BILL ANALYSIS �
SB 1011
Page 1
SENATE THIRD READING
SB 1011 (Monning)
As Amended June 26, 2014
Majority vote
SENATE VOTE :36-0
INSURANCE 13-0
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|Ayes:|Perea, Hagman, Allen, | | |
| |Bradford, | | |
| |Ian Calderon, Cooley, | | |
| |Dababneh, Frazier, Beth | | |
| |Gaines, Gonzalez, Olsen, | | |
| |V. Manual P�rez, | | |
| |Wieckowski | | |
|-----+--------------------------+-----+--------------------------|
| | | | |
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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
(IC), 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 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,
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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
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 two or more qualified nonprofits join together;
b) The nonprofits are exempt from taxation pursuant to
federal Internal Revenue Code Section 501(c)(3);
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;
e) The risk pool be organized as a public benefit
corporation pursuant to California law.
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 : Unknown. This bill is keyed non-fiscal by the
Legislative Counsel. (See discussion of premium taxes, below.)
COMMENTS :
1)Purpose of this bill. According to the author, the
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property-casualty liability insurance crisis of the 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 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. Nonetheless, there is no
opposition on file.
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
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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
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
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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 this 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
Assembly Insurance 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 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 to the General Fund 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.
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8)Prior Legislation:
a) AB 3545 (Lancaster), Chapter 342, Statutes of 1980,
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.
b) AB 2639 (Lancaster), Chapter 717, Statutes of 1990,
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) SB 38 (Lockyer), Chapter 954, Statutes of 1990, exempted
nonprofit risk pools from the taxes imposed by the Bank and
Corporation Tax Law.
d) AB 3024 (Transportation Committee), Chapter 758,
Statutes of 2002, 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.
Analysis Prepared by : Mark Rakich / INS. / (916) 319-2086
FN: 0004292