By Crabb H.B. No. 2670 A BILL TO BE ENTITLED 1-1 AN ACT 1-2 relating to the provision of certain workers' compensation coverage 1-3 to certain local government employees. 1-4 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS: 1-5 SECTION 1. Subtitle C, Title 5, Local Government Code, is 1-6 amended by adding Chapter 175 to read as follows: 1-7 CHAPTER 175. TEXAS POLITICAL 1-8 SUBDIVISIONS WORKERS' COMPENSATION 1-9 POOLING STANDARDS ACT 1-10 Sec. 175.001. SHORT TITLE. This Chapter may be cited as the 1-11 Texas Political Subdivisions Workers' Compensation Pooling 1-12 Standards Act. 1-13 Sec. 175.002. PURPOSE. The purpose of this Chapter is to: 1-14 (1) provide standards of operation for a joint 1-15 insurance fund, hereinafter referred to as "pool," established by 1-16 political subdivisions under Texas Labor Code Annotated, Section 1-17 504.016. 1-18 (2) foster and promote sound business practices for 1-19 such pools; 1-20 (3) recognize and protect the political subdivisions' 1-21 investment in such pools and preserve its economic security; and 1-22 (4) promote the efficiency and effectiveness of such 1-23 pools to the greatest extent possible. 2-1 Sec. 175.003. SUPERVISION AND ADMINISTRATION OF POOLS. (a) 2-2 A pool's board of trustees that has created a risk pool to provide 2-3 workers' compensation coverage may provide coverage for the pool's 2-4 staff, including persons with whom the pool has contracted to 2-5 perform staff functions. 2-6 (b) A group of political subdivisions that create a risk 2-7 pool shall provide for the selection of a board of trustees to 2-8 supervise the operation of the pool. A member or employee of the 2-9 board is not liable with respect to any claims for which coverage 2-10 is provided by the pool or brought against any member of the pool. 2-11 (c) No officer or employee of an entity that has a service 2-12 contract with a pool shall be a trustee of that pool. 2-13 (d) The process of selecting trustees shall be set forth in 2-14 the pool's governing documents. 2-15 (e) A pool may be administered by a staff employed by the 2-16 pool or by a third-party contractor. 2-17 (f) Before entering into a contract with a person to be a 2-18 third party contractor of the pool, the trustees shall require that 2-19 person to submit information necessary for the trustees to evaluate 2-20 the background, experience, and financial qualifications and 2-21 solvency of that person. The information submitted by a 2-22 prospective contractor, other than an insurance company, must 2-23 disclose: 2-24 (1) any ownership interest that the prospective 2-25 contractor has in an insurance company, or other provider of 3-1 services or coverages of the pool or the contractor; and 3-2 (2) any commission or other benefit that the 3-3 prospective contractor will receive for purchasing services or 3-4 coverage for the pool. 3-5 Sec. 175.004. GOVERNING DOCUMENTS. (a) A pool's governing 3-6 documents, and any revisions thereto, shall be filed with the 3-7 Secretary of State and shall be made available to all pool members. 3-8 The governing documents must be filed within 90 days of adoption by 3-9 the board of trustees. Amendments must be filed within 90 days 3-10 from the date of adoption by the board of trustees. 3-11 (b) A pool's governing documents shall include: 3-12 (1) membership eligibility criteria, including 3-13 withdrawal provisions, expulsion provisions, and member 3-14 obligations; 3-15 (2) provision for an annual budget; 3-16 (3) procedures through which the trustees are 3-17 selected; 3-18 (4) procedures for handling catastrophic losses; 3-19 (5) powers and duties of the board of trustees, 3-20 including claims settlements, claims reserves, maintenance of 3-21 minutes of meetings, and selection of service contractors; 3-22 (6) the pool's investment and cash management 3-23 policies; 3-24 (7) procedures for establishing contributions and 3-25 maintaining reserves; 4-1 (8) insolvency procedures; and 4-2 (9) dissolution procedures. 4-3 (c) If the Secretary of State determines that a pool has 4-4 failed to file the governing documents or amendments thereto, the 4-5 secretary shall immediately mail a notice to the pool and the 4-6 appropriate attorney for the state. If the pool files the 4-7 documents within ten days after the date the notice is mailed, the 4-8 secretary shall notify the appropriate attorney for the state. If 4-9 the pool fails to comply with the notification, the pool is civilly 4-10 liable to the state for the sum of $5,000.00. 4-11 Sec. 175.005. TRUSTEE TRAINING. (a) Trustees for a risk 4-12 pool must have at least 8 hours of combined professional 4-13 instruction in one or more of the following areas: 4-14 (1) laws governing the establishment and operation of 4-15 risk pools created by political subdivisions; 4-16 (2) principles of self-insurance and risk pooling, 4-17 including actuarial and underwriting principles and investment 4-18 principles; 4-19 (3) general fiduciary duties of trustees; 4-20 (4) principles of reading and understanding financial 4-21 statements; or 4-22 (5) other relevant topics. 4-23 (b) Not later than the 180th day after the date of selection 4-24 as trustee, or after the effective date of this chapter, whichever 4-25 is the later date, a trustee must complete the training required by 5-1 Subsection (a). 5-2 (c) Each year thereafter, each trustee must receive at least 5-3 eight hours of continuing training in areas related to pool 5-4 operation. 5-5 Sec. 175.006. FINANCIAL AUDIT AND ACTUARIAL EVALUATION. (a) 5-6 The trustees of the pool shall have the fiscal account and records 5-7 of the risk pool audited annually by a nationally recognized 5-8 independent auditor. 5-9 (b) The person who performs the audit must be a certified 5-10 public accountant. 5-11 (c) The independent audit shall: 5-12 (1) cover a pool's fiscal year; 5-13 (2) be in accordance with generally accepted 5-14 accounting practices (GAAP), and conform to accounting standards as 5-15 promulgated by the American Institute of Certified Public 5-16 Accountants including the pronouncements by the Financial 5-17 Accounting Standards Board (FASB) and the Governmental Accounting 5-18 Standards Board (GASB) or their successors; 5-19 (3) include a description of the excess insurance 5-20 and/or reinsurance structure including limits, sublimits, aggregate 5-21 limits, retentions and other special provisions; 5-22 (4) include a description of the excess insurers 5-23 and/or reinsurers, and all financial and solvency ratings of the 5-24 insurers and reinsurers. 5-25 (d) Annual audits shall be filed with the Secretary of State 6-1 and shall be distributed to all pool members. 6-2 (e) The trustees of the pool shall have an actuarial 6-3 evaluation performed annually of the claims reserves and 6-4 liabilities of the risk pool. 6-5 (f) The person who performs the actuarial evaluation must be 6-6 a Fellow of the Casualty Actuarial Society (F.C.A.S.). 6-7 (g) The actuarial review shall describe underwriting and 6-8 rating procedures, and shall include an examination of and 6-9 recommendations concerning the amount of reserves required to pay 6-10 all known and incurred but not reported claims and associated 6-11 expenses. 6-12 (h) The actuarial review shall be filed with the Secretary 6-13 of State and be available to all pool members. 6-14 (i) If the Secretary of State determines that a pool has 6-15 failed to file the audit and actuarial review required, the 6-16 secretary shall immediately mail a notice to the pool and the 6-17 appropriate attorney for the state. If the the pool files the 6-18 documents within ten days after the date the notice is mailed, the 6-19 secretary shall notify the appropriate attorney for the state. If 6-20 the pool fails to comply with the notification, the pool is civilly 6-21 liable to the state for the sum of $5,000.00. 6-22 Sec. 175.007. INVESTMENTS. (a) The trustees of a risk pool 6-23 shall invest the pool's money in accordance with the Public Funds 6-24 Investment Act of 1987 to the extent that law can be made 6-25 applicable. 7-1 (b) In addition to investments authorized under the Public 7-2 Funds Investment Act of 1987, the trustees of a pool may invest the 7-3 pool's money in any investment authorized by the Texas Trust Code. 7-4 (c) The trustees of a risk pool shall adopt a written 7-5 investment and cash management policy and shall review it annually. 7-6 Sec. 175.008. CLAIMS TRACKING AND REVIEWS. (a) A pool must 7-7 maintain a management information system with the capability of 7-8 tracking all claims and providing status reports to pool members. 7-9 (b) At least once every three years, a pool shall conduct a 7-10 review of claims processing. 7-11 (c) The review must be performed by qualified individuals 7-12 who are independent of the pool and any claims contractors. 7-13 Sec. 175.009. CONTRACTORS/THIRD-PARTY ADMINISTRATORS. (a) 7-14 Before entering into a third-party administrator contract with any 7-15 person or entity, a pool shall require that person or entity to 7-16 submit information necessary for the trustees to evaluate the 7-17 background, experience, qualifications, and solvency of that person 7-18 or entity. 7-19 (b) The information submitted by a prospective third-party 7-20 administrator must disclose: 7-21 (1) any ownership interest that the prospective 7-22 third-party administrator has in any insurance company or other 7-23 provider of services or coverages to the pool or to the prospective 7-24 third-party administrator; and 7-25 (2) any commission or other benefit that the 8-1 prospective third-party administrator will receive for purchasing 8-2 services or coverages for the pool. 8-3 (c) A contract between a pool and a third-party 8-4 administrator must include: 8-5 (1) a complete description of services to be provided; 8-6 (2) payment for services; 8-7 (3) the procedures for cancelling the contract; 8-8 (4) the method for indemnifying the pool in cases 8-9 involving third-party administrator's negligence; 8-10 (5) the authority of the pool to review and evaluate 8-11 the services provided by the third-party administrator; and 8-12 (6) a requirement that the third-party administrator 8-13 report periodically to the pool. 8-14 Sec. 175.010. INSOLVENCY. (a) For the purposes of this 8-15 chapter, "insolvency" shall mean the inability of a risk pool to 8-16 meet its obligations to pay current claims costs as they become due 8-17 in the usual course of business. 8-18 (b) The provisions of this Chapter shall have no impact on 8-19 the responsibility of an individual political subdivision for its 8-20 claims, losses, associated program expenses, and any other 8-21 obligations to the pool or its members. 8-22 (c) The trustees of the pool shall determine whether or not 8-23 the pool is insolvent in accordance with the definition of 8-24 insolvency found in Subsection (a). If it is determined by the 8-25 trustees that a risk pool is insolvent, the trustees shall declare 9-1 the pool insolvent and notify each member or participating 9-2 political subdivision of their determination. Such notification 9-3 shall inform each pool member of its responsibility to pay 9-4 outstanding current and future claims against the member. 9-5 Thereafter, each pool member shall fulfill that responsibility. 9-6 (d) If a pool is declared insolvent by the trustees, the 9-7 pool shall terminate its affairs in accordance with the insolvency 9-8 provision of its governing documents. 9-9 (e) The governing documents of a risk pool shall include a 9-10 provision for dealing with insolvency of the pool. The insolvency 9-11 provision shall provide general direction for cessation of 9-12 underwriting operations; termination of the affairs of the pool; 9-13 and the disposition of the pool's assets, debts, obligations, 9-14 losses, and other liabilities. 9-15 Sec. 175.011. EXCESS LOSS COVERAGE AND REINSURANCE. A risk 9-16 pool may purchase excess loss coverage or reinsurance, if available 9-17 at a reasonable cost to insure a pool against financial losses that 9-18 the pool determines might place the solvency of the pool in 9-19 financial jeopardy. 9-20 Sec. 175.012. APPLICATION OF CERTAIN LAWS. A risk pool 9-21 subject to this chapter is not insurance or an insurer under the 9-22 Insurance Code and other laws of this state, and the State Board of 9-23 Insurance does not have jurisdiction over a pool created under this 9-24 chapter. A pool or its agents may not represent to persons who 9-25 apply for coverage or who are covered by the pool that the coverage 10-1 is insurance, unless the coverage is by contract purchased from an 10-2 insurance company authorized to do business in Texas. 10-3 Sec. 175.013. SUBROGATION. The payor of workers' 10-4 compensation benefits, whether a political subdivision, group of 10-5 political subdivisions, or pool, shall be subrogated to the 10-6 employees' right of recovery for personal injuries caused by the 10-7 conduct of a third party as provided under Section 111.059 of the 10-8 Human Resources Code. 10-9 Sec. 175.014. MISCELLANEOUS PROVISIONS. Notwithstanding any 10-10 other provisions of law, files and records relating to individual 10-11 claims and reserves for such claims shall be confidential. 10-12 SECTION 2. The importance of this legislation and the 10-13 crowded condition of the calendars in both houses create an 10-14 emergency and an imperative public necessity that the 10-15 constitutional rule requiring bills to be read on three several 10-16 days in each house be suspended, and this rule is hereby suspended. 10-17 COMMITTEE AMENDMENT NO. 1 10-18 Amend H.B. 2670 as follows: 10-19 (1) On Page 9, line 20, delete the word "not" 10-20 (2) On Page 9, beginning on line 21 and continuing on line 10-21 22, delete the phrase "State Board of Insurance" and replace it 10-22 with "Texas Department of Insurance" 10-23 (3) On Page 9, line 22, delete the word "not" 10-24 (4) On Page 9, line 23, delete the phrase "may not" and 10-25 replace it with the word "shall" 11-1 (5) On Page 9, line 25, delete the "," and replace it with a 11-2 "." 11-3 (6) On Page 9, beginning on line 25 and continuing through 11-4 line 27, delete the phrase "unless the coverage is by contract 11-5 purchased from an insurance company authorized to do business in 11-6 Texas." 11-7 Brimer