BILL ANALYSIS �
Senate Committee on Labor and Industrial Relations
Ted W. Lieu, Chair
Date of Hearing: April 24, 2013 2013-2014 Regular
Session
Consultant: Gideon L. Baum Fiscal:Yes
Urgency: No
Bill No: SB 487
Author: Calderon
As Introduced/Amended: April 4, 2013
SUBJECT
Workers' compensation insurance: Self-Insured Group Security
Fund.
KEY ISSUE
Should the Legislature create a separate security fund for
Self-Insured Groups (SIGs) for the purposes of securing workers'
compensation liability?
ANALYSIS
Existing law establishes a workers' compensation system that
provides benefits to an employee who suffers from an injury or
illness that arises out of and in the course of employment,
irrespective of fault. This system requires all employers to
secure payment of benefits by either securing the consent of the
Department of Industrial Relations to self-insure or by securing
insurance against liability from an insurance company duly
authorized by the state.
Existing law allows employers to self-insure either as an
individual employer, or as one employer in a group of employers .
Groups of self-insured employers are frequently referred to as
Self-Insured Groups or SIGs. (Labor Code �3700)
Existing law provides that each year every private self-insuring
employer shall secure incurred liabilities for the payment of
compensation and the performance of the obligations of employers
imposed by renewing the prior year's security deposit or by
making a new deposit of security. These funds are deposited
into the Self-Insurers' Security Fund (SISF) . (Labor Code
�3701)
Existing law the deposit shall be an amount equal to the
self-insurer's projected losses, net of specific excess
insurance coverage. The calculation of projected losses and
expenses shall be reflected in a written actuarial report that
projects ultimate liabilities of the private self-insured
employer at the expected actuarial confidence level. The written
actuarial report shall be prepared by an actuary meeting the
qualifications prescribed by the director in regulation. (Labor
Code �3701)
Existing law provides that if the Department of Industrial
Relations determines that a private self-insured employer has
failed to pay workers' compensation as required by this
division, the security deposit shall be utilized to administer
and pay the employer's compensation obligations. (Labor Code
�3701.5)
Existing law provides that, if an employer fails to pay the
compensation to an injured worker, the award, upon application
by the injured worker or his or her beneficiaries, must be paid
by the director from the Uninsured Employers Benefits Trust
Fund. (Labor Code �3716)
This bill would create the Self-Insured Group Security Fund (SIG
Fund), a separate security fund for Self-Insured Groups (SIGs).
This bill would require that the SIG Fund is governed by a 7
member board: the Director of the Department of Industrial
Relations, 3 members from the SIG Boards, and 3 members SIG
administrators. The SIG Fund members from the SIG Boards will
have 2 years terms; the administrators will have 4 year terms .
This bill provides that, until July 1, 2014, the Self-Insurers'
Security Fund (SISF) must assume the workers' compensation
obligations of all insolvent self-insured employers, including
SIGs.
This bill provides that, after July 1, 2014, the SIG Fund has
Hearing Date: April 24, 2013 SB 487
Consultant: Gideon L. Baum Page 2
Senate Committee on Labor and Industrial Relations
the right and obligation to obtain reimbursement from every
member of the insolvent SIG, up to the amount of the workers'
compensation obligations, including administrative and legal
costs.
This bill would also create an alternative process by which SIGs
can secure their incurred liabilities in the SIG Fund whereby
the SIG Fund posts a composite deposit that collectively secures
the aggregate liability of SIGs. This is known as the "SIG
Alternate Composite Deposit Program."
This bill would also make technical and conforming changes to
allow the SIG Fund to operate fully and independently from the
Self-Insurers' Security Fund.
COMMENTS
1. What is a Self-Insured Group?
A Self-Insured Group (SIG) is a mutual benefit corporation
that takes on the workers' compensation liabilities of its
employer members. They are generally specialized by industry.
For example, the California Restaurant Mutual Benefit
Corporation (CRMBC), a restaurant SIG, only accepts
restaurants as members. With 3,000 members and $1 billion in
payroll, CRMBC is the largest SIG in California. In total,
there are 23 active SIGs in California with about $5.1 billion
in payroll. As of August 1, 2012, 9 SIGs have gone insolvent.
In joining a SIG, the employer and SIG become jointly and
severally liable for all workers' compensation liabilities.
While in theory a member of a SIG is only liable for their own
liabilities and can be assessed for their liabilities even
after they leave the SIG, collections become complicated in
the event of a rapid exodus of members and/or a SIG becoming
insolvent. Under these circumstances, a scenario plays out
similarly to a run on the bank, with the members leaving and a
financially distressed forced to use limited resources to try
and pursue funds to prop up the SIG and fund remaining
liabilities.
Hearing Date: April 24, 2013 SB 487
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Senate Committee on Labor and Industrial Relations
When this results in an insolvent SIG, the Self-Insurers'
Security Fund (SISF) steps up and takes over the SIG and the
SIG's liabilities. SISF then is also a party to court
proceedings regarding an insolvent SIG.
SB 487 seeks to carve SIGs out of SISF, requiring SIGs to form
their own security fund, as well as a specific governing
board, in order manage the workers' compensation liability of
Self-Insurance Groups.
2. Unresolved Challenges in the Creation of SIG Fund:
As currently written, SB 487 contains several issues that
would pose significant challenges to SISF, the SIG Fund, and
the workers' compensation system. These are discussed below:
Risk Shift to SISF:
As currently written, SB 487 provides that SISF is liable for
workers' compensation liabilities prior to July 1, 2014, and
then from that point forward SIG Fund would incur SIG workers'
compensation liability. This would leave SISF with the
obligations of SIGs that have failed as well as the pre-SB 863
liabilities of health SIGs, suggesting a significant risk
shift. This would undermine SISF and possible generate
significant costs for self-insured employers.
SIG Group Composition:
As currently written, SB 487 SIG Fund is governed by a 7
member board. Three of those slots are from the SIGs and
three are SIG administrators. However, the SIG administrators
have terms that are twice as long as the employer/SIG
representatives. This would place the individuals who are
truly liable at a disadvantage on their own governing board.
Actuarial Standards:
SB 863 created new actuarial standards for self-insured
employers, including that the calculation of projected losses
and expenses shall be reflected in a written actuarial report.
Hearing Date: April 24, 2013 SB 487
Consultant: Gideon L. Baum Page 4
Senate Committee on Labor and Industrial Relations
The written actuarial report shall be prepared by an actuary
meeting the qualifications prescribed by the director in
regulation. This requirement also applies to SIGs. As
written, however, the SIG Fund DOES NOT require the same
actuarial standards as SISF. Therefore, SB 487 could have the
impact of lowering actuarial standards for SIGs, increasing
the risk of SIG insolvencies.
3. Possible Amendments and Committee Actions:
In light of the unresolved problems, the Committee may wish to
amend SB 487 by removing the provisions of the SIG Fund and
instead require DIR and SISF to study the issue of the
creation of a SIG Fund, including an actuarial breakdown of
the costs and liabilities entailed with the creation of a new
security fund.
Alternatively, SB 487 could be held in the policy process,
allowing the bill to be taken up in the second year of a two
year session after greater discussion between the author's
office, the proponents, and DIR and SISF.
4. Double Referral to Senate Committee on Insurance:
If SB 487 is approved by this Committee, it will be referred
to the Senate Committee on Insurance.
5. Proponent Arguments :
Proponents argue that, when well run and secured,
Self-Insurance Groups are an important tool for California's
employers in affordably securing liability against workers'
compensation costs. Proponents also argue that the recent
spate of SIG insolvencies suggest a need for a need structure
and a new way forward. Proponents believe that creating a
separate Self-Insured Group Security Fund will ensure that
injured workers get the benefits they need in the event of an
insolvency, as well as provide better administration to ensure
that the appropriate parties cover their full liabilities.
6. Opponent Arguments :
Hearing Date: April 24, 2013 SB 487
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Senate Committee on Labor and Industrial Relations
None on file.
7. Prior Legislation :
SB 863 (DeLeon), Statutes of 2012, Chapter 363 created, among
other things, new actuarial standards for self-insured
employers.
SUPPORT
Associated California Self-Insured Businesses
California Agricultural Products, Inc.
California Contractors Network, Inc.
California Farm Management, Inc.
OPPOSITION
None on file.
Hearing Date: April 24, 2013 SB 487
Consultant: Gideon L. Baum Page 6
Senate Committee on Labor and Industrial Relations