BILL ANALYSIS �
SB 1011
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Date of Hearing: June 25, 2014
ASSEMBLY COMMITTEE ON INSURANCE
Henry T. Perea, Chair
SB 1011 (Monning) - As Amended: April 22, 2014
SENATE VOTE : 36-0
SUBJECT : Self-insurance: nonprofit health and human services
organizations
SUMMARY : Authorizes certain 501(c)(3) nonprofit organizations
to provide self-insurance to its members through a pooling of
risk against damage to property and the losses related to the
loss of use of property. Specifically, this bill :
1)Authorizes existing nonprofit self-insurance pooling
organizations that provide liability coverage to also provide
property coverage to their members.
2)Requires that the members of these self-insurance pooling
arrangements be provided a written notice that the nonprofit
organization is not regulated by the Insurance Commissioner,
and that the California Insurance Guarantee Association (CIGA)
does not guarantee payment in the event the nonprofit becomes
insolvent.
EXISTING LAW :
1)Provides generally that the regulation of insurance in
California is the responsibility of the Insurance Commissioner
(IC), as head of the Department of Insurance (DOI).
2)Establishes a range of consumer protections for policyholders
and others who are the beneficiaries of insurance policies,
including an Unfair Practices Act, financial solvency
regulation, statutory guarantees that covered claims will be
paid in the event that the insurer obligated to make payment
has become insolvent, and property-casualty rate regulation
(as enacted by initiative statute - Proposition 103 at the
November, 1988 General Election), and empowers the IC to
enforce these laws.
3)Provides various exceptions to the general rule that all
"insurance" is regulated by the IC pursuant to these laws. As
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relevant to this bill, the Corporations Code expressly states
that certain nonprofit organizations may join together to
provide specified liability protection in a self-insurance
risk pool provided that:
a) At least 2 or more qualified nonprofits join together;
b) The nonprofits are exempt from taxation pursuant to
Section 501(c)(3) of the federal Internal Revenue Code;
c) The nonprofits are not hospitals, but are organized
chiefly to provide or fund health or human services;
d) All members of the pool agree to pay premiums or
contributions that ensure a financially sound pool.
4)Provides that a pool established pursuant to these
Corporations Code provisions may not provide coverage for
punitive or exemplary damages due to a judgment against an
employee of a member organization.
5)Specifies that an organization established pursuant to these
Corporations Code provisions shall not be considered insurance
nor subject to the Insurance Code.
FISCAL EFFECT : Undetermined (see discussion of premium taxes,
below.)
COMMENTS :
1)Purpose of the bill . According to the author, the
property-casualty liability insurance crisis of 1980s affected
many potential policyholders, but nonprofit organizations were
particularly vulnerable because many of their exposures are
unique and unfamiliar to commercial insurers. Faced with huge
increases in liability insurance premiums, nonprofit
organizations were forced to drastically cut services and
staff, use scarce reserves, raise fees, and even close their
doors. In 1986, the Legislature responded by enacting
Corporations Code Section 5005.1, which authorized a new form
of group self-insurance specific to 501(c)(3) entities that
provide or fund health or human services, sometimes referred
to as a "nonprofit risk pool." Under that law, these
organizations are allowed to band together to share their risk
collectively, pool their resources to cover potential
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liabilities, and develop techniques and programs for loss
mitigation and avoidance. These organizations have
successfully self-insured liability and commercial auto
coverage, including coverage for vehicle property damage, for
25 years.
2)Background . Risk pools authorized by Corporations Code
Section 5005.1 are a form of group self-insurance where
nonprofit organizations join together in an arrangement
providing for the pooling of self-insured claims or losses,
sometimes referred to as nonprofit risk pools or charitable
risk pools. California law treats these risk pools as a form
of self-insurance not subject to the Insurance Code or
regulation by the DOI. Thus, the DOI does not apply the
Proposition 103 rate regulation rules to these pools, does not
engage in market conduct examinations, financial solvency
oversight, and other standard insurance regulatory activities.
Additionally, these pools do not participate in CIGA, which
pays defined claims in the event a licensed property-casualty
insurer becomes insolvent.
Although not explicitly required in statute, in practice the
existing nonprofit risk pools are organized as public benefit
corporations subject to oversight by the Attorney General.
Any person with a grievance could file a complaint with the
Attorney General who has the power to investigate and bring an
action to enforce applicable law. Directors and officers must
act in the best interest of the nonprofit and may be liable
for breaches of duty. Ultimately, these organizations are
member operated for the benefit of members, and do not have
the same arms-length relationship that commercial insurers
have with policyholders.
There are two known nonprofit risk pools in California.
NonProfits United administers a vehicle insurance pool that
only provides commercial automobile coverage. Nonprofits'
Insurance Alliance of California (NIAC), the sponsor of the
bill, provides liability coverage directly, and makes property
insurance available to its members through an arrangement with
an admitted insurer.
3)Other services provided by risk pools . NIAC and some of its
members state that it provides many benefits to members above
and beyond liability coverage, and it is expected to do the
same with property coverage. For example, in 2013 alone, NIAC
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provided training for 945 employed and volunteer drivers.
NIAC provided statistics showing that it performed 651
consultations to nonprofits on matters of general risk
management and loss control, and offered dozens of risk
management webinars to 831 nonprofit executives on topics such
as Essential Elements of a Fleet Safety Program, Conducting
Harassment Investigations, the Interactive Process under the
Americans with Disabilities Act, Risk Management for Volunteer
Programs, Wage and Hour Compliance for California Employers,
and Developing a Risk-Aware Culture. All of these services
were free of charge to members. Additionally, NIAC notes that
it has returned over $31 million to its members since it began
the dividend program.
4)1980's liability insurance crisis . As a result of the
substantial withdrawal of commercial liability insurers from
the market in the 1980's, a number of novel and creative
alternatives were established both at the state and federal
level. The health and human services nonprofit self-insurance
pooling statute was one of those efforts to mitigate the harm
caused by that market withdrawal. By all measures, this
alternative has proven successful. But there is no evidence
that a property insurance crisis exists currently. As a
result, it might be questioned whether there is a need to
establish a carve-out from standard insurance law when there
is not a failing market necessitating that carve-out. On the
other hand, the members of current nonprofit self-insurance
risk pools have a high degree of confidence in their
organization, and support allowing their organization to take
care of a broader range of their insurance needs.
5)Increased exposure . According to the sponsor, NIAC members
are currently paying approximately $12 million on property
insurance premiums to a commercial insurer through the NIAC
program. Its self-insured liability exposure is approximately
$60 million. Thus, there is approximately a 20% increase in
exposure that is contemplated by the bill. However, it is
well accepted that liability insurance is a higher risk, more
volatile line of insurance than property insurance. Thus, an
organization that successfully manages $60 million of
liability insurance might be considered a sound entity to
manage $12 million of property insurance. In fact, the
Committee has received numerous letters from NIAC member
nonprofit organizations attesting to their satisfaction with
the broad range of services provided by NIAC, and expressing
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the view that NIAC understands the uniqueness and special
needs of nonprofit organizations better than commercial
insurers. These nonprofit organization supporters believe
they will get better service for lower costs if this bill is
enacted.
6)Existing property coverage . While it was a liability
insurance crisis that led to the authorization of these
charitable risk pools, this bill is not the first measure
subsequent to the pools' creation to authorize them to provide
more than liability coverage. In 1990, legislation expanded
the scope of authorized coverage from liability only to also
include automobile property damage losses. That was a lesser
expansion than is being proposed by this bill, but it may
serve as precedent on the question of whether expansions of
authorized coverage beneficial to the member nonprofits might
be appropriate.
7)Premium tax loss . If all of NIAC's members that currently use
the NIAC commercial insurance arrangement terminate their
commercial insurance and obtain their property coverage
through the risk-pool, there will be a loss of premium tax
revenue. The loss could approach $300,000. The issue is
whether a potential loss of premium tax revenue is a valid
reason to deny these nonprofits access to self-insurance
services that these organizations argue better serve their
needs.
8)Potential amendment . According to proponents, all of the
existing organizations that operate pursuant to the nonprofit
health and human services risk pool exception are public
benefit corporations, even though there is no requirement in
the law for this form of corporate organization. Because this
form of organization does have better oversight than other
possible forms that a risk pool might opt to organize as, the
author should consider making it a requirement that these risk
pools organize as public benefit corporations.
9)Prior Legislation:
a) Statutes 1980, Chapter 342, (AB 3545, Lancaster)
authorized certain 501(c)(3) organizations to join together
to form a risk pool for the purposes of self-insuring
against tort and other forms of liability.
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b) Statutes 1990, Chapter 717, (AB 2639, Lancaster)
expanded the types of coverage provided through a nonprofit
risk pool to include physical damage to motor vehicles
owned and operated by a member.
c) Statutes 1990, Chapter 954, (SB 38, Lockyer) exempted
nonprofit risk pools from the taxes imposed by the Bank and
Corporation Tax Law.
d) Statutes 2002, Chapter 758, (AB 3024, Committee on
Transportation) added proof of coverage provided by a
charitable risk pool (aka nonprofit risk pool) to the list
of acceptable evidence of financial responsibility required
under Vehicle Code Section 34630.
REGISTERED SUPPORT / OPPOSITION :
Support
Nonprofits' Insurance Alliance of California (sponsor)
Alegria Community Living
Bill Wilson Center, Santa Clara
Boys & Girls Clubs of Central Sonoma County
Boys & Girls Clubs of Fresno County
Boys & Girls Clubs of Garden Grove
California Association of Nonprofits (CalNonprofits)
Child Advocates of Placer County
Children's Services Network, Fresno
Community Action Partnership of Orange County
Community Bridges/Puentes de la Comunidad, Aptos
Cooper Fellowship, Inc., Santa Ana
Diane Cooper-Puckett, Exec. Director, The Peg Taylor Center for
Adult Day Health Care, Chico
Grandparents as Parents, Canoga Park
La Cl�nica, Oakland
Lassen Family Services
Lilliput Children's Services, Citrus Heights
NEO Law Group
Novato Youth Center
San Diego Center for Children
Shields for Families, Los Angeles
Suzanne Cross, Board Member, Coro Center for Civic Leadership
and Unite to Light
Terra Nova Counseling, Citrus Heights
Turning Point of Central California, Visalia
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Venice Community Housing Corporation
Victor Treatment Centers & Victor Community Support Services,
Chico
Opposition
None received
Analysis Prepared by : Mark Rakich / INS. / (916) 319-2086