By:  Armbrister                                       S.B. No. 1039
                                 A BILL TO BE ENTITLED
                                        AN ACT
    1-1  relating to the liquidation of insolvent insurers and the insurance
    1-2  guaranty associations.
    1-3        BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
    1-4        SECTION 1.  Paragraph (a) of Section 8, Article 21.28,
    1-5  Insurance Code, is amended to read as follows:
    1-6        (a)  Priority of Distribution of Assets.  The priority of
    1-7  distribution of assets from the insurer's estate shall be in
    1-8  accordance with the disbursement plan approved by the court
    1-9  pursuant to Section 7A of this Article, and in accordance with the
   1-10  order of each class as provided by this subsection.  Every claim in
   1-11  each class shall be paid in full or adequate funds retained for
   1-12  such payment before the members of the next class receive any
   1-13  payment.  No subclasses shall be established within any class.
   1-14        Class 1.
   1-15              (1)  All of the receiver's, conservator's, and
   1-16  supervisor's costs and expenses of administration, including
   1-17  repayment of funds advanced to the receiver from the abandoned
   1-18  property fund of the State Board of Insurance.
   1-19              (2)  All of an insurance guaranty association's or
   1-20  foreign insurance guaranty association's costs and expenses of
   1-21  administration allocated to a receivership estate and <A>all of the
   1-22  expenses of an insurance guaranty association or foreign insurance
   1-23  guaranty association in handling claims.  For the purposes of this
    2-1  section, attorneys fees incurred by an insurance guaranty
    2-2  association or foreign insurance guaranty association in the
    2-3  defense of insureds under policies issued by impaired insurers
    2-4  shall be considered an expense in handling claims.
    2-5              (3)  Wages owed to employees of the insurer as provided
    2-6  for in Section 6 of this Article.
    2-7              (4)  Secured creditors to the extent of the value of
    2-8  the security as provided by Section 8(c) of this Article.
    2-9        Class 2.
   2-10              (1)  All claims by policyholders, beneficiaries,
   2-11  insureds, and liability claims against insureds covered under
   2-12  insurance policies and insurance contracts issued by the insurer.
   2-13              (2)  All claims by an insurance guaranty association or
   2-14  a foreign insurance guaranty association that are payments of
   2-15  proper policyholder claims.
   2-16        Class 3.
   2-17        All other claims of general creditors not falling within any
   2-18  other priority under this section including claims for taxes and
   2-19  debts due the federal government or any state or local government
   2-20  which are not secured claims.
   2-21        Class 4.
   2-22        Claims of surplus or contribution note holders, holders of
   2-23  debentures or holders of similar obligations and proprietary claims
   2-24  of shareholders, members, or other owners according to the terms of
   2-25  the instruments.
    3-1        SECTION 2.  Paragraph (8) of Section 5, Article 21.28-C,
    3-2  Insurance Code, is amended to read as follows:
    3-3              (8)  "Covered claim" means an unpaid claim of an
    3-4  insured or third-party liability claimant that arises out of and is
    3-5  within the coverage and not in excess of the applicable limits of
    3-6  an insurance policy to which this Act applies, issued or assumed
    3-7  (whereby an assumption certificate is issued to the insured) by an
    3-8  insurer licensed to do business in this state, if that insurer
    3-9  becomes impaired and the third-party claimant or liability claimant
   3-10  or insured is a resident of this state at the time of the insured
   3-11  event, or <the property from which the claim arises is permanently
   3-12  located in this state> the claim is a first party claim for damage
   3-13  to property with a permanent location in this state.  "Covered
   3-14  claim" shall also include <75 percent of unearned premiums, but in
   3-15  no event shall a covered claim for unearned premiums exceed $1,000>
   3-16  an amount not exceeding $10,000 per policy for a covered claim for
   3-17  the return of unearned premium.  All covered claims less than or
   3-18  equal to $25.00 must be specifically requested in writing.
   3-19  Individual covered claims (including any and all derivative claims
   3-20  by more than one person which arise from the same occurrence, which
   3-21  shall be considered collectively as a single claim under this Act)
   3-22  shall be limited to $100,000, except that the association shall pay
   3-23  the full amount of any covered claim arising out of a workers'
   3-24  compensation claim made under a workers' compensation policy.
   3-25  "Covered claim" shall not include any amount sought as a return of
    4-1  premium under a retrospective rating plan or any amount due any
    4-2  reinsurer, insurer, insurance pool, or underwriting association, as
    4-3  subrogation recoveries, reinsurance recoveries, contribution,
    4-4  indemnification or otherwise.  In addition, the insured of an
    4-5  impaired insurer shall likewise not be liable, and the insurer
    4-6  shall not be entitled to sue or continue a suit against the insured
    4-7  of the impaired insurer, for any subrogation recovery, reinsurance
    4-8  recovery, contribution or indemnity asserted by any reinsurer,
    4-9  insurer, insurance pool, or underwriting association to the extent
   4-10  of the applicable liability limits previously provided to such
   4-11  insured by the insolvent insurer.  "Covered claim" shall not
   4-12  include supplementary payment obligations, including adjustment
   4-13  fees and expenses, attorney's fees and expenses, court costs,
   4-14  interest and penalties, and interest and bond premiums incurred
   4-15  prior to the determination that an insurer is an impaired insurer
   4-16  under this Act.  "Covered claim" shall not include any prejudgment
   4-17  or postjudgment interest which accrues subsequent to the
   4-18  determination that an insurer is an impaired insurer under this
   4-19  Act.  "Covered claim" shall not include any claim for recovery of
   4-20  punitive, exemplary, extracontractual, or bad-faith damages,
   4-21  whether sought as a recovery against the insured, insurer, guaranty
   4-22  association, receiver, special deputy receiver or commissioner,
   4-23  awarded in a court-judgment against an insured or insurer.
   4-24  "Covered claim" shall not include, and the association shall not
   4-25  have any liability to an insured or third-party liability claimant,
    5-1  for its failure to settle a liability claim within the limits of a
    5-2  covered claim under this Act.  With respect to a covered claim for
    5-3  unearned premiums, both persons who were residents of this state at
    5-4  the time the policy was issued and persons who are residents of
    5-5  this state at the time the company is found to be an impaired
    5-6  insurer shall be considered to have covered claims under this Act.
    5-7  If the impaired insurer has insufficient assets to pay the expenses
    5-8  of administering the receivership or conservatorship estate, the
    5-9  portion of the expenses of administration incurred in the
   5-10  processing and payment of claims against the estate shall also be a
   5-11  covered claim under this Act.
   5-12        SECTION 3.  Paragraph (a) of Section 7, Article 21.28-C,
   5-13  Insurance Code, is amended to read as follows:
   5-14        (a)  The board of directors of the association is composed of
   5-15  nine persons who serve terms as established in the plan of
   5-16  operation.  Five members shall be selected by member insurers,
   5-17  subject to the approval of the commissioner.  To be eligible to
   5-18  serve as an industry board member, a person must be a full-time
   5-19  employee of a member insurer.  The remaining members shall be
   5-20  representative of the general public appointed by the commissioner.
   5-21  Vacancies on the board shall be filled for the remaining period of
   5-22  the term by a majority vote of the remaining board members, subject
   5-23  to the approval of the commissioner.
   5-24        SECTION 4.  Paragraph (b) of Section 8, Article 21.28-C,
   5-25  Insurance Code, is amended to read as follows:
    6-1        The association shall undertake to discharge the policy
    6-2  obligations of the impaired insurer, including the duty to defend
    6-3  insureds under a liability policy, to the extent that such policy
    6-4  obligations are covered claims under this Act.  In performing its
    6-5  statutory obligations, the association may also enforce any duty
    6-6  imposed on the insured party or beneficiary under the terms of any
    6-7  policy of insurance within the scope of this Act.  In performing
    6-8  its statutory obligations under this Act, the association shall not
    6-9  be considered to be in the business of insurance, shall not be
   6-10  considered to have assumed or succeeded to any liabilities of the
   6-11  impaired insurer, and shall not be considered to otherwise stand in
   6-12  the shoes of the impaired insurer for any purpose, including but
   6-13  not limited to the issue of whether the association is amenable to
   6-14  the personal jurisdiction of the Courts of any other State.  <The
   6-15  association is considered the insurer to the extent of its
   6-16  obligation on the covered claims and to that extent has all rights,
   6-17  duties, and obligations of the impaired insurer as if the insurer
   6-18  had not become impaired.>
   6-19        SECTION 5.  Paragraph (d) of Section 8, Article 21.28-C,
   6-20  Insurance Code, is amended to read as follows:
   6-21        (d)  The association shall investigate and adjust,
   6-22  compromise, settle, and pay covered claims to the extent of the
   6-23  association's obligation and deny all other claims.  The
   6-24  association shall have the right to appoint and to direct legal
   6-25  counsel retained under liability insurance policies for the defense
    7-1  of covered claims.  The association may review settlements,
    7-2  releases, and judgments to which the impaired insurer or its
    7-3  insureds were parties to determine the extent to which those
    7-4  settlements, releases, and judgments may be properly contested.
    7-5  Any judgment taken by default or consent against an insured or the
    7-6  impaired insurer, and any settlement, release or judgment entered
    7-7  into by the insured or the impaired insurer, shall not be
    7-8  considered to be binding upon the association, and shall not be
    7-9  considered as evidence of liability or of damages in connection
   7-10  with any claim brought against the association or any other party
   7-11  under this Act.
   7-12        Notwithstanding any other provision of this Act, a covered
   7-13  claim shall not include any claim filed with the guaranty
   7-14  association after the later of the final date for filing claims
   7-15  against the liquidator or receiver of an insolvent insurer, or
   7-16  eighteen months after the order of liquidation.
   7-17        SECTION 6.  Paragraph (a) of Section 12, Article 21.28-C,
   7-18  Insurance Code, is amended to read as follows:
   7-19        (a)  A person who has a claim against an insurer under any
   7-20  provision in an insurance policy other than a policy of an impaired
   7-21  insurer that is also a covered claim shall exhaust first the
   7-22  person's rights under the policy, including but not limited to any
   7-23  claim for indemnity or medical benefits under any workers'
   7-24  compensation, health, disability, uninsured motorist, personal
   7-25  injury protection, medical payment, liability, or other policy and
    8-1  the right to defense under any such policy.  The association shall
    8-2  have a credit or setoff against any amount of benefits which would
    8-3  otherwise be payable by the association to the claimant under this
    8-4  Act, in the amount of the claimant's recovery under any policy
    8-5  issued by an unimpaired insurer.  Subject to the provisions of
    8-6  subsections (1) and (2) below, the association's credit or setoff
    8-7  under this Section shall be deducted from damages incurred by the
    8-8  claimant, and the remaining sum shall be the maximum amount payable
    8-9  by the association, except that the association's liability shall
   8-10  not exceed $100,000 or the limits of the policy under which the
   8-11  claim is made, whichever is less.
   8-12              (1)  Notwithstanding the foregoing, if a claimant is
   8-13  seeking recovery of policy benefits that, but for the insolvency of
   8-14  the impaired insurer, would be subject to lien or subrogation by a
   8-15  workers' compensation insurer, health insurer or any other insurer,
   8-16  whether impaired or not, then the association's credit or offset
   8-17  shall be deducted from the damages incurred by the claimant or the
   8-18  limits of the policy under which the claim is made, whichever is
   8-19  less.
   8-20              (2)  In no event shall a claimant's recovery under this
   8-21  Act result in a total recovery to the claimant that is greater than
   8-22  that which would have resulted but for the insolvency of the
   8-23  impaired insurer.  Subject to Section 5(8) of this Act, a
   8-24  claimant's recovery under this Act shall not result in a recovery
   8-25  to the claimant that is less than that which would have resulted
    9-1  but for the insolvency of the impaired insurer.
    9-2        SECTION 7.  Section 14, Article 21.28-C, Insurance Code, is
    9-3  amended to read as follows:
    9-4        Not later than <March> April 30 of each year, the association
    9-5  shall submit an audited financial statement to the state auditor
    9-6  for the preceding calendar year in a form approved by the state
    9-7  auditor's office.
    9-8        SECTION 8.  Section 17, Article 21.28-C, Insurance Code, is
    9-9  amended to read as follows:
   9-10        All proceedings in which an impaired insurer is a party or is
   9-11  obligated to defend a party in any court in this state, except
   9-12  proceedings directly related to the receivership or instituted by
   9-13  the receiver, shall be stayed for six months and any additional
   9-14  time thereafter as may be determined by the court from the date of
   9-15  the designation of impairment or an ancillary proceeding is
   9-16  instituted in the state, whichever is later, to permit proper
   9-17  defense by the receiver or the association of all pending causes of
   9-18  action.  All deadlines under the Texas Rules of Civil Procedure,
   9-19  the Texas Rules of Appellate Procedure, the Federal Rules of Civil
   9-20  Procedure and the Federal Rules of Appellate Procedure shall be
   9-21  tolled during the stay.  The court in which the delinquency
   9-22  proceeding is pending shall have exclusive jurisdiction and venue
   9-23  regarding the application, enforcement and extension of the stay.
   9-24  As to any covered claims arising from a judgment under any
   9-25  decision, verdict, or finding based on the default of the impaired
   10-1  insurer or its failure to defend an insured, the association either
   10-2  on its own behalf or on behalf of the insured shall be entitled,
   10-3  upon application, to have the judgment, order, decision, verdict,
   10-4  or finding set aside by the same court or administrator that made
   10-5  the judgment, order, decision, verdict, or finding and shall be
   10-6  permitted to defend the claim on the merits.
   10-7        SECTION 9.  Section 18 of Article 21.28-C, Insurance Code, is
   10-8  amended to read as follows:
   10-9        (b)  If the board of directors determines that additional
  10-10  funds are needed in any of the three accounts, it shall make
  10-11  assessments as necessary to produce the necessary funds.  The
  10-12  association, in determining the proportionate amount to be paid by
  10-13  individual insurers under an assessment, shall take into
  10-14  consideration the lines of business written by the impaired insurer
  10-15  and shall assess individual insurers in proportion to the ratio
  10-16  that the total net direct written premium collected in this state
  10-17  by the insurer for those lines of business bears to the total net
  10-18  direct written premium collected by all insurers, other than
  10-19  impaired insurers, in this state for those lines of business.  The
  10-20  association shall determine the total net direct written premium of
  10-21  an individual insurer and for all insurers in the state from the
  10-22  insurers' annual statements for the year preceding assessment.
  10-23  Assessments under this subsection during a calendar year may be
  10-24  made up to, but not in excess of, two percent of each insurer's net
  10-25  direct written premium for the preceding calendar year in the lines
   11-1  of business for which the assessments are being made.  However, in
   11-2  the event of a natural disaster or other catastrophic event, the
   11-3  association may seek authority from the Governor, Lieutenant
   11-4  Governor and Speaker of the House of Representatives to assess
   11-5  member insurers writing other than auto or workers' compensation
   11-6  lines of business up to an additional two percent of each insurer's
   11-7  net direct written premiums for the preceding calendar year.  If
   11-8  the maximum assessment in any calendar year does not provide an
   11-9  amount sufficient for payment of covered claims of impaired
  11-10  insurers, assessments may be made in the next and successive
  11-11  calendar years.
  11-12        (h)  Notwithstanding paragraph (b) of this section, the
  11-13  association may assess the workers' compensation line of business
  11-14  during a calendar year not more than three percent of each
  11-15  insurer's net direct written premium for the preceding calendar
  11-16  year for assessments made on or before December 31, 1997 <1995>. An
  11-17  assessment under this subsection may be made only if the
  11-18  association finds that the assessment is necessary to meet the
  11-19  obligations of the association.  This subsection expires January 1,
  11-20  1998 <1996>.
  11-21        SECTION 10.  Paragraph (c), of Section 18, Art. 21.28-C,
  11-22  Insurance Code is amended to read as follows:
  11-23        It shall be the duty of each insurer to pay the amount of an
  11-24  assessment under Section (b) of this section to the association not
  11-25  later than the 30th day after the association <commissioner> gives
   12-1  notice of the assessment.
   12-2        SECTION 11.  This Act takes effect on September 1, 1995.
   12-3        SECTION 12.  The importance of this legislation and the
   12-4  crowded condition of the calendars in both houses create an
   12-5  emergency and an imperative public necessity that the
   12-6  constitutional rule requiring bills to be read on three several
   12-7  days in each house be suspended, and this rule is hereby suspended.