Today's Law As Amended


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SB-11 Workers’ compensation: private self-insurance groups.(2003-2004)



As Amends the Law Today


SECTION 1.

 Section 3701.5 of the Labor Code is amended to read:

3701.5.
 (a) If the director determines that a private self-insured employer  employer, or a private group of self-insured employers,  has failed to pay workers’ compensation as required by this division, the security deposit shall be utilized to administer and pay the employer’s or group’s outstanding  compensation obligations.
(b) If the director determines the security deposit has not been immediately made available for the payment of compensation, the director shall determine the method of payment and claims administration as appropriate, which may include, but is not limited to, payment by a surety that issued the bond, or payment by an issuer of an irrevocable letter of credit, and administration by a surety or by an adjusting agency, or through the Self-Insurers’ Security Fund, or any combination thereof. If the director arranges for administration and payment by any person other than the Self-Insurers’ Security Fund after a default is declared, the fund shall have no responsibility for claims administration or payment of the claims. Fund or the Self-Insured Groups’ Security Fund, or any combination thereof. 
(c) If the director determines the payment of benefits and claims administration shall be made through the Self-Insurers’ Security Fund or the Self-Insured Groups’ Security  Fund, the fund shall commence payment of the private self-insured employer’s obligations for which it is liable under Section 3743 or 3748  within 30 days of notification. Payments shall be made to claimants whose entitlement to benefits can be ascertained by the fund, with or without proceedings before the appeals board. Upon the assumption of obligations by the fund pursuant to the director’s determination, the fund shall have a right to immediate possession of any posted security and the custodian, surety, or issuer of any irrevocable letter of credit shall turn over the security to the fund together with the interest that has accrued since the date of the self-insured employer’s default or insolvency.
(d) The director shall promptly audit an employer or group upon making a determination under subdivision (a) or (b). The employer, any excess insurer or reinsurer, and any adjusting agency shall provide any relevant information in their possession. If the audit results in a preliminary estimate that liabilities exceed the amount of the security deposit, the director shall direct the custodian of the security deposit to liquidate it and provide all proceeds to the Self-Insurers’ Security Fund or to the Self-Insured Groups’ Security Fund. If the preliminary estimate is that liabilities are less than the security deposit, the director shall ensure the administration and payment of compensation pursuant to subdivision (b).
(d) (e)  The payment of benefits by the Self-Insurers’ Security Fund or the Self-Insured Groups’ Security Fund  from security deposit proceeds shall release and discharge any custodian of the security deposit, surety, any issuer of a letter of credit, and the self-insured employer, from liability to fulfill obligations to provide those same benefits as compensation, but does not release any person from any liability to the fund for full reimbursement. Payment by a surety constitutes a full release of the surety’s liability under the bond to the extent of that payment, and entitles the surety to full reimbursement by the principal or his or her estate. Full reimbursement includes necessary attorney fees and other costs and expenses, without prior claim or proceedings on the part of the injured employee or other beneficiaries. Any decision or determination made, or any settlement approved, by the director or by the appeals board under subdivision (f) (g)  shall conclusively be presumed valid and binding as to any and all known claims arising out of the underlying dispute, unless an appeal is made within the time limit specified in Section 5950.
(e) (f)  The director shall advise the Self-Insurers’ Security Fund or the Self-Insured Groups’ Security Fund  promptly after receipt of information indicating that a private self-insured employer or group  may be unable to meet its compensation obligations. The director shall also advise the Self-Insurers’ Security Fund or the Self-Insured Groups’ Security Fund  of all determinations and directives made or issued pursuant to this section. All financial, actuarial, or claims information received by the director from any self-insurer may be shared by the director with the Self-Insurers’ Security Fund. 
(f) (g)  Disputes concerning the posting, renewal, termination, exoneration, or return of all or any portion of the security deposit, or any liability arising out of the posting or failure to post security, or adequacy of the security or reasonableness of administrative costs, including legal fees, and arising between or among a surety, the issuer of an agreement of assumption and guarantee of workers’ compensation liabilities, the issuer of a letter of credit, any custodian of the security deposit, a self-insured employer, employer  or group, or  the Self-Insurers’ Security Fund or the Self-Insured Groups’ Security Fund  shall be resolved by the director. An appeal from the director’s decision or determination may be taken to the appropriate superior court by petition for writ of mandate. Payment of claims from the security deposit or by the Self-Insurers’ Security Fund or the Self-Insured Groups’ Security Fund  shall not be stayed pending the resolution of the disputes unless and until the superior court issues a determination staying a payment of claims decision or determination of the director.

SEC. 2.

 Article 2.3 (commencing with Section 3737) is added to Chapter 4 of Part 1 of Division 4 of the Labor Code, to read:

Article  2.3. Private Self-Insurance Group Security Act
3737.
 This article shall govern the establishment and regulation of any group of private employers formed for the purpose of self-insuring the obligation and liability of members to pay compensation as required under this division.
3737.1.
 (a) Any employers seeking or possessing authority to operate as a private self-insured group shall apply for a certificate of consent to self-insure from the director.
(b) Any employers seeking a certificate of consent to self-insure as a private self-insured group shall be required to provide and maintain certified independently audited financials for as many of its founding members as is necessary to evidence a minimum consolidated net worth of five million dollars ($5,000,000) and a minimum consolidated net income of the group members of five hundred thousand dollars ($500,000). After the self-insured group reaches and maintains these levels, any additional new members shall not be required to provide these financials. Instead, the administrators of the group shall evaluate the finances of the potential new members by reviewing their financial statements, tax returns, credit reports, or other appropriate documentation as specified in the bylaws of the self-insured group.
(c) Any employers seeking a certificate of consent to self-insure as a private self-insured group shall be required to demonstrate to the satisfaction of the department that they meet the criteria of Section 3737.2.
(d) Any employers seeking a certificate of consent to self-insure as a private self-insured group shall be required to post and maintain the security deposit in a form acceptable to the director and in an amount described in Section 3737.3.
(e) Any employers seeking a certificate of consent to self-insure as a private self-insured group shall each agree to assume and discharge, jointly and severally, any compensation liability under this division and under Section 15479 of Title 8 of the California Code of Regulations of any and all other employers that are members of the self-insured group.
(f) Any employers seeking a certificate of consent to self-insure as a private self-insured group shall be required to provide one of the following:
(1) An independent evaluation of the applicant group’s injury and illness prevention program as set forth in Sections 6314.5 and 6401.7, and Section 3203 of Title 8 of the California Code of Regulations, prepared by an independent, licensed, California professional engineer, certified safety professional, or certified industrial hygienist. The evaluation preparer shall disclose to the director if any of the following is true:
(A) The preparer or the preparer’s firm has had business dealings with group member employers or their owners during the prior two years.
(B) The preparer is or has been employed by the present or prior insurance carrier or insurance broker for any member of the self-insured group during the past five years.
(C) The preparer or preparer’s firm has been employed by a member employer or its parent in a safety and health or accident prevention capacity during the past five years.
(2) A written report or citation of a Division of Occupational Safety and Health inspection of the applicant employer’s injury and illness prevention program pursuant to Sections 6314.5 and 6401.7, and Section 3203 of Title 8 of the California Code of Regulations. The Division of Occupational Safety and Health inspection shall have been conducted within 120 days of the date of application to become self-insured.
(g) The business relationships disclosed pursuant to paragraph (1) of subdivision (f) may be considered by the director but shall not alone constitute conflicts of interest, nor shall they disqualify an individual from being an independent professional as required by that paragraph.
(h) Every group shall maintain an effective injury prevention program. An evaluation report pursuant to subdivision (f) that shows the applicant for a certificate of consent to self-insure to be without an effective injury prevention program shall be good cause for denial of the application for self-insurance by the director without prejudice to reapply at a later date.
(i)  An employer applicant to a private self-insured group must abate all serious violations found in the safety and health evaluation report. Written verification of abatement must be sent from the evaluation preparer to the department.
(j) An employer applicant to a self-insured group that is already established shall comply with the self-insured group’s injury and illness prevention program.
3737.2.
 A private self-insured group may self-insure two or more employers that meet any of the following criteria:
(a) Are engaged in a common trade or business within the meaning of subdivision (b) of Section 11656.6 of the Insurance Code. Such a private self-insured group shall file with the department a statement that complies with the conditions set forth in paragraph (3) of subdivision (a) of Section 11656.6 of the Insurance Code.
(b) Are engaged in related activities in a given industry. Such a private self-insured group shall demonstrate the related nature of the member employers’ business activities, to the satisfaction of the department, by filing with the department documentation establishing that:
(1) All member employers are classified within the same or a related Standard Industrial Classification Code Division Structure as published in the United States Department of Commerce’s Standard Industrial Classification Code Manual or the equivalent North American Industry Classification System grouping, or share a predominant payroll classification.
(2) All member employers are members in good standing in an industry-specific trade association, which shall not have been established for the primary purpose of securing a certificate of consent to self-insure from the department, and which shall have been in existence for at least five years prior to the application for consent to self-insure.
(c) Have furnished other information, as required by the director, demonstrating the employer members’ common trade or business or related activities in a given industry.
3737.3.
 (a) New private self-insured groups shall post and maintain with the director a security deposit in a form acceptable to the director and in an amount equal to the combined prior three years of incurred losses of the founding members of the group, subject to the statutory minimum established in subdivision (b) of Section 3701.
(b) During the annual reporting process of the private self-insured group, the director shall evaluate the funding status and security of the group. If the director determines that the security deposit is no longer proportional to the potential exposure of the group as a result of an increase in membership or loss experience, or as a result of a failure of the group to maintain total assets in excess of its total liabilities, including the actuarially estimated ultimate future claims liabilities, the director shall immediately adjust the security deposit in the amount of the deficiency. Should the director determine that the security deposit is proportional to the size and loss experience of the group, and that the group is adequately funded, no adjustment to the security deposit shall occur.
3737.5.
 (a) A private self-insured group shall annually demonstrate to the director that the group has a positive net worth (assets of the self-insured group exceed the liabilities of the self-insured group) based upon the group’s audited financial statements prepared by an independent, licensed certified public accountant in accordance with generally accepted accounting principles. The estimated ultimate future claims liabilities shall be projected by an actuary who is a Fellow of the Casualty Actuarial
Society.
(b) A private self-insured group shall establish rates based upon projected claims and claim expenses as set forth by the director in regulations.
(c) In the event that any private self-insured group fails to, at all times, maintain assets in excess of its liabilities, the director shall require the self-insured group to take reasonable and necessary remedial action as the director may determine, including, but not limited to:
(1) The submission, by the self-insured group, of a plan, with a form and content acceptable to the director, for prompt correction of the deficiency.
(2) A reevaluation of past member employer contribution rates and a projected plan for future contribution rates for any period of time that the department may require.
(3) The suspension of any additional new members into the self-insured group, the suspension of any distribution of dividends or earnings on deposits or investments, or the collection of all assessments or any portion thereof until the self-insured group is deemed by the director to be capitalized in accordance with this provision.
(4) The reallocation of surplus self-insured group funds collected in other calendar years, but that are unnecessary for the payment of claims or expenses for the calendar year collected.
(5) The reallocation of investment earnings associated with other calendar years, but not necessary for the payment of claims or expenses in the calendar year in which the earnings are associated.
(6) An immediate assessment upon the members of the self-insured group.
(7) The required posting of additional security.
(8) An examination of the self-insured group’s operations and finances by an outside qualified professional such as an attorney, actuary, certified public accountant, or other person or organization.
(9) Any other action that the director may find appropriate in order to promptly correct the deficiency.
(d) In the event that the director determines that the financial stability of the self-insured group cannot be restored in a timely and appropriate manner, after notice and opportunity for a hearing, the director may appoint a conservator or liquidator to manage the group. Appointment of a conservator or liquidator by the director shall also be good cause to revoke the self-insured’s group’s certificate of consent to self-insure.
(e) In the event that the annual financial and actuarial reports described in Section 3737.9 evidence a surplus of group moneys in excess of the amount necessary to fund all obligations for a given fund year, the group’s board of trustees may declare excess contributions, which may be refunded to the group’s members in an amount not to exceed 50 percent of the surplus and no earlier than 36 months after the date the declaration of the board of trustees is provided in writing to the director. An additional 25 percent of the surplus for that fund year may be refunded to the group members 48 months after the date the declaration of the board of trustees is provided in writing to the director, and the remaining 25 percent of the surplus may be refunded to the group members 60 months after the date the declaration of the board of trustees is provided in writing to the director.
(f) The director shall adopt rules prescribing standards for the investment of group funds.
3737.7.
 Every private self-insured group shall have and maintain in full force a specific excess workers’ compensation insurance policy or reinsurance contract issued by an admitted casualty insurance carrier or reinsurer authorized to transact that business in the state by the Department of Insurance. The specific excess policy or reinsurance contract shall not have a minimum retention level above one million dollars ($1,000,000) per occurrence and the policy or contract may not be cancelled or renewed without prior written notice to the director and the self-insured group at least 30 days prior to the date of cancellation or nonrenewal by the carrier.
3737.9.
 (a) Private self-insured groups shall annually file with the director the following reports, on or before July 1 of each year:
(1) The group self-insurers’ annual report as prescribed by the director.
(2) Current financial statements for the group as a whole, prepared by an independent certified public accountant in accordance with generally accepted accounting principles, for the preceding fiscal year.
(3) An actuarial report, certified by an independent qualified actuary who is a member of the Casualty Actuarial Society. The actuarial report shall include a projection of the self-insured group’s estimated ultimate future claims liabilities.
(4) A payroll report, filed by classification codes of the Workers’ Compensation Insurance Rating Bureau for each member of the self-insured group and in aggregate, for the preceding 12-month period and including the current total number of employers participating in the group as well as the current total number of employees for each employer. The payroll report shall be accompanied by the final payroll audit of the group, as submitted to the group’s excess insurance carrier.
(b) Every three years, on or before July 1, each private self-insured group shall file an audit of the outstanding claims and reserves performed by a qualified independent claims auditor.
(c) As necessary, the director may conduct a special audit to evaluate a private self-insured group’s financial health. In circumstances where the director does not have the staff expertise or other necessary resources to conduct this special audit, the director may engage the services of a legal, financial, or other qualified person or organization to conduct or assist in the audit. In the event that outside professional services are utilized, any costs incurred shall be borne and paid by the private self-insured group under examination.
(d) The group administrator of a private self-insured group shall immediately report to the director, in writing, any information that materially alters any of the facts presented to the director in the reports required by this section, that materially alters the actuarial confidence of the group, or that indicates that the self-insured group is no longer in compliance with the statutory and regulatory requirements of the self-insurance program.
(e) The group administrator of any private self-insured group shall provide to the director a copy of any amendment or update to the self-insured group’s bylaws or underwriting guidelines that pertains to the operations of the self-insured group.
(f) Private self-insured groups shall also be required to file any additional reports that may be deemed necessary by the director.
3737.11.
 All admittances of new member employers to private self-insured groups shall be in accordance with the following provisions:
(a) A private self-insured group may admit a new member
employer upon the submission to the department of a completed application, as prescribed by the director, for an interim certificate of consent to self-insure at least 10 business days prior to the effective date of coverage. The employer applicant to the private self-insured group shall be deemed self-insured and approved by the director on the effective date of coverage requested under the interim certificate of consent to self-insure unless the application is denied in writing by the director within 10 business days of receipt of the application. The member shall be self-insured from the effective date of coverage requested through the date of denial by the director. Coverage under the self-insured group shall continue as set forth in subdivision (b).
(b) The department shall review and act upon an application for a certificate of consent to self-insure from a new member to a private self-insured group within 179 days from the effective date of coverage and shall, within that period, issue a written approval or denial of the new member’s application. If the department denies the new member’s application for a certificate of consent to self-insure, that employer shall leave the group and provide proof of alternate coverage to the director and to the group no later than 60 days after receiving notice of denial of the application. Until the effective date of the alternate coverage, the self-insured group shall remain liable for all compensation liabilities of the employer. In no event shall the private self-insured group be responsible for the employer’s compensation liabilities for injuries that occur more than 60 days after the employer received notice of the denial of the application for a certificate of consent to self-insure. The employer shall remain liable for the payment of contributions and assessments into the private self-insured group for the employer’s period of coverage as a member of the group.
(c) The director shall notify the Labor Commissioner of any employer that was granted membership in a private self-insured group, was subsequently denied a certificate of consent to self-insure by the director, and, after 45 days from the denial, has yet to provide to the director proof of coverage for workers’ compensation liabilities in the form of a binder, certificate of insurance, or policy to the director.
(d) At the discretion of the director, the department may request the financial statements of any employer applicant to a self-insured group if that employer’s contributions to the group during the first year of membership would comprise 25 percent or more of the group’s total contributions for that same year.
(e) Any employer that joins a private self-insured group shall maintain its membership in the group for a minimum of one year unless its membership is terminated under the provisions of Section 3737.11 or 3737.12.
3737.12.
 (a) (1) No member of a private, self-insured group may be involuntarily canceled or terminated from membership in a group self-insurer unless at least 15 calendar days’ advance written notice has been provided to the group member and to the director. The notice of involuntary cancellation or termination from the self-insured group shall take effect 30 calendar days after the date of the written notice to the director and the employer, unless a later date is contained in the notice from the self-insured group.
(2) In the case of involuntary cancellation or termination of membership of a member, the self-insured group shall remain liable for all compensation liabilities of the group member resulting from any claim with a date of injury during the period of membership in the group self-insurer, up to the effective date of the involuntary termination or cancellation. The group member shall remain liable for the payment of any contributions or assessments to the self-insured group relating to the period of the employer’s membership.
(3) Notwithstanding paragraph (2), the following provisions apply in the case of the involuntary cancellation or termination of membership of a member of a self-insured group:
(A) The self-insured group’s liability for a member’s claims shall stop on the date of the member’s coverage under a standard workers’ compensation policy issued by an admitted carrier.
(B) A current or former group member’s claims may be transferred to a carrier as set forth in subdivision (c) of Section 3702.8 under a special excess workers’ compensation policy.
(C) A current or former group member’s claims may be transferred to another private self-insured group if the bylaws of the two groups permit the transfer and the transfer is approved by the director.
(D) A current or former group member’s claims may be transferred to the member if the bylaws of the group self-insurer permit the transfer ,the member has possession of an individual certificate of consent to self-insure issued by the director and the transfer has been approved by the director.
(4) Notice to the director of cancellation or termination of a group member from a private self-insured group as set forth in paragraph (1) shall be good cause for summary revocation of the affiliate certificate issued to the group member on the applicable date under paragraph (3) or the cancellation or termination date under paragraph (1).
(5) Any group member leaving a self-insured group shall provide proof of workers’ compensation coverage to the director and to the self-insured group within 45 days after the notice of cancellation or termination, whether the notice is from the self-insured group or the group member. The director shall notify the Labor Commissioner of any employer that voluntarily or involuntarily leaves a private self-insured group and that has failed to provide proof of coverage for workers’ compensation liabilities in the form of a binder, certificate of insurance, or policy to the director within 45 days after the notice of cancellation or termination.
(b) (1) Any member of a self-insured group may withdraw from the group and obtain alternate coverage after providing at least 30 days’ advance written notice of its intent to voluntarily withdraw its participation in the group to the self-insured group’s administrator and the director.
(2) The self-insured group shall remain liable for all compensation liabilities of any group member resulting from any claim with a date of injury during the period of membership in the group self-insurer, including the 30-day notice period required for voluntary withdrawal of membership. The group member shall remain liable for the payment of any contributions and assessments to the self-insured group for the period of the employer’s membership in the group self-insurer.
3737.14.
 (a) Each self-insured group’s application for a certificate of consent to self-insure from the director shall be accompanied by a filing on the part of the group administrator setting forth all of the following information:
(1) The names and addresses of each of the officers, directors, and general managers of the group administrator.
(2) Evidence of experience in the administration of group insurance or self-insured groups.
(3) Two professional references associated with recent group administration experience or other relevant experience.
(4) If incorporated in California, a certificate of incorporation, or, if not incorporated, or incorporated in a state other than California, proof of an actual place of business where contact may be made and legal service, if necessary, may be accomplished.
(5) Evidence of a fidelity bond and a professional liability insurance policy in amounts and forms approved by the director.
(b) The director shall have the authority to undertake reasonable and necessary action to ensure that the group administrator’s credentials and operations are within acceptable industry standards.
3737.15.
 (a) No claims administrator of a private group self-insurer, or employee, officer, or director of such a claims administrator, shall be an employee, officer or director of, or have either a direct or indirect management or financial interest in, the group administrator of the same private group self-insurer.
(b) No group administrator of a private self-insured group, or employee, officer, or director of the group administrator, shall be an employee, officer, or director of, or have either a direct or indirect management or financial interest in, the claims administrator serving that private self-insured group.
(c) No group administrator or claims administrator of a private self-insured group shall also serve as the independent certified public accountant for the same private self-insured group.
(d) No member, employee, officer, or director of the board of trustees of a private self-insured group shall be an employee, officer, or director of, or have a direct or indirect management or financial interest in, the group’s claims administrator, group administrator, or independent certified public accountant.
3737.16.
 The director shall adopt reasonable rules and regulations as necessary to effectuate the provisions of this article. The regulations shall include, but not be limited to, the establishment of appropriate application fees and administrative assessments to fund the oversight of the group self-insurance program.

SEC. 3.

 Section 3741.1 is added to the Labor Code, to read:

3741.1.
 As used in this article, “Self-Insurers’ Security Fund” includes both the Self-Insurers’ Security Fund for private self-insured employers and the Self-Insured Groups’ Security Fund for groups of private self-insured employers.

SEC. 4.

 Section 3748 is added to the Labor Code, to read:

3748.
 (a) For the exclusive purpose of ensuring the full payment of private self-insured group members’ obligations under this division, there shall be established, in like manner as the Self-Insurers’ Security Fund established pursuant to Section 3742, a Self-Insured Groups’ Security Fund. The Self-Insurers’ Security Fund and the Self-Insured Groups’ Security Fund shall at all times be maintained as two distinct funds, and the moneys and other assets in each shall not be commingled or used to pay claims from the other.
Any risk that transfers from the Self-Insurers’ Security Fund to the Self-Insured Groups’ Security Fund shall become the exclusive obligation of the Self-Insured Groups’ Security Fund, and the Self-Insurers’ Security Fund shall retain no liability for that risk. The Self-Insured Groups’ Security Fund shall begin providing coverage to its members on or before July 1, 2007, upon approval from the director of one of the following:
(1) A financial plan prepared by an independent actuary who is a Fellow of the Casualty Actuarial Society that demonstrates an assessment base sufficiently large to insure the payment of benefits to employees of a defaulting group.
(2) An alternative security plan whereby all eligible private group self-insureds shall collectively secure the aggregate incurred liabilities of the eligible group through a combination of cash and securities, surety bonds, irrevocable letters of credit, insurance, or other financial instruments or guarantees sufficient to meet the security requirements set by the director.
(b) The Self-Insured Groups’ Security Fund shall submit a plan for the director’s approval no later than April 1, 2007. Until the director approves either a financial plan or an alternative security plan as described in paragraphs (1) and (2), all self-insured groups shall remain members of the Self-Insurers’ Security Fund.
(c) Whenever the director, pursuant to Section 3701.5, shall so order, the Self-Insured Groups’ Security Fund shall assume the liabilities of a private group self-insurer and make payments from the Self-Insured Groups’ Security Fund. The Self-Insured Groups’ Security Fund shall secure reimbursement therefor from any and all member employers of the private self-insured group.
(d) Assessments into the Self-Insured Groups’ Security Fund shall be made by each private self-insured group. These assessments shall be calculated in accordance with a formula determined by the board of trustees of the Self-Insured Groups’ Security Fund as a percentage of the contributions received by the group from its members for the prior year, but not to exceed 2 percent of the aggregate contributions. Funds obtained by these assessments may be used only for the purposes of this section.
(e) Self-Insured Groups’ Security Fund assessments provided for in subdivision (d) may be assessed annually upon each private self-insured group, as determined to be necessary by the board of trustees of the Self-Insured Groups’ Security Fund.