BILL ANALYSIS �
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Date of Hearing: May 4, 2011
ASSEMBLY COMMITTEE ON INSURANCE
Jose Solorio, Chair
AB 1004 (Hagman) - As Amended: March 31, 2011
SUBJECT : Insurance: claims against insolvent insurers
SUMMARY : Requires the Insurance Commissioner (IC), through the
Conservation and Liquidation Office (CLO), to publish with the
court with jurisdiction over an insolvent insurer's estate
information relating to approved claims. Specifically, this
bill :
1)Requires the CLO to report and publish, on a quarterly basis
in a filing with the court where the liquidation proceeding is
pending, all claims allowed in the liquidation proceeding.
2)Requires the CLO to provide a written notice to the claimant
after it has determined that the claim is an allowed claim
that includes the following information:
a) An estimate of when a distribution will be made on
the claim.
b) Instructions on how to opt out of the publication
procedure described above.
c) An offer to claimants that, if they opt out
initially, they can later change that decision and have
their information published.
3)Requires the IC, the CLO, or the receiver, as applicable, upon
receipt of notice that a claim has been assigned to another
party, to process the claim within 21 days.
EXISTING LAW :
1)Establishes a comprehensive system to handle insurer
insolvencies, based on the appointment by a superior court of
the IC as receiver, and including the California Insurance
Guarantee Association (CIGA), which pays "covered claims" of
insolvent property-casualty insurers, and the California Life
and Health Insurance Guarantee Association (CLHIGA), which
pays "covered claims" of insolvent life or health insurers.
2)Recognizes the CLO as the entity that takes possession of the
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estates of insolvent insurers, pursuant to court order and
supervision, and requires the CLO to maximize the assets of
the insolvent insurer and pay claims as provided by law.
3)Establishes the priorities of different types of claims
against the insolvent insurer, and provides that claims in a
lower priority are not paid until higher priority claims are
paid 100%. (For example, a general commercial creditor is not
paid until it is determined that policyholder and third-party
claimants under insurance policies are assured 100% payment of
amounts due under the insolvent insurer's policies.)
4)Provides that CIGA and CLHIGA shall pay certain of the
obligations under the insurance policies issued by the
insolvent insurer, subject to specified limitations and caps.
5)Provides that CIGA and CLHIGA have the same priority as
policyholder claims to recoup the amounts that are paid out by
the Associations to policyholders or third-party claimants
under insurance policies issued by the insolvent insurer.
FISCAL EFFECT : Undetermined but potentially substantial
nongovernmental costs (paid out of the assets of the insolvent
insurers) to the CLO to comply with the bill's requirements.
COMMENTS :
1)Purpose . According to the author, existing law provides no
guidance to the CLO over the decision to develop a framework
for creditors who may be seeking to liquidate their claims
against the estate of an insolvent insurer. Due to the nature
of many "long-tail" insurance claims, insolvent insurers'
estates often remain open for many years, leaving claimants
waiting for extended periods of time with a claim pending.
The author argues that this bill would provide a workable
approach to providing a liquidity solution for these
claimants.
2)Practical effect of the bill . If implemented as drafted, the
bill would allow third-party companies to review the report
the CLO files with the court, and make cold-calls to claimants
to ascertain if they are interested in selling their rights to
a claim at a discounted price. If a claimant is willing, an
offer can be made that, if accepted, places the third-party
purchaser, such as the sponsor of the bill (ARGO Partners), in
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the shoes of the claimant. The third-party purchaser then
waits until the insolvent insurer's estate is finally settled
out, and collects as if it were the original claimant.
Proponents have suggested that many of the claimants are
substantial business entities that could make sound decisions
about early liquidation of their claim. While the bill's
broad sweep would bring in many other claimants, it is true
that there are sophisticated claimants. For example, CIGA has
a $500,000 cap, and a company with a $2,000,000 claim would be
waiting for its $1,500,000 excess over what CIGA will pay in
the short term. However, there has not been any evidence
presented that this sort of sophisticated claimant is unable
to evaluate its business situation, and find a potential buyer
on its own without need for the publication of claims as
provided by the bill. In fact, these transactions are not
prohibited by existing law, and already occur today.
3)The bill is vague on what the CLO should report . The bill
requires the CLO to "report and publish all claims allowed" on
a quarterly basis. However, it does not specify what
information related to the claim should be reported, nor does
it address any issues relating to publication of personal
information of a claimant. In discussions with proponents,
Committee staff has been advised that the name and address of
the individual or entity who filed the claim, the amount the
claim is worth, and the priority of the claim would be the
basic information needed. Despite the option the bill
provides for claimants to receive a notice from CLO and comply
with opt out procedures, it can be argued that the act of
filing a claim with the CLO for amounts owed from the
insolvent insurer should not have the effect of making that
information public. It is not clear that the opt-out
provisions provide sufficient privacy protections, as noted by
the IC, below.
4)Impact on workers' compensation claimants . Because of an
unprecedented number of insolvencies of workers' compensation
insurers in the late 1990's through 2001, a substantial number
of the insolvent insurer estates under the jurisdiction of the
CLO are workers' compensation insurers. As a result, a large
number of the "claims allowed" that would be published under
the terms of the bill would involve information about
individual workers' compensation claimants - the names and
addresses of the injured workers. Should the bill move
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forward, the proponents have expressed a willingness to carve
out this type of claim. However, it remains uncertain whether
the publishing of any information that involves individuals,
as opposed to entities that have claims, would constitute an
inappropriate invasion of the person's privacy, and whether an
"opt out" is a sufficient privacy protection.
5)NAIC working group . The National Association of Insurance
Commissioners (NAIC) has recently convened a working group
with a goal to recommend a Model Law by the end of the year.
Insurer insolvencies are inherently multi-state matters.
While the insurance regulator of the state where the insolvent
insurer is domiciled is the primary receiver, there are
numerous complexities among the states, including coordination
of each state's guarantee association's rights and
responsibilities.
The NAIC's initiation of review of this issue is not based
solely on finding ways to streamline early liquidation for
willing claimants. There have been complaints of abuse of
claimants that have raised concerns. In one California
matter, for example, a claimant sold a claim at 60% of value
within a day of a distribution that was widely anticipated and
that provided a 100% payment. Thus, the issues involve both
enhancing opportunity to liquidate claims, as well as claimant
protection. In light of the complexity of the issue, and the
fact that only a few states are even beginning to look into
the concept, it may be appropriate to hold the bill until
January, 2012, to ascertain whether there is a consensus
developing that balances claimants' interests in the potential
for early liquidation of claims, the receivers' interests in
controlling expenses, and claimants' privacy and substantive
interests.
6)Insurance Commissioner's concerns . The IC has a number of
serious concerns with the bill because of the burdens it would
place on the CLO, privacy problems, and the associated costs
that would be borne by the insolvent estates, which would
result in lower payouts to claimants. The IC notes that there
are literally tens of thousands of claims against an insolvent
insurer, and the burdens the bill would impose could
substantially reduce the funds available to pay claims by
substantially increasing the cost of administering the estate.
CIGA, in opposition to the bill, reiterates this problem,
noting that a reduction in estate assets would reduce its
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recoveries. As a result, the IC is strongly of the view that
the bill is premature in light of the NAIC working group that
is only beginning to look into the issue.
REGISTERED SUPPORT / OPPOSITION :
Support
ARGO Partners
Opposition
American Insurance Association
California Insurance Guarantee Association (CIGA)
Analysis Prepared by : Mark Rakich / INS. / (916) 319-2086