BILL ANALYSIS �
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Date of Hearing: April 18, 2012
ASSEMBLY COMMITTEE ON INSURANCE
Jose Solorio, Chair
AB 1734 (Hagman) - As Introduced: February 16, 2012
SUBJECT : Insurance: claims against insolvent insurers
SUMMARY : Requires the Conservation and Liquidation Office
(CLO) at the Department of Insurance (DOI), to publish data
identifying the businesses with claims against insurers being
liquidated by the CLO. Specifically, this bill :
1)Requires the CLO to report and publish on a quarterly basis
corporate claims allowed in the liquidation proceeding. The
report would be made through the court overseeing the
liquidation of the insurer.
2)Exempts from the reporting and publication requirement claims
covered by the California Insurance Guarantee Association
(CIGA) and claims that relate to workers' compensation.
3)Requires the CLO to provide a claimant with a notice of
determination that includes:
a) An estimate of when the claim will be paid.
b) An option for the claimant to opt-out of having
their information published as required by this bill.
4)Requires the CLO to process a claim assignment request within
30 days.
5)Prohibits the acceptance of a claim assignment request in the
period 30 days before or 60 days after the CLO pays the claim.
6)Establishes that the claim purchaser is responsible for
ensuring that the seller of the claim has the legal right to
do so.
7)Indemnifies the CLO for any harm or economic loss resulting
from a misrepresentation made to the claim purchaser by the
claim seller.
8)Permits the CLO to charge a fee, not to exceed $250, for
processing a claim assignment request.
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EXISTING LAW :
1)Establishes a comprehensive system to handle insurer
insolvencies, based on the appointment by a superior court of
the Insurance Commissioner (commissioner) as receiver, and
including 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
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.
6)Provides that CLO costs are paid from the funds remaining in
the estate of the insolvent insurer.
FISCAL EFFECT : Unknown
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.
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The author argues that this bill would provide a workable
approach to providing a liquidity solution for these
claimants.
2)Claim Assignment. Claims against insurers in the liquidation
process can be sold to a third party purchaser (referred to as
a "claim assignment") and there is an established process at
CLO to review and approve the sale of claims. The bill
requires CLO to publish claimant data on a quarterly basis.
The publication of this data would provide third party
purchasers, such as the sponsor of the bill (ARGO Partners),
information needed to contact claimants to determine if they
are interested in selling their rights to a claim at a
discounted price. If the claim is sold to a third-party
purchaser, 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. Such an
arrangement can provide the original claimant with a faster
payment than would occur in the years-long liquidation
process, however it can require sophisticated financial
analysis for a claimant to determine a fair price for a claim
given the uncertainty of how much of the claim will be paid
and when that payment may occur. It is unclear the extent to
which the population of "corporate" claimants addressed by
this bill has the capability to perform the analysis required
to make a financially sound decision to sell a claim.
3)Retrospective Application. The bill applies to both current
and future liquidations by the CLO. Providing the opt-out
information for future liquidations can be easily accomplished
through the existing notice of determination process.
However, the CLO would incur significant costs if required to
provide and track that information for all claimants against
current liquidations. These costs would be taken from the
funds remaining with each insolvent insurer and therefore
removed from the pool of assets available to pay claimants and
to reimburse CIGA. To the extent that CIGA is not reimbursed
from the funds of insolvent insurers it must make up the
difference by increasing a surcharge paid by insurance
purchasers. In order to reduce the bill's adverse impact on
existing claimants and purchasers of insurance, the Committee
may wish to consider amending the bill to only apply to
liquidations that begin on or after January 1, 2013.
4)Opt-In vs. Opt-Out. The bill requires publication of
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potentially sensitive financial information regarding a
private business. While the bill does provide the opportunity
for businesses to opt-out of publication, an opt-in
requirement may be more appropriate given the sensitivity of
this information. An opt-in process still provides notice to
claimants that they have the option to sell their claim and
ensures that only those businesses that are potentially
interested in selling their claims would have information
regarding their claim published. The Committee may wish to
consider amending the bill to require claimants to opt-in to
the publication of their information.
5)Transaction Fee. The bill imposes a transaction fee on all
claim assignment requests processed by the CLO in anticipation
of an increased volume of claim assignment requests that would
be generated by the bill. Absent establishing such a fee, the
cost of the added workload would be taken from the remaining
assets of the insurer being liquidated and reduce the funds
available to pay claims. The fee would be paid by the entity
buying the claim; however, it is reasonable to expect the
price offered to purchase a claim will ultimately reflect this
added business cost for the purchaser. Furthermore, the
Department has not determined the actual cost of implementing
the bill and the proposed $250 transaction fee is a
placeholder.
6)Method of Publication. The bill requires that claimant
information be published via a court filing by the CLO. This
method of publication entails increased workload and cost for
the CLO and the court supervising the liquidation. The
Committee may wish to consider amending the bill to delete
this requirement and instead require the CLO to publish the
information directly.
7)Suggested Amendments. The author may want to consider the
following amendments to resolve a number of technical issues
in the bill:
a) Specify the data elements that must be reported.
b) Define the forms of business organization
(corporation, limited liability company, partnership,
etc.) whose claims are intended to be reported.
c) Delete the requirement that claim information be
published through the court overseeing the liquidation
and instead require the commissioner to report claim data
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upon the written request of a bona fide investment
company.
d) Delete the requirement that notices mailed to
claimants include an estimate of when the claim will be
paid and instead require the notice to include the
average time that elapses between when a claim is allowed
and when payment is made.
e) Specify that claims covered by CLHIGA are exempt
from being reported on the same terms that CIGA claims
are exempt from being reported.
REGISTERED SUPPORT / OPPOSITION :
Support
ARGO Partners (sponsor)
Opposition
American Insurance Association
California Life and Health Insurance Guarantee Association
Department of Insurance (unless amended)
Analysis Prepared by : Paul Riches / INS. / (916) 319-2086