CIGA Bill Gets Approval in Calif. Legislative Session, SB 71 Falls Short

As the California Legislature wound up its 2001 session in mid-September, two workers’ compensation-related bills awaited their fate on the desk of Governor Gray Davis.

AB 1183: CIGA Premium Surcharge
In the case of AB 1183 (Calderon), a decision came quickly from Davis, who signed the bill into law on Sept. 12. AB 1183 made its way through the legislature with veritably no opposition and was passed on Aug. 31. It raises the premium surcharge to insurers from 1 percent to 2 percent in order to ensure that the California Insurance Guarantee Fund (CIGA), an important safety net for policyholders in the event a carrier goes insolvent, remains adequately funded.

According to Lawrence Mulryan, executive director of the CIGA, the association was “created in 1969 by statute, which basically provides that as a condition of doing business in the state, all admitted property/casualty carriers have to belong to our association. That means if one of these admitted carriers becomes insolvent and is liquidated, then the association has the responsibility of paying those covered claims. Conversely, when a member is insolvent and liquidated, the remaining companies are subject to assessment from the association to pay the claimants for the one or two companies that have gone into insolvency.”

There are three separate components of the CIGA program, including one for workers’ comp, and another for other property/casualty lines.

“AB 1183 gives a blanket authority to the CIGA board to increase assessments,” said Sam Sorich, vice president and western regional manager at the National Association of Independent Insurers (NAII). “The reality is that the board does not impose assessment unless there’s a shortfall…The pressing problem that confronts us today is the problem in the workers’ compensation area. What will happen, no doubt, is the CIGA board will approve an increase in the assessment of workers’ compensation insurers. But that order will not affect other p/c lines.”

It is, in fact, a recent spate of workers’ compensation carrier insolvencies in California that prompted the creation of AB 1183. The most significant of these include Superior National Insurance Co. and Reliance Insurance Company.

Mulryan noted that approximately 30 years ago, Guarantee Funds were created throughout the country pursuant to a National Association of Insurance Commissioners model law. “All the Guarantee Funds moved from year to year with basically minimal assessment needs,” Mulryan said. “For example, over a span of time, [CIGA’s] average cash payout was in the neighborhood of $17 million a year.

“All our current liabilities for everything before Superior National caused us to have to spend approximately $2.5 million a month,” Mulryan continued. “For the Superior National Group, we have to spend about $37.5 million…For Reliance, the cash flow appears to be slightly more than $27 million. It’s big any way you measure it, and it’s even bigger when you add it onto our already existing obligations due to [other] recent insolvencies.”

Which leads to the reality that, despite the passage of AB 1183, CIGA is in need of additional help and is currently working with the California Department of Insurance (CDI) in order to receive much more prompt distribution of assets from the estates.

Mulryan noted that there is currently about $200 million in the workers’ comp deposit that Reliance has with the CDI. He added that CIGA needs that money very quickly so that it can fund Reliance claims.

“At the time that the discussions of [AB 1183] started…we didn’t have Reliance—we had Superior National, and that was it,” Mulryan said. “While we went through the discussions, a couple of the smaller ones came along our way…Credit General and HIH and Sable.” And while those may be referred to as “smaller,” Mulryan noted that if one looks at the total impact of those three, that adds up to about $425 million per year.

“[AB 1183] only provides a doubling of the assessment capacity, which roughly means about an additional $70 million in workers’ compensation every year,” Mulryan said. However, the 2-percent assessment is subject to a sunset clause. “That means we can only assess at 2 percent for this year and next year. We need it to be extended beyond 2002, and we need distributions from the estates in order to meet those cash needs…For example, with Superior, although we’ve spent approximately $400 million so far, we haven’t gotten a penny from the estate.”

Mulryan said that CIGA had recently gotten a court order approving a transfer of funds from HIH to CIGA. “We may get that within days,” he said.

Mulryan added that he believes the CDI is doing all it can to get Reliance assets to CIGA as quickly as possible. He said that for Reliance, “$1.2 billion is the best estimate we have of…what’s being represented as fully developed costs for [covered] California claims in all the categories that would apply to [CIGA].” Of Reliance’s approximately 23,000 open files, the liability estimated for workers’ comp is about $365 million; $683 million for general liability and commercial liability; and for personal lines, other than homeowners, about $139 million.

SB 71: Workers’ Comp Benefit Increase
However, another more controversial workers’ comp-related bill, SB 71 (Burton), was vetoed very near the Governor’s deadline.

Sorich noted that while the NAII had supported AB 1183, it opposed SB 71.

“As time went on and people analyzed its provisions, most of the insurance community and the business community just couldn’t find enough cost savings in the bill to justify the benefit increases and expressed the concern that benefit increases of this magnitude at this time would do damage to the workers’ compensation system,” Sorich said. He added that the NAII came to believe that SB 71 would increase workers’ comp system costs, making insurance more costly for employers. Secondly, the NAII felt the bill could have worsened the solvency picture for some workers’ comp insurers.

In Davis’ statement regarding his veto of SB 71, he stated, “Since there is a general agreement about the need to increase benefits for injured workers, I believe that if we work together, the legislature, my staff and the interested parties can craft a comprehensive bill…before the 2002 legislative session begins.”

However, Sorich pointed out that neither bill is the end of the story. “It would be great to say the increase from 1 percent 2 percent for a year has resolved that issue,” he said. “I’m afraid we may be still grappling with workers’ comp insolvencies this time next year. [And for] SB 71, this is certainly not the end of the story either. This bill was vetoed, but there’s an acknowledgment by everybody that workers’ comp benefits should be increased. The question is, ‘how do we go about doing that?'”

Topics California Carriers Workers' Compensation Property Casualty