BILL ANALYSIS H.B. 2670 By: Crabb 4-25-95 Committee Report (Amended) BACKGROUND Public entities are required by law (Section 504.011 of the Labor Code) to provide workers' compensation insurance coverage for their employees. The public entity is given the option of providing the coverage by either self-insuring, providing coverage under a workers' compensation insurance policy, or entering into an inter-local agreement with other political subdivisions for the provision of self-insurance. Public insurance pools have been created, through the use of inter-local agreements, to provide workers' compensation coverage for public entities. Currently, the state does not regulate either political subdivisions who self-insure or public pools created to provide workers' compensation insurance. Insurance carriers are regulated by the Texas Department of Insurance (TDI) to ensure that they are solvent and are operating in accordance with statutory mandates. During 1994, the House Business and Industry Committee was charged with studying insurance pools that provide workers' compensation coverage for public entities and determining whether regulation is needed to protect members and claimants or otherwise protect the integrity of pools. The Committee made recommendations in its interim report to the 74th Legislature, which drew heavily from model legislation developed by the National Association of Insurance Commissioners and standards for public pools developed by the Public Risk Management Association. This legislation contains those recommendations. PURPOSE The purpose of this bill is to provide limited regulation of insurance pools for the protection of members and claimants. The major modifications proposed by this bill: - create the Texas Political Subdivisions Workers' Compensation Pooling Standards Act; - require public pools to file governing documents and financial statements with the Secretary of State; - require ongoing board of trustee training; - require annual financial audits and actuarial evaluations; and - define information which must be included in a contract between a pool and a third-party administrator. RULEMAKING AUTHORITY It is the committee's opinion that this bill does not expressly grant any additional rulemaking authority to a state officer, department, agency or institution. SECTION BY SECTION ANALYSIS SECTION 1. Amends Subtitle C, Title 5, Local Government Code by adding Chapter 175. Sec. 175.001. Names the new chapter the Texas Political Subdivisions Workers' Compensation Pooling Standards Act. Sec. 175.002. Provides the purpose of the chapter. Sec. 175.003. (a) Allows a pool board of trustees to provide workers' compensation coverage for pool staff, including persons under contract. (b) Political subdivisions which create a pool must select a board of trustees. Exempts members and employees of the board from liability for claims. (c) Prohibits an officer or employee of a contractor from being a trustee on a board. (d) Requires the selection process for trustees to be presented in the pool's governing documents. (e) Allows a pool to be administered by pool staff or by a third-party contractor. (f) Requires trustees to obtain information from a third-party contractor before hiring. The information must include: any ownership in an insurance carrier or other provider of services to the pool and any commission or other benefit the third-party administrator will receive. Sec. 175.004. (a) Requires a pool's governing documents to be filed with the Secretary of State and made available to pool members. The documents and any amendments must be filed within 90 days of adoption by board of trustees. (b) Defines the required governing documents. (c) Requires the Secretary of State to notify the pool and appropriate attorney for the state if a pool fails to file governing documents or amendments. If the documents are not filed within 10 days, the pool is liable to the state for $5,000.00. Sec. 175.005. (a) Requires trustees to have at least 8 hours of professional instruction in specified areas. (b) Requires the training referred to in subsection (a) to be completed within 180 days of selection or of the effective date of the chapter. (c) Requires a trustee to receive at least 8 hours of training each year. Sec. 175.006. (a) Requires an annual audit of the pool's fiscal account and records which is performed by a nationally recognized independent auditor. (b) The auditor must be a certified public accountant. (c) Provides a description of how the audit shall be conducted and elements which must be included. (d) Requires annual audits to be submitted to the Secretary of State and to all pool members. (e) Requires an annual actuarial evaluation of claims reserves and liabilities of the pool. (f) Requires that the actuarial evaluation be performed by a Fellow of the Casualty Actuarial Society. (g) Requires the actuarial review to include: a description of underwriting and rating procedures and an examination and recommendations for reserves. (h) Requires the actuarial review to be filed with the Secretary of State and all pool members. (i) Requires the Secretary of State to notify the pool and appropriate attorney for the state if a pool fails to file the audit or actuarial review. If the documents are not filed within 10 days, the pool is liable to the state for $5,000.00. Sec. 175.007. (a) Requires trustees to invest pool funds in accordance with the Public Funds Investment Act of 1987 as applicable. (b) Allows the trustees to invest pool funds as authorized by the Texas Trust Code. (c) Requires the trustees to adopt an investment and cash management policy and to review it annually. Sec. 175.008. (a) Requires a pool to maintain a management information system capable of tracking claims and providing status reports to pool members. (b) Requires a pool to review claims processing at least every three years. (c) Requires the review to be conducted by qualified individuals independent of the pool and of any claims contractors. Sec. 175.009. (a) Requires trustees to obtain information from a third-party administrator before entering into a contract. (b) Information obtained from a third-party administrator must include: (1) any ownership in an insurance company or other provider of services to the pool and (2) any commission or other benefit the third-party administrator will receive. (c) Requires a contract between a third-party administrator and a pool to include specific pieces of information. Sec. 175.010. (a) Defines "insolvency" for the purposes of this chapter. (b) Specifies that this chapter does not impact on a political subdivision's responsibility for claims, losses, associated expenses. (c) Requires pool trustees to determine if a pool is insolvent. Requires the trustees to notify all pool members if a pool is insolvent. The notification must inform members of their responsibility for outstanding claims. (d) Requires an insolvent pool to terminate its affairs in accordance with the governing documents. (e) Requires governing documents to include provisions dealing with the insolvency of a pool. Sec. 175.011. Allows a pool to purchase excess loss coverage or reinsurance. Sec. 175.012. Clarifies that a pool is not insurance or an insurer under the Insurance Code and that the State Board of Insurance does not have jurisdiction over a pool. Sec. 175.013. Authorizes a workers' compensation benefits payor (political subdivision, group of political subdivisions, or pool) to be subrogated, as provided under Sec. 111.059, Human Resources Code, for a personal injury caused by a third party. Sec. 175.014. Specifies that individual claims and reserves on claims are confidential. SECTION 2. Emergency clause. EXPLANATION OF AMENDMENTS Amendment #1 to H.B. 2670 makes technical corrections by deleting language under Section 175.012 to conform and make risk pools insurance or insurers under the Insurance Code. These new changes give jurisdiction over a pool to the Department of Insurance. A pool or its agents shall be required to inform persons who apply for coverage or who are presently covered by the pool, that the pool's coverage is insurance. SUMMARY OF COMMITTEE ACTION H.B. 2670 was considered by the Committee on Business and Industry in a public hearing on March 28, 1995. No public testimony was considered on the bill. H.B. 2670 was left pending before the committee without objection. H.B. 2670 was reconsidered by the committee on pending business on April 4, 1995. Testifying in support of H.B. 2670 was Carey Boethel, representing Texas Association of Counties Workers' Compensation Self-Insurance Fund, Dubravka Romano, representing Texas Association of School Boards, R. Marvin Townsend, representing the Texas Municipal League Intergovernmental Risk Pool, Leonard Spearman, Jr, representing Harris County Judge Robert Eckels and Harris County Commissioners Court. No one testified on or against H.B. 2670. The committee considered a completed committee substitute for the bill. The committee substitute was withdrawn without objection. H.B. 2670 was referred to a subcommittee consisting of Representative Brimer. H.B. 2670 was considered by the subcommittee in a formal meeting on April 11, 1995. The subcommittee considered (1) one amendment to the bill. The one (1) amendment was adopted without objection. Without objection, H.B. 2670, as amended was left pending before the subcommittee. After being recalled from subcommittee, H.B. 2670 was considered by the committee on April 25, 1995. The committee considered one (1) amendment to the bill. The one (1) amendment was adopted without objection. H.B. 2670 was reported favorably as amended with the recommendation that it do pass and be printed, by a record vote of 7 (seven) ayes, 0 (zero) nays, 0 (zero) present-not-voting, 2 (two) absent.