Existing law authorizes certain nontraditional insurers, including religious organizations meeting specified criteria, to insure against specified risks. Existing law authorizes these associations to insure against a specified list of losses, including, but not limited to, vandalism or malicious mischief, vehicles owned or operated by the insured or by any tenant of the described premises, falling trees, burglary and theft, and mysterious disappearance.

This bill would remove insuring vehicles owned or operated by the insured or by any tenant of the described premises from the list of insurable losses and would add insuring against liability to the list of insurable losses.

Existing law prohibits an association from writing insurance in excess of $10,000 on any one risk or in excess of $60,000 in any one city block within an incorporated city without immediately reinsuring all the excess amount. Existing law authorizes an association to write insurance for an amount not exceeding $60,000 on any one risk if the excess over $10,000 is reinsured, as provided. An association is not authorized to accept reinsurance but may reinsure risks if that reinsurance is by contracts and with reinsurers that meet the prescribed standards.

This bill would delete the above-described provisions.

Existing law authorizes certain nontraditional insurers, including religious organizations meeting specified criteria, to insure against specified risks. Existing law authorizes these associations to insure against a specified list of losses, including, but not limited to, vandalism or malicious mischief, vehicles owned or operated by the insured or by any tenant of the described premises, falling trees, burglary and theft, and mysterious disappearance.

This bill would remove insuring vehicles owned or operated by the insured or by any tenant of the described premises from the list of insurable losses and would add insuring against liability to the list of insurable losses.

Existing law prohibits an association from writing insurance in excess of $10,000 on any one risk or in excess of $60,000 in any one city block within an incorporated city without immediately reinsuring all the excess amount. Existing law authorizes an association to write insurance for an amount not exceeding $60,000 on any one risk if the excess over $10,000 is reinsured, as provided. An association is not authorized to accept reinsurance but may reinsure risks if that reinsurance is by contracts and with reinsurers that meet the prescribed standards.

This bill would delete the above-described provisions.

Existing law authorizes certain nontraditional insurers, including religious organizations meeting specified criteria, to insure against specified risks. Existing law authorizes these associations to insure against a specified list of losses, including, but not limited to, vandalism or malicious mischief, vehicles owned or operated by the insured or by any tenant of the described premises, falling trees, burglary and theft, and mysterious disappearance.

This bill would remove insuring vehicles owned or operated by the insured or by any tenant of the described premises from the list of insurable losses and would add insuring against liability to the list of insurable losses.

Existing law authorizes certain nontraditional insurers, including religious organizations meeting specified criteria, to insure against specified risks. Existing law authorizes these associations to insure against a specified list of losses, including, but not limited to, vandalism or malicious mischief, falling trees, burglary and theft, and mysterious disappearance.

This bill would add insuring against liability to the list of insurable losses.

CONCURRENCE IN SENATE AMENDMENTS

CSA1 Bill Id:AB 407

Author:(Bigelow, et al.)

As Amended Ver:May 10, 2017

Majority vote

Original Committee Reference: INS.

SUMMARY: Permits fraternal fire insurers to offer liability coverage in conjunction with a fire insurance policy.

The Senate amendments

1. Repeal a duplicative statute relating to reinsurance requirements for fraternal fire insurers.
2. Make minor clarifying changes.

EXISTING LAW:

1. Provides a comprehensive regulatory system for property/casualty insurers including financial supervision, consumer protection rules, and rate regulation.
2. Permits an association formed prior to January 1, 1947 to obtain a certificate of exemption as a "fraternal fire insurer."
3. Permits a fraternal fire insurer to issue fire insurance policies to its members and exempts the fraternal fire insurer from the other provisions of the Insurance Code.
4. Requires the fraternal fire insurer to comply with standards governing its operations and finances.

FISCAL EFFECT: Undetermined

COMMENTS:

1. Purpose. According to the author, since the law was put on the books in 1949, Mennonite Aid Plan (MAP) has not been allowed to include liability coverage in its policies. However, in recent years, the need for liability coverage for homeowners purchasing fire insurance policies from MAP has increased. Separate standalone liability coverage is available, but it is becoming increasingly difficult to obtain. Standalone coverage must be purchased as a separate policy from a different company and is becoming harder and more expensive to obtain.
2. Homeowner's Insurance. A typical homeowner's policy includes coverages against multiple risks including structure loss/damage, loss of contents, loss of use, and personal liability. Originally, fraternal fire insurers only provided insurance against structural damage or loss, but SB 454 (Insurance Committee), Statutes of 2001, Chapter 277 added coverage for burglary, theft, or loss of personal property. This bill would allow MAP to provide liability coverage as well. With the addition of liability coverage, the policies issued by MAP would better approximate a standard homeowner's policy.
3. "Fraternal" Insurers. As a general matter, any entity that is offering a product that functions as insurance must be licensed and regulated by the Insurance Commissioner. However, the Insurance Code (code) exempts a number of entities and products from this general rule. In some cases the code simply relieves the insurer from meeting particular requirements that are unnecessary or irrelevant to the specific product (e.g., vehicle service contracts and portable electronic device insurance). In other cases, the code exempts some types of organizations (e.g., fraternal benefit societies and peace officer benefit and relief associations) from all or part of the regulatory requirements for ordinary insurers. These exempted organizations typically have long provided insurance products to discrete, tightly knit communities and are not subjected to the full scope of insurance regulation because it is assumed the close relationship between the entity and its community prevents many of the abuses or problems otherwise associated insurance.
4. Cap on Retained Risks. Existing law establishes two caps on the amount of coverage a fraternal fire insurer may provide. Coverage for a risk over the cap must be "reinsured." A reinsurer covers the insurer's loss above a specified threshold. The existing coverage caps are intended to prevent the fraternal fire insurer from excessive exposure based on a single event or loss. Current law has two separate coverage caps, but one of them is obsolete and MAP has operated under the second cap for many years. The Senate amendments repeal the obsolete coverage cap provision.
5. Mennonite Aid Plan of the Pacific Coast. MAP has been providing homeowners' coverage for the Mennonite people and their congregations continuously since 1922. The Mennonite Aid Plan is allowed to write fire insurance solely for its members and its churches and exempts it from most of the requirements in the code. However, MAP is subject to financial exams by the California Department of Insurance (DOI). The effect of the exemption is that MAP does not need to get form approval or rate approval from the DOI.

Analysis Prepared by: Paul Riches / INS. / (916) 319-2086 FN: 0001153

 THIRD READING  

Bill No: AB 407

Author:

:

Vote:

SENATE INS., BANK. & FIN. COMMITTEE: 9-0, 6/28/17

AYES: Mendoza, Galgiani, Glazer, Hernandez, Lara, Morrell, Newman, Portantino, Roth

NO VOTE RECORDED: Berryhill, Gaines, Hueso, Mitchell

ASSEMBLY FLOOR: 77-0, 4/6/17 (Consent) - See last page for vote

SUBJECT:

SOURCE: Mennonite Aid Plan of the Pacific Coast

DIGEST:

This bill authorizes a fraternal fire insurer to offer liability coverage in conjunction with a fire insurance policy.

ANALYSIS:

Existing law:

1. Provides a comprehensive regulatory system for property/casualty insurers including financial supervision, consumer protection rules, and rate regulation.
2. Authorizes certain entities to form a fraternal fire insurer (“fraternal insurer”) as an association of members that contribute to each other's property losses.
3. Authorizes a fraternal insurer formed prior to January 1, 1947, to issue insurance policies that cover property damage to its members and exempts it from other provisions of the Insurance Code.
4. Prohibits a fraternal insurer from covering a single risk valued at over $10,000 and any combination of risks within the same city block of over $60,000, and requires the fraternal insurer to reinsure risks in excess of those caps.
5. Prohibits a religious fraternal insurer from covering a single risk valued at 10% of its capital and surplus (assets minus liabilities) and any combination of risks within the same city block over 20% its capital and surplus, and requires the fraternal insurer to reinsure risks in excess of those caps.

This bill:

1. Authorizes a fraternal insurer to offer liability coverage along with the property coverage.
2. Eliminates the $10,000/$60,000 cap.

Background

California law authorizes a number of cooperative risk-sharing enterprises that offer insurance or insurance-alternatives subject to limited regulation. Generally speaking, these are nonprofit entities built around communities of interest, governed by boards elected by their members, and subject to nonprofit law and any applicable fiduciary duties. They may only offer products to their members and are not permitted to advertise or sell policies to the public-at-large. The close relationship between the entity and its members discourages many of the problems targeted by insurance regulation. Examples include fraternal benefit societies that offer life insurance to members and nonprofit risk pools that offer liability and property coverage to qualifying nonprofits.

A fraternal fire insurer offers coverage to its members against property damage, like the type offered in a homeowners policy. Because this authority was granted prior to the development of the standard policy, they were limited to offering “fire insurance.” SB 454 (Committee on Insurance, Chapter 277, Statutes of 2001) expanded coverage to include burglary, theft, or loss of personal property.

But modern policies usually pair property and liability coverage. While consumers may buy separate policies for each type of coverage, this approach is inconvenient and likely more expensive. This bill allows a fraternal insurer to provide liability coverage as well and a package more closely matched to those offered by commercial insurers.

Only one fraternal insurer, the Mennonite Aid Plan of the Pacific Coast (“MAP”) still operates in California (new fraternal insurers are not authorized under existing law). MAP was formed in 1922 to offer coverage to Mennonite churches and members. While MAP is not subject to most of California’s insurance laws, the California Department of Insurance (CDI) retains the authority to verify that MAP has the assets or valid reinsurance agreements to back up its promises (reinsurance is type of backup agreement where the reinsurer covers losses in excess of a defined threshold). The sponsor has consulted with CDI on the bill, but CDI has not taken a formal position or expressed any concerns.

As an additional protection against insolvency, existing law establishes two caps on the amount of coverage provided by a fraternal insurer. These caps require the fraternal insurer to reinsure losses that might threaten its solvency and protects it against excessive exposure based on a single event or loss (such as a fire wiping out an entire block). MAP is subject to the cap limiting single risks to 10% of its capital and surplus and risks in a single city block to 20%. This bill eliminates a second, obsolete cap that limits risks based on fixed values that have not been updated since 1965.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

SUPPORT: (Verified 6/28/17)

Mennonite Aid Plan of the Pacific Coast (source)

National Association of Mutual Insurance Companies

OPPOSITION: (Verified 6/28/17)

None received

ARGUMENTS IN SUPPORT: MAP explains that standalone liability coverage has become increasingly difficult to obtain and not financially feasible for many of its policyholders. Authorizing MAP to offer liability coverage will permit it to better serve its members.

ASSEMBLY FLOOR: 77-0, 4/6/17

AYES: Acosta, Aguiar-Curry, Travis Allen, Arambula, Baker, Berman, Bigelow, Bloom, Bocanegra, Bonta, Brough, Burke, Caballero, Calderon, Cervantes, Chau, Chávez, Chen, Chiu, Choi, Chu, Cooley, Cooper, Cunningham, Dababneh, Dahle, Daly, Flora, Fong, Frazier, Friedman, Gallagher, Cristina Garcia, Eduardo Garcia, Gipson, Gloria, Gomez, Gonzalez Fletcher, Gray, Grayson, Harper, Holden, Irwin, Jones-Sawyer, Kalra, Kiley, Lackey, Levine, Limón, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Mullin, Muratsuchi, Nazarian, Obernolte, O'Donnell, Patterson, Quirk, Quirk-Silva, Reyes, Ridley-Thomas, Rodriguez, Rubio, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Voepel, Waldron, Weber, Wood

NO VOTE RECORDED: Eggman, Melendez, Rendon

Prepared by:

6/30/17 10:30:38

**** END ****

SENATE COMMITTEE ON INSURANCE, BANKING AND FINANCIAL INSTITUTIONS

Senator Tony Mendoza, Chair

2017 - 2018 Regular

Bill No: AB 407 Hearing Date: June 28, 2017

Subject: Fraternal fire insurers: coverage

SUMMARY

This bill would authorize a fraternal fire insurer to offer liability coverage in conjunction with a fire insurance policy.

DIGEST

Existing law

1. Provides a comprehensive regulatory system for property/casualty insurers including financial supervision, consumer protection rules, and rate regulation.
2. Authorizes certain entities to form a fraternal fire insurer (“fraternal insurer”) as an association of members that contribute to each other's property losses.
3. Authorizes a fraternal insurer formed prior to January 1, 1947, to issue insurance policies that cover property damage to its members and exempts it from other provisions of the Insurance Code.
4. Prohibits a fraternal insurer from covering a single risk valued at over $10,000 and any combination of risks within the same city block of over $60,000, and requires the fraternal insurer to reinsure risks in excess of those caps.
5. Prohibits a religious fraternal insurer from covering a single risk valued at 10% of its capital and surplus (assets minus liabilities) and any combination of risks within the same city block over 20% its capital and surplus, and requires the fraternal insurer to reinsure risks in excess of those caps.

This bill

1. Authorizes a fraternal insurer to offer liability coverage along with the property coverage.
2. Eliminates the $10,000/$60,000 limits on directly insured risks.
   

COMMENTS

1. Purpose of the bill Only one fraternal insurer, the Mennonite Aid Plan (“MAP)” offers coverage in California. According to the author, since the law authorizing fraternal insurers to offer fire policies was put on the books in 1949, MAP has not been allowed to include liability coverage. However, in recent years, the need for liability coverage for homeowners purchasing insurance policies from MAP has increased. Separate standalone liability coverage is available, but it is becoming increasingly difficult to obtain. This bill would allow MAP to include liability coverage in the homeowners policies they are already able to offer to members of the Mennonite church.
2. Background California law authorizes a number of special, cooperative enterprises that offer insurance or insurance-alternatives subject to limited regulation. Generally speaking, these are nonprofit entities built around communities of interest, governed by boards elected by their members, and subject to nonprofit law and any applicable fiduciary duties. They may only offer products to their members and are not permitted to advertise or sell policies to the public-at-large. For example, fraternal benefit societies offer life insurance to members, peace officer benefit and relief associations offer long-term disability or long-term care plans to peace officers and family, and nonprofit risk pools offer liability and property coverage to qualifying nonprofits. The close relationship between the entity and its members discourages many of the problems targeted by insurance regulation.

If not managed carefully, these groups may suffer financial problems. Unlike commercial insurers covered by a guarantee association (such as the California Insurance Guarantee Association), if they go bankrupt or insolvent, there is no failsafe in place. When liabilities exceed assets, members might agree to pay an additional assessment or to a decrease in benefits. Still, many of these organizations have consistently and reliably served their members even through eras of severe economic strain.

MAP is a fraternal insurer that offers coverage against property damage, like the type offered in a homeowners policy. Originally they were authorized to sell “fire insurance” covering damage by fire, but were authorized to cover property losses from other causes in 2001. MAP offers policies only to members including individuals and churches. MAP is exempted from most of the requirements in the Insurance Code and does not need approval to issue new policies or charge new rates, but it is subject to financial examination by the California Department of Insurance (CDI).

Homeowners Insurance A typical homeowners policy includes coverages against multiple risks including structure loss/damage, loss of contents, and loss of use. Most modern policies also cover legal liabilities arising from events that occur on and off-the property (dog bites for example). But the standard homeowners policy was not developed until after fraternal insurers were authorized to offer property coverage. Liability coverage would not have been anticipated at that time and was not included in the authorizing statute.

Property and liability coverage are now almost always paired together. While it is possible to buy separate property coverage, such as California FAIR Plan policies, and separate liability coverage that supplement property-only coverage this approach is far more inconvenient to the consumer and likely more expensive.

This bill would allow MAP to provide liability coverage as well. With the addition of liability coverage, the policies issued by MAP would more closely match those offered by commercial insurers.

Unlike property coverage where the insured file the claims, liability coverage involves third-party claims (the injured party). It also covers the insured’s legal defense. MAP’s experience writing property coverage does not translate directly to writing liability; however, MAP performed underwriting services on behalf of commercial insurers that have sold supplemental liability policies to MAP members. MAP also intends to issue its policies based on standard forms published by an insurance services organization that also provides statistics, data, and support services.

While MAP is not subject to most of California’s insurance laws, CDI retains the authority to verify that MAP has the assets or valid reinsurance agreements to back up its promises. The sponsor has consulted with CDI on the bill, but CDI has not taken a formal position or expressed any concerns.

Cap on Retained Risks Existing law establishes two caps on the amount of coverage a fraternal insurer may directly provide. However, the fraternal insurer may issue coverage above the cap that is “reinsured.” Reinsurance is like insurance for insurers, when a loss meets a certain threshold, a reinsurer covers the excess. These caps provide some consumer protection by ensuring that larger risks are spread among multiple parties and prevent the fraternal from excessive exposure based on a single event or loss (such as a fire wiping out an entire block).

One restriction limits the value of risks retained by a fraternal insurer to $10,000 for any single risk and $60,000 for any group of risks in the same city block. The provision was last updated in 1965 and, according to the sponsor, has not been applied to MAP which is subject to a different standard specific to fraternal insurers affiliated with religious organizations.

The other restriction prohibits a religious fraternal insurer from insuring a single risk in excess of 10% of its capital and surplus and 20% for risks in a single city block; the cap grows or contracts based on available assets. This bill eliminates the $10,000/$60,000 cap, but leaves the cap based on capital and surplus.

1. Arguments in Support MAP explains that standalone liability coverage has become increasingly difficult to obtain and not financially feasible for many of its policyholders. Authorizing MAP to offer liability coverage will permit it to better serve its members.
2. Arguments in Opposition None received.
3. Prior Legislation SB 454 (Committee on Insurance), Chapter 277, Statutes of 2001, authorized fraternal insurers to offer coverage against burglary, theft, or loss of personal property.

POSITIONS

Support

Mennonite Aid Plan of the Pacific Coast

National Association of Mutual Insurance Companies

Oppose

None received

-- END --

Date of Hearing: March 29, 2017

ASSEMBLY COMMITTEE ON INSURANCE

Tom Daly, Chair

ABPCA Bill Id:AB 407 (

Author:Bigelow) – As Introduced Ver:February 9, 2017

SUBJECT: Fraternal fire insurers: coverage

SUMMARY: Permits fraternal fire insurers to offer liability coverage in conjunction with a fire insurance policy.

EXISTING LAW:

1. Provides a comprehensive regulatory system for property/casualty insurers including financial supervision, consumer protection rules, and rate regulation.
2. Permits an association formed prior to January 1, 1947 to obtain a certificate of exemption as a "fraternal fire insurer."
3. Permits a fraternal fire insurer to issue fire insurance policies to its members and exempts the fraternal fire insurer from the other provisions of the Insurance Code.
4. Requires the fraternal fire insurer to comply with standards governing its operations and finances.

FISCAL EFFECT: Undetermined

COMMENTS:

1. Purpose. According to the author, since the law was put on the books in 1949, Mennonite Aid Plan (MAP) has not been allowed to include liability coverage in its policies. However, in recent years, the need for liability coverage for homeowners purchasing fire insurance policies from MAP has increased. Separate standalone liability coverage is available, but it is becoming increasingly difficult to obtain. Standalone coverage must be purchased as a separate policy from a different company and is becoming harder and more expensive to obtain.
2. Homeowner's Insurance. A typical homeowner's policy includes coverages against multiple risks including structure loss/damage, loss of contents, loss of use, and personal liability. Originally, fraternal fire insurers only provided insurance against structural damage or loss, but SB 454 (Statutes of 2001, Chapter 277) added coverage for burglary, theft, or loss of personal property. This bill would allow MAP to provide liability coverage as well. With the addition of liability coverage, the policies issued by MAP would better approximate a standard homeowner's policy.
3. "Fraternal" Insurers. As a general matter, any entity that is offering a product that functions as insurance must be licensed and regulated by the Insurance Commissioner. However, the Insurance Code (code) exempts a number of entities and products from this general rule. In some cases the code simply relieves the insurer from meeting particular requirements that are unnecessary or irrelevant to the specific product (e.g., vehicle service contracts and portable electronic device insurance). In other cases, the code exempts some types of organizations (e.g., fraternal benefit societies and peace officer benefit and relief associations) from all or part of the regulatory requirements for ordinary insurers. These exempted organizations typically have long provided insurance products to discrete, tightly knit communities and are not subjected to the full scope of insurance regulation because it is assumed the close relationship between the entity and its community prevents many of the abuses or problems otherwise associated insurance.
4. Mennonite Aid Plan of the Pacific Coast. MAP has been providing homeowners' coverage for the Mennonite people and their congregations continuously since 1922. The Mennonite Aid Plan is allowed to write fire insurance solely for its members and its churches and exempts it from most of the requirements in the code. However, MAP is subject to financial exams by the California Department of Insurance (DOI). The effect of the exemption is that MAP does not need to get form approval or rate approval from the DOI.

REGISTERED SUPPORT / OPPOSITION:

Support

Mennonite Aid Plan of the Pacific Coast

National Association of Mutual Insurance Companies (NAMIC)

Opposition

None received

Analysis Prepared by: Paul Riches / INS. /