Existing law establishes the California Insurance Guarantee Association to provide coverage against losses arising from the failure of an insolvent property, casualty, or workers compensation insurer to discharge its obligations under its insurance policies. Existing law requires the association to pay and discharge all covered claims, which includes the obligations of the insolvent insurer.

This bill would additionally provide that a covered claim includes a claim filed by an employee of a general employer that has entered into a contractual relationship with a special employer that is a self-insured governmental entity. The bill would provide that in that case, if certain criteria are met, the contractual agreement would be conclusive proof that the special employer never intended to provide workers compensation insurance for the employees of the general employer.

SENATE COMMITTEE ON INSURANCE

Senator Richard Roth, Chair

2015 - 2016 Regular

Bill No: SB 604 Hearing Date: May 13, 2015

Subject: California Insurance Guarantee Association: definitions.

SUMMARY

Includes as a “covered claim” for the purposes of California Insurance Guarantee Association (CIGA) liability a workers’ compensation claim filed by an employee of a general employer that has entered into a contractual relationship with a special employer that is a self-insured governmental entity, when the workers’ compensation insurer of the general employer becomes insolvent.

DIGEST

Existing law

1. Establishes CIGA to pay “covered claims” of insolvent member insurers, as specified. (§1063 et. seq.)

2. Requires each insurer admitted to transact insurance in this state in three specified classes of insurance, including workers’ compensation, auto and homeowners, and all other property casualty insurance, to participate in CIGA as a condition of doing business.

3. Defines “covered claims,” and expressly limits CIGA’s authority to make payments to only those claims that are specifically enumerated.

4. Specifically provides that a “covered claim” does not include a claim to the extent it is covered by any other insurance. (§1063.1(c)(9))

5. Requires CIGA to allocate levy assessments and claims payments and costs based on the three categories of insurance.

6. Provides that California policyholders pay an assessment on insurance policies (up to 2%, subject to some qualifications) in order to fund CIGA's claims-paying obligations.
   
   

7. Authorizes CIGA to issue up to $1.5 billion in bonds by January 1, 2023 to pay workers’ compensation claims and efficiently manage its cash flow needs, as specified.

8. Allows CIGA to levy an assessment on workers’ compensation insurers, based upon direct premium collected, for the purpose of paying off the bonds.

9. Provides that the requirements for workers’ compensation coverage are met when an employer utilizing employees on a temporary or contract basis (special employer) enters into a valid and enforceable agreement with the other employer (general employer) who agrees to obtain, and has, in fact, obtained workers’ compensation coverage for those employees. (Labor Code §3602(d)(1))

This bill

1. Specifies a “covered claim” includes a claim filed by an employee of a general employer that has entered into a contractual relationship with a special employer that is a self-insured governmental entity.
   
   

COMMENTS

1. Purpose of the bill To prevent self-insured governmental entities from having to pay workers’ compensation claims of temporary contracted employees when the workers’ compensation insurer of the general employer becomes insolvent.
   
   

2. Background CIGA was created by legislation in 1969 as an association of insurers that makes payments to policyholders of property/casualty, workers’ compensation and “miscellaneous” insurers when the member insurance company becomes insolvent and is unable to do so. It is a statutory entity that depends on the establishing legislation for its existence and for a definition of the scope of its powers, duties and protections. CIGA is funded by premium surcharges upon applicable lines of insurance, and those surcharges are limited by statute to a maximum of 2%.

The purpose of CIGA is to pay “covered claims” of member insurance companies that have become insolvent. CIGA’s total liability for any single claim is $500,000, other than claims for workers’ compensation, which are not limited. CIGA does not have to pay a claim “to the extent that it is covered by any other insurance of a class covered by this article and available to the claimant or insured.” (Insurance Code §1063.1(c)(9)(A)) This requires a factual determination on a number of issues. If another insurer is jointly and severally liable for a claim, for example if a worker suffers a cumulative injury and the employer has switched workers’ compensation insurers, or there are different employers, the non-insolvent insurer must bear the entire claim. This provision has caused quite a bit of unhappiness among insurers and those who are self-insured, and frequently leads to litigation over coverage and CIGA’s liability for claims payments. Self-insurers, whether public or private, have been determined many times to constitute “other insurance” for purposes of §1063.1.

Special and General Employers In considering whether a claim is “covered” or that other insurance is available, in the case of temporary or contract employees, CIGA and the courts have distinguished between special and general employment status. CIGA can assert availability of “other insurance” if special employer status is found. Generally speaking, a special employer exerts control over the employee in the course of the temporary or contract employment. For example, a special employer exerts direct control over the work the employee does and sets the employee’s hours. In the general employer situation, the temporary agency or contractor retains control over the employee, directing the employee at work and setting the hours. In the case of the bill’s sponsor Los Angeles County, some of the positions filled by employees that led to workers’ compensation claims determined by CIGA to not be “covered claims” included laundry service, cook and clerical workers working in county facilities. If these positions were filled by permanent employees, their workers’ compensation claims would clearly be covered by the County. CIGA determined these claims, on a case by case basis, to involve special employment status, and therefore “other insurance” (the County’s self-insurance) was available. In the case of the County of Los Angeles v. Workers’ Compensation Appeals Board, PDQ Personnel Services, Inc., insured by Superior National Insurance Company, and CIGA before the Court of Appeal (77 Cal. Comp. Cases 644) the court denied writ, upholding the decision by the Workers’ Compensation Appeals Board (WCAB) in its rejection of the County’s argument that it “contracted away” its liability for benefits by requiring temporary agency PDQ Services to obtain workers’ compensation insurance for temporary county employees hired through PDQ. The WCAB held that the liability of general and special employers for compensation benefits is joint and several, and that the County is available as “other insurance” within the meaning of Insurance Code §1063.1(c)(9).

In the PDQ case noted above, the County had obtained an indemnity agreement from the temporary agency, and the WCAB cited that as additional evidence that the county was aware it could be held liable for benefits for the temporary employees. Collecting could be difficult however, if the company providing the employees is a small or medium size business. Alternatively, the special employer could require or ensure that the general employer’s workers’ compensation insurer is highly rated.

It should be noted that several of the claims Los Angeles County is contesting with CIGA involve Superior National, a major workers’ compensation insurer that became insolvent in 2000, along with 26 other workers’ compensation insurers over the next three years. Many large carriers had underpriced their insurance policies after rates were de-regulated in 1995, and subsequently experienced high loss ratios, rising health costs and benefits increases. Approximately 25% of the private workers’ compensation carriers failed, creating stress on the entire system. Prior to 2000, CIGA was handling about 6,500 total claims (4,100 workers’ compensation claims), had 11 claims staff and two third party administrators. From 2000-2003, CIGA took on more than 185,000 claims (140,000 workers’ compensation claims). The projected total liability for claims from Superior National and Fremont, the two largest companies, is more than $3.5 billion. According to CIGA, it still has a workers’ compensation deficit of approximately $2.3 billion as a result of the insolvencies in the early 2000s.

3. Support According to the author, SB 604 will clarify that in the that event a self-insured governmental entity contracts with a general employer whose workers' compensation carrier becomes insolvent, CIGA would be responsible for the workers' compensation liability.  SB 604 will protect the legal interests of self-insured government entities and the fiscal integrity of taxpayer monies by ensuring that employers are not exposed to duplicate workers' compensation liabilities.

The Los Angeles County Board of Supervisors sponsored SB 604 to clarify that self-insured employers are not liable for the costs associated with unpaid workers’ compensation claims of contracted temporary services agencies whose insurer becomes insolvent. A contrary interpretation contradicts the purpose of the CIGA supplemental surcharge fee, which is to cover organizations and their employees from the insolvency of insurance companies. A recent court case that held a self-insured employer may be held liable to CIGA for costs associated with job-related injuries incurred by a contractor’s employee nullifies the protections of CIGA and exposes self-insured governmental agencies to incur millions of dollars in duplicate workers’ compensation liabilities.

CSAC Excess Insurance Authority supports SB 604 because public entities entering into a contract for services with such employer should not be held liable for injuries sustained by an employee of the independent contractor if/when their carrier becomes insolvent.

4. Opposition CIGA opposes this bill because it seeks to create an exception for a self-insured public entity from statutes and numerous court decisions that hold a special employer liable when the general employer’s workers’ compensation insurer fails. If this bill were enacted, the liability for these benefits would be transferred to all employers insured for workers’ compensation. Since most large employers are self-insured for workers’ compensation the liability would fall on all of the small and medium sized employers whose workers’ compensation premiums are surcharged by CIGA. Since there are several ways that the public entity can protect themselves from this liability, SB 604 is nothing more than a tax on small and medium sized employers in California.

Pacific Compensation Insurance Company opposes SB 604 because it would fundamentally alter the way in which claims against insolvent insurance companies are paid for when there is also liability for claims payments by self-insured public entities. The Association of California Insurance Companies opposes SB 604 because the proponents want a special provision that would transfer the cost of losses all other participants in the workers’ compensation system similarly situated have to bear. Those additional losses to CIGA would then have to be recouped from assessments on insurers that are surcharged back to all businesses in the state that are insured for workers’ compensation.

The Service Employees International Union of California opposes SB 604 because it could incentivize self-insured governmental entities to contract out services in order to limit their liability for workers’ compensation.

5. Questions This bill would treat the workers’ compensation claims of temporary or contract workers for self-insured public entities differently than similar claims for temporary or contract workers at self-insured private companies. Is this appropriate? If the committee chooses to expand CIGA’s responsibility for these claims, should it extend to both public and private self-insured entities? How would this affect CIGA’s liabilities? Should the status of the governmental entity as self-insured be the determining factor? What if the governmental entity is insured, such as through the State Compensation Insurance Fund—should it still be liable, possibly facing higher premiums as a result? The bill as drafted is not limited to apply only to future claims. Would this open CIGA up to actions by public entities to recoup claims payments made in prior years? Even claims that have been fully litigated? Should the bill be limited to only apply to prospective workers’ compensation claims?

6. Suggested Amendment Amend the bill to apply to claims filed on or after the effective date.
   
   

7. Prior and Related Legislation AB 822 (Cooley) establishes a 1-year statute of limitations for filing a claim against CIGA.
   
   

POSITIONS

Support

County of Los Angeles (sponsor)

Acclamation Insurance Management

Allied Managed Care

Association of California School Administrators

California Black Chamber of Commerce

California Coalition on Workers’ Compensation

California Professional Association of Specialty Contractors

California Special Districts Association

California State Association of Counties

CSAC Excess Insurance Authority

League of California Cities

Rural Counties Representatives of California

Urban Counties Caucus

Oppose

American Insurance Association

Association of California Insurance Companies

California Insurance Guarantee Association

Pacific Compensation Insurance Company

Service Employees International Union California

-- END --

SENATE COMMITTEE ON INSURANCE

Senator Richard Roth, Chair

2015 - 2016 Regular

Bill No: SB 604 Hearing Date: April 22, 2015

Subject: California Insurance Guarantee Association: definitions

SUMMARY

Includes as a “covered claim” for the purposes of California Insurance Guarantee Association (CIGA) liability a workers’ compensation claim filed by an employee of a general employer that has entered into a contractual relationship with a special employer that is a self-insured governmental entity, when the workers’ compensation insurer of the general employer becomes insolvent.

DIGEST

Existing law

1. Establishes CIGA to pay “covered claims” of insolvent member insurers, as specified; (§1063 et. seq.)

2. Requires each insurer admitted to transact insurance in this state in three specified classes of insurance, including workers’ compensation, auto and homeowners, and all other property casualty insurance, to participate in CIGA as a condition of doing business;

3. Defines “covered claims,” and expressly limits CIGA’s authority to make payments to only those claims that are specifically enumerated;

4. Specifically provides that a “covered claim” does not include a claim to the extent it is covered by any other insurance; (§1063.1(c)(9))

5. Requires CIGA to allocate levy assessments and claims payments and costs based on the three categories of insurance;

6. Provides that California policyholders pay an assessment on insurance policies (up to 2%, subject to some qualifications) in order to fund CIGA's claims-paying obligations;
   
   

7. Authorizes CIGA to issue up to $1.5 billion in bonds by January 1, 2023 to pay workers’ compensation claims and efficiently manage its cash flow needs, as specified;

8. Allows CIGA to levy an assessment on workers’ compensation insurers, based upon direct premium collected, for the purpose of paying off the bonds;

9. Provides that the requirements for workers’ compensation coverage are met when an employer utilizing employees on a temporary or contract basis (special employer) enters into a valid and enforceable agreement with the other employer (general employer) who agrees to obtain, and has, in fact, obtained workers’ compensation coverage for those employees. (Labor Code §3602(d)(1))

This bill

1. Specifies a “covered claim” includes a claim filed by an employee of a general employer that has entered into a contractual relationship with a special employer that is a self-insured governmental entity.
   
   

COMMENTS

1. Purpose of the bill To prevent self-insured governmental entities from having to pay workers’ compensation claims of temporary contracted employees when the workers’ compensation insurer of the general employer becomes insolvent.
   
   

2. Background CIGA was created by legislation in 1969 as an association of insurers that makes payments to policyholders of property/casualty, workers’ compensation and “miscellaneous” insurers when the member insurance company becomes insolvent and is unable to do so. It is a statutory entity that depends on the establishing legislation for its existence and for a definition of the scope of its powers, duties and protections. CIGA is funded by premium surcharges upon applicable lines of insurance, and those surcharges are limited by statute to a maximum of 2%.

The purpose of CIGA is to pay “covered claims” of member insurance companies that have become insolvent. CIGA’s total liability for any single claim is $500,000, other than claims for workers’ compensation, which are not limited. CIGA does not have to pay a claim “to the extent that it is covered by any other insurance of a class covered by this article and available to the claimant or insured.” (Insurance Code §1063.1(c)(9)(A)) This requires a factual determination on a number of issues. If another insurer is jointly and severally liable for a claim, for example if a worker suffers a cumulative injury and the employer has switched workers’ compensation insurers, or there are different employers, the non-insolvent insurer must bear the entire claim. This provision has caused quite a bit of unhappiness among insurers and those who are self-insured, and frequently leads to litigation over coverage and CIGA’s liability for claims payments. Self-insurers, whether public or private, have been determined many times to constitute “other insurance” for purposes of §1063.1.

Special and General Employers In considering whether a claim is “covered” or that other insurance is available, in the case of temporary or contract employees, CIGA and the courts have distinguished between special and general employment status. CIGA can assert availability of “other insurance” if special employer status is found. Generally speaking, a special employer exerts control over the employee in the course of the temporary or contract employment. For example, a special employer exerts direct control over the work the employee does and sets the employee’s hours. In the general employer situation, the temporary agency or contractor retains control over the employee, directing the employee at work and setting the hours. In the case of the bill’s sponsor Los Angeles County, some of the positions filled by employees that led to workers’ compensation claims determined by CIGA to not be “covered claims” included laundry service, cook and clerical workers working in county facilities. If these positions were filled by permanent employees, their workers’ compensation claims would clearly be covered by the County. CIGA determined these claims, on a case by case basis, to involve special employment status, and therefore “other insurance” (the County’s self-insurance) was available. In the case of the County of Los Angeles v. Workers’ Compensation Appeals Board, PDQ Personnel Services, Inc., insured by Superior National Insurance Company, and CIGA before the Court of Appeal (77 Cal. Comp. Cases 644) the court denied writ, upholding the decision by the Workers’ Compensation Appeals Board (WCAB) in its rejection of the County’s argument that it “contracted away” its liability for benefits by requiring temporary agency PDQ Services to obtain workers’ compensation insurance for temporary county employees hired through PDQ. The WCAB held that the liability of general and special employers for compensation benefits is joint and several, and that the County is available as “other insurance” within the meaning of Insurance Code §1063.1(c)(9).

In the PDQ case noted above, the County had obtained an indemnity agreement from the temporary agency, and the WCAB cited that as additional evidence that the county was aware it could be held liable for benefits for the temporary employees. Collecting could be difficult however, if the company providing the employees is a small or medium size business. Alternatively, the special employer could require or ensure that the general employer’s workers’ compensation insurer is highly rated.

It should be noted that several of the claims Los Angeles County is contesting with CIGA involve Superior National, a major workers’ compensation insurer that became insolvent in 2000, along with 26 other workers’ compensation insurers over the next three years. Many large carriers had underpriced their insurance policies after rates were de-regulated in 1995, and subsequently experienced high loss ratios, rising health costs and benefits increases. Approximately 25% of the private workers’ compensation carriers failed, creating stress on the entire system. Prior to 2000, CIGA was handling about 6,500 total claims (4,100 workers’ compensation claims), had 11 claims staff and two third party administrators. From 2000-2003, CIGA took on more than 185,000 claims (140,000 workers’ compensation claims). The projected total liability for claims from Superior National and Fremont, the two largest companies, is more than $3.5 billion. According to CIGA, it still has a workers’ compensation deficit of approximately $2.3 billion as a result of the insolvencies in the early 2000s.

3. Support According to the author, SB 604 will clarify that in the event a self-insured governmental entity contracts with a general employer whose workers' compensation carrier becomes insolvent, CIGA would be responsible for the workers' compensation liability.  SB 604 will protect the legal interests of self-insured government entities and the fiscal integrity of taxpayer monies by ensuring that employers are not exposed to duplicate workers' compensation liabilities.

The Los Angeles County Board of Supervisors sponsored SB 604 to clarify that self-insured employers are not liable for the costs associated with unpaid workers’ compensation claims of contracted temporary services agencies whose insurer becomes insolvent. A contrary interpretation contradicts the purpose of the CIGA supplemental surcharge fee, which is to cover organizations and their employees from the insolvency of insurance companies. A recent court case that held a self-insured employer may be held liable to CIGA for costs associated with job-related injuries incurred by a contractor’s employee nullifies the protections of CIGA and exposes self-insured governmental agencies to incur millions of dollars in duplicate workers’ compensation liabilities.

CSAC Excess Insurance Authority supports SB 604 because public entities entering into a contract for services with such employer should not be held liable for injuries sustained by an employee of the independent contractor if/when their carrier becomes insolvent.

4. Opposition CIGA opposes this bill because it seeks to create an exception for a self-insured public entity from statutes and numerous court decisions that hold a special employer liable when the general employer’s workers’ compensation insurer fails. If this bill were enacted, the liability for these benefits would be transferred to all employers insured for workers’ compensation. Since most large employers are self-insured for workers’ compensation the liability would fall on all of the small and medium sized employers whose workers’ compensation premiums are surcharged by CIGA. Since there are several ways that the public entity can protect themselves from this liability, SB 604 is nothing more than a tax on small and medium sized employers in California.

Pacific Compensation Insurance Company opposes SB 604 because it would fundamentally alter the way in which claims against insolvent insurance companies are paid for when there is also liability for claims payments by self-insured public entities. The Association of California Insurance Companies opposes SB 604 because the proponents want a special provision that would transfer the cost of losses all other participants in the workers’ compensation system similarly situated have to bear. Those additional losses to CIGA would then have to be recouped from assessments on insurers that are surcharged back to all businesses in the state that are insured for workers’ compensation.

5. Questions This bill would treat the workers’ compensation claims of temporary or contract workers for self-insured public entities differently than similar claims for temporary or contract workers at self-insured private companies. Is this appropriate? If the committee chooses to expand CIGA’s responsibility for these claims, should it extend to both public and private self-insured entities? How would this affect CIGA’s liabilities? Should the status of the governmental entity as self-insured be the determining factor? What if the governmental entity is insured, such as through the State Compensation Insurance Fund—should it still be liable, possibly facing higher premiums as a result? The bill as drafted is not limited to apply only to future claims. Would this open CIGA up to actions by public entities to recoup claims payments made in prior years? Even claims that have been fully litigated? Should the bill be limited to only apply to prospective workers’ compensation claims?

6. Suggested Amendment Amend the bill to apply to claims filed on or after the effective date.
   
   

7. Prior and Related Legislation AB 822 (Cooley) establishes a 1-year statute of limitations for filing a claim against CIGA.
   
   

POSITIONS

Support

County of Los Angeles (sponsor)

Acclamation Insurance Management

Allied Managed Care

Association of California School Administrators

California Black Chamber of Commerce

California Coalition on Workers’ Compensation

California Professional Association of Specialty Contractors

California Special Districts Association

California State Association of Counties

CSAC Excess Insurance Authority

League of California Cities

Rural Counties Representatives of California

Urban Counties Caucus

Oppose

American Insurance Association

Association of California Insurance Companies

California Insurance Guarantee Association

Pacific Compensation Insurance Company

-- END --