. (d) "Experience rating" means a rating procedure utilizing past insurance experience of the individual policyholder to forecast future losses by measuring the policyholder's loss experience against the loss experience of policyholders in the same classification to produce a prospective premium credit, debit, or unity modification. (e) "Loss trending" means any procedure for projecting developed losses to the average date of loss for the period during which the policies are to be effective. (f) "Market" means the interaction between buyers and sellers of workers' compensation insurance within this state pursuant to the provisions of this article. (g) "Pure premium rate" means that portion of the rate which represents the loss cost per unit of exposure, including loss adjustment expense. (h) "Rate" means the cost of insurance per exposure base unit, prior to any application of individual risk variations based on loss or expenses considerations and does not include minimum premiums. (i) "Statistical plan" means the plan, system, or arrangement used in collecting data. (j) "Supplementary rate information" means any manual or plan of rates, classification system, rating schedule, minimum premium, policy fee, rating rule, rating plan, and any other similar information needed to determine the applicable premium for an insured. (k) "Supporting information" means the experience and judgment of the filer and the experience or data of other insurers or organizations relied on by the filer, the interpretation of any statistical data relied on by the filer, descriptions of methods used in making the rates, and any other similar information required to be filed by the commissioner. 11731. This article applies to workers' compensation insurance and employers' liability insurance written in connection therewith. 11732. Rates shall not, if continued in use, tend to impair or threaten the solvency of an insurer or tend to create a monopoly in the market. For the purpose of this section, the rates of any individual insurer are presumed to create a monopoly in the market if the insurer has a market share, based on percentage of statewide workers' compensation premium, equivalent to 20 percent or more of the premium written by all insurers other than the State Compensation Insurance Fund. 11733. In determining whether rates comply with Section 11732, the following criteria shall apply: (a) Due consideration may be given to past and prospective loss and expenses experience within this state, to catastrophe hazards and contingencies, to events or trends within this state, to loadings for leveling premium rates over time or for dividends or savings to be allowed or returned by insurers to their policyholders, members or subscribers, and to all other relevant factors, including judgment. For purposes of determining whether rates would tend to impair or threaten the solvency of an insurer, the commissioner shall consider the insurer's experience in other states. (b) The expense provisions included in the rates to be used by an insurer shall reflect the operating methods of the insurer and, so far as is credible, its own actual and anticipated expense experience. (c) The rates may contain provision for contingencies and an allowance permitting a reasonable profit. In determining the reasonableness of profit, consideration should be given to all investment income attributable to premiums and the reserves associated with those premiums. 11734. (a) Every workers' compensation insurer shall adhere to a uniform experience rating plan filed with the commissioner by an advisory organization designated by the commissioner and subject to his or her disapproval. (b) The commissioner shall designate an advisory organization to assist him or her in gathering, compiling, and reporting relevant statistical information, and to develop a classification system. An insurer may develop its own classification system upon which a rate may be made or adopt the classification system developed by the designated advisory organization; provided, however, that any classification system developed by an insurer must be filed with the commissioner 30 days prior to its use. The commissioner shall disapprove a classification system filed by an insurer pursuant to this section if the insurer fails to demonstrate that the data thereby produced can be reported consistent with the uniform statistical plan or the classification system developed by the advisory organization. Every workers' compensation insurer shall record and report its workers' compensation experience to the designated advisory organization as set forth in the uniform statistical plan approved by the commissioner. (c) The designated advisory organization shall develop and file manual rules, subject to the approval of the commissioner, reasonably related to the recording and reporting of data pursuant to the uniform statistical plan, uniform experience rating plan, and such classification systems as may be in effect. Every workers' compensation insurer shall adhere to the approved manual rules and experience rating plan in writing and reporting its business. No insurer shall agree with any other insurer or with an advisory organization to adhere to manual rules which are not reasonably related to the recording and reporting of data pursuant to the uniform statistical plan or classification system developed by the advisory organization. 11735. (a) Every insurer shall file with the commissioner all rates, rating plans, and supplementary rate information which are to be used in this state. The rates and supplementary information shall be filed not later than 30 days prior to the effective date. If the commissioner finds, after a hearing, that an insurer's rates require closer supervision because of the insurer's financial condition, as determined pursuant to Section 11733, the insurer shall file with the commissioner at least 30 days before the effective date, all of those rates and the supplementary rate information and supporting information as prescribed by the commissioner. Upon application by the filer, the commissioner may authorize an earlier effective date. (b) Rates filed pursuant to this section shall be filed in the form and manner prescribed by the commissioner. All rates, supplementary information and any supporting information for rates filed under this article shall, as soon as filed, be open to public inspection at any reasonable time. Copies may be obtained by any person on request and upon payment of a reasonable charge. (c) Upon the written application of the insurer and insured, stating its reasons therefor, filed with the commissioner, a rate in excess of that provided by a filing otherwise applicable may be used on any specific risk. (d) Notwithstanding Section 679.70, no advisory organization may issue nor may any insurer use any classification system or rate, as applied or used, that violates Section 679.71 or 679.72 or that violates the Unruh Civil Rights Act which shall also include any arbitrary economic discrimination by an insurer as a prohibited basis of discrimination. 11736. The experience rating plan shall contain reasonable eligibility standards, provide adequate incentives for loss prevention, and shall provide for sufficient premium differentials so as to encourage safety. 11737. (a) The commissioner may disapprove a rate if the insurer fails to comply with the filing requirements under Section 11736. (b) If the commissioner believes that rates may violate any of the requirements of this article, he or she shall call a hearing prior to any disapproval. The commissioner shall disapprove a rate if he or she finds that the rate would, if continued in use, tend to impair or threaten the solvency of an insurer or tend to create a monopoly in the market pursuant to Section 11732. (c) Every insurer or advisory organization shall provide within this state reasonable means whereby any person aggrieved by the application of its filings may be heard on written request to review the manner in which the rating system has been applied in connection with the insurance afforded or offered. If the insurer or advisory organization fails to grant or reject the request within 30 days, the applicant may proceed in the same manner as if the application had been rejected. Any party affected by the action of the insurer or advisory organization on the request may, within 30 days after written notice of the action, appeal to the commissioner who, after a hearing held upon not less than 10 days' written notice to the appellant and to the insurer or advisory organization, may affirm, modify, or reverse such action. (d) If the commissioner disapproves a rate, the commissioner shall issue an order specifying in what respects it fails to meet the requirements of this article and stating when within a reasonable period thereafter such rate shall be discontinued for any policy issued or renewed after a date specified in the order. The order shall be issued within 30 days after the close of the hearing or within such reasonable time extension as the commissioner may fix. The order may include a provision for premium adjustment for the period after the effective date of the order for policies in effect on that date. (e) Whenever an insurer has no legally effective rates as a result of the commissioner's disapproval of rates or other act, the commissioner shall on request of the insurer specify interim rates for the insurer that are adequate to protect the interests of all parties and may order that a specified portion of the premiums be placed in an escrow account approved by him or her. When new rates become legally effective, the commissioner shall order the escrowed funds or any overcharge in the interim rates to be distributed appropriately, except that refunds of less than ten dollars ($10) per policyholder shall not be required. 11738. A classification shall take no account of any physical impairment of employees or the extent to which employees may have persons dependent upon them for support. 11739. (a) An insurer shall not use any plan for the payment of dividends to policyholders by reason of a participating provision in a workers' compensation insurance policy which is unfairly discriminatory. (b) Every insurer issuing workers' compensation insurance policies under the laws of this state shall file annually with the rating organization designated by the commissioner information relating to dividend payments made to its policyholders. Information filed shall be in sufficient detail to permit the rating organization to prepare for the commissioner's review and approval, a report showing in the aggregate for all companies premiums earned, losses incurred, and dividends paid the preceding calendar year under policies containing a participating provision, separately by premium size and loss ratio categories, as may reasonably be prescribed by the commissioner. (c) Information submitted by individual companies pursuant to this section shall be confidential and not subject to public disclosure under any law of this state. SEC. 3. Section 11750.1 of the Insurance Code is amended to read: 11750.1. As used in this article, unless a different meaning is manifest, the term: (a) "Insurer" means every insurer authorized to transact workers' compensation insurance and employer's liability insurance incidental thereto and written in connection therewith in this state, including the State Compensation Insurance Fund; (b) "Rating organization" means any organization which has as its primary object or purpose the collecting of rating information, the making of pure premiums and those rating plans authorized by Article 2 (commencing with Section 11730) for workers' compensation insurance and employer's liability insurance incidental thereto and written in connection therewith and presenting them to the commissioner for issuance or approval; (c) "Insurance" means workers' compensation insurance and employer's liability insurance incidental thereto and written in connection therewith; (d) "Willful" or "willfully" in relation to an act or omission which constitutes a violation of this article means with actual knowledge or belief that such act or omission constitutes such violation and with specific intent to commit such violation. (e) "Advisory organization" means every person, group or organization, other than an insurer, whether located within or without this state, which prepares policy forms or underwriting rules incidental to or in connection with workers' compensation insurance and employer's liability insurance incidental thereto and written in connection therewith or which collects and furnishes to admitted insurers or rating organizations loss statistics or other statistical information and data relating to workers' compensation insurance and employer's liability insurance incidental thereto and written in connection therewith and acts in an advisory capacity to such insurers or rating organizations as distinguished from a ratemaking capacity. No duly authorized attorney at law acting in the usual course of his profession shall be deemed to be an advisory organization. (f) "Employer's liability insurance incidental thereto and written in connection therewith" means insurance of any liability of employers for injuries to, or death of, employees arising out of, and in the course of, employment when this insurance is incidental to, and written in connection with, the workers' compensation insurance issued to the same employer and covering the same employer interests. SEC. 4. Section 11750.3 of the Insurance Code is amended to read: 11750.3. A rating organization may be organized pursuant to this article and maintained in this state for the following purposes: (a) To provide reliable statistics and rating information in respect to workers' compensation insurance and employer's liability insurance incidental thereto and written in connection therewith. (b) To collect and tabulate information and statistics for the purpose of developing pure premium rates to be submitted to the commissioner for issuance or approval. (c) To formulate rules and regulations in connection with pure premium rates and the administration of classifications and rating systems. (d) To inspect risks for classification or rate purposes and to furnish to the insurer and upon request of the employer and after notice to the insurer, to furnish to the employer full information concerning the rates applicable to the employer's insurance. (e) To examine policies, daily reports, endorsements or other evidences of insurance for the purpose of ascertaining whether they comply with the provisions of law and to make reasonable rules governing their submission. (f) Within one year after expiration of any workers' compensation insurance policy, to initiate test audits of insured employer's payrolls and insurer's audits of such payrolls to check the accuracy and reliability thereof, and to examine all records relative thereto and premises of insured employers. (g) To exchange information and experience data with rating organizations, advisory organizations, and insurers in this and other states, in respect to ratemaking. (h) To become a member or subscriber of any lawfully authorized ratemaking or advisory organization whenever membership in such organization is necessary or helpful to the rating organization. (i) To perform all acts necessary, incidental or convenient to carry out the foregoing purposes or the provisions of this chapter relating to rating organizations. SEC. 5. Section 11751.1 of the Insurance Code is amended to read: 11751.1. To obtain and retain a license, a rating organization shall provide satisfactory evidence to the commissioner that it shall do all of the following: (a) Permit any insurer to become a member at a reasonable cost and without discrimination, or to withdraw therefrom. (b) Neither have nor adopt any rule or exact any agreement, the effect of which would be to require any member as a condition of membership to adhere to any rates. (c) Neither adopt any rule nor exact any agreement, the effect of which would be to prohibit or regulate the payment of dividends, savings, or unabsorbed premium deposits allowed or returned by insurers to their policyholders or members. (d) Neither practice nor sanction any plan or act of boycott, coercion, or intimidation. (e) Neither enter into nor sanction any contract or act by which any person is restrained from lawfully engaging in the insurance business. (f) Notify the commissioner promptly of every change in its constitution or articles of incorporation, agreement of association, or in its bylaws, rules and regulations governing the conduct of its business; its list of members; and the name and address of the resident of this state designated by it upon whom notices or orders of the commissioner or process affecting the organization may be served. (g) Agree that the commissioner or his or her representative may attend all meetings of the organization or any of its committees. (h) Agree to permit four members of the public, two representing organized labor and two representing insured employers, to serve on the managing or governing committee of the organization as specified in Section 11751.35. (i) Maintain reasonable records of the experience of its members and of the data, statistics or information collected or used in connection with the pure premium rates, classifications, manual rules, and policy and endorsement forms used by its members so that these records will be available at all reasonable times to enable the commissioner to determine whether the rating organization and its members comply with the provisions of this chapter applicable to them. These records shall be maintained in an office within this state. The commissioner may prescribe a uniform system for the keeping of the records which shall be reasonably adapted to the rating organization and its members' method of operation and which shall be applicable to all rating organizations licensed under this article and their members. SEC. 6. Section 11752.8 is added to the Insurance Code, to read: 11752.8. All policies of insurance issued or renewed for the first time between January 1, 1995, and January 1, 1996, shall include a notice to the policyholder, in easily understandable language, containing a summary of the changes in the rating laws enacted during the 1993-94 Regular Session of the Legislature. SEC. 7. Sections 1 to 5, inclusive of this act shall become operative January 1, 1995.