GEC H.B. 3575 75(R) BILL ANALYSIS BUSINESS & INDUSTRY H.B. 3575 By: Brimer 4-17-97 Committee Report (Unamended) BACKGROUND In 1989, Senate Bill 1 changed the Texas Workers' Compensation Assigned Risk Pool to the Texas Workers' Compensation Insurance Facility (Facility). In 1991, House Bill 62 mandated that the Facility should cease writing new policies on or after January 1, 1994 and cease being the insurer of last resort, and required that its claim assets and liabilities be transferred to the Texas Workers' Compensation Insurance Fund (Fund) no later than January 1, 1999. No steps were taken to plan the 1999 transfer until 1995, when Governor George Bush stated that he favored an earlier closure of the Facility. Two meetings between the Facility and the Fund were held in 1995, but discussions stopped. Representative Kim Brimer and Senator Bill Ratliff took the Governor's charge to the Research and Oversight Council (ROC) in April 1996. Meetings with both board members and staffs of the Texas Property and Casualty Insurance Guaranty Association (Association), the Texas Department of Insurance (TDI), the Facility, the Fund, as well as ROC staff were held in 1996 and 1997 to accomplish this charge. Two options emerged: (a) the privatization of the Facility, and (b) transfer of the Facility to the Association. PURPOSE To establish the authority for the privatization of the Facility on or before August 31, 1997, and to provide for the transfer of control of all of the assets, liabilities and obligations of the Facility to the Association should efforts at privatization fail. RULEMAKING AUTHORITY This bill delegates rulemaking authority to the Commissioner of Insurance in SECTION 2.02 Section 26(n). SECTION BY SECTION ANALYSIS PART 1. PRIVATIZATION OF FACILITY SECTION 1.01. PURPOSE. States that the purposes of Part 1 are to provide a means to (1) convert the Facility into a stock insurance company and facilitate the transfer of control to a third party, and (2) ensure the Converted Facility has full authority to enforce the rights of the Facility existing immediately before conversion, except as provided in Part 1. SECTION 1.02. DEFINITIONS. Defines "closing date," "commission," "commissioner," "converted facility," "facility," "fund," "insurer," and "servicing company". SECTION 1.03. CONVERSION; CONVERSION EFFECTIVE DATE; CONTINGENT TRANSFER. (a) Converts the Facility from a nonprofit, unincorporated association to a Texas stock property and casualty insurance company effective on consummation of the transactions contained in a conversion agreement. (b) Requires the Facility to be transferred to the Association in accordance with Part 2 if a conversion agreement is not approved, or the transactions contemplated by the agreement are not consummated, on or before August 31, 1997. SECTION 1.04. CONVERSION AGREEMENT. Authorizes the Facility to enter into an agreement to issue and sell shares of the stock. Specifies that the agreement must be approved by a majority of the voting members of the Facility Governing Committee. SECTION 1.05. COMMISSIONER APPROVAL. (a) Requires Facility to submit any agreement reached for the issuance and sale of stock to the commissioner for review and approval not later than June 30, 1997. (b) Requires the commissioner to order the Facility to be converted if the Facility's agreement for the issuance and sale of stock is approved. SECTION 1.06. EFFECT OF CONVERSION. (a) Provides the Converted Facility with all the rights, privileges, powers, and authority of any other stock corporation organized to transact property and casualty insurance business in Texas; the Converted Facility is to be considered a continuation of the Facility; the Converted Facility is vested with all property of the Facility. (b) Authorizes the Converted Facility to enforce all contract and statutory rights of the Facility under any servicing company arrangements. Part 1 may not be construed as an assignment of the Facility's rights or obligations under any such agreements. (c) Specifies that each debt, claim, and cause of action of the Facility, and all property rights, privileges, franchises, and other interests of the Facility, remain the property of the Converted Facility. (d) Preserves the rights of all Facility policy holders and creditors, and the standing of all claims, under the Converted Facility. (e) Specifies that each debt, liability, and duty of the Facility becomes a debt, liability, or duty of the Converted Facility and may be enforced against the Converted Facility. (f) Specifies that any pending cause of action or similar proceeding in which the Facility was a party on the effective date of the conversion (1) is not affected by the conversion; (2) may be continued by or against the Converted Facility; and (3) continues to be governed by both Article 5.76-2, Insurance Code, as it existed prior to repeal, and the applicable bylaws, rules, and regulations of the Facility. (g) Prohibits the Converted Facility from amending its bylaws, rules, or regulations in a manner that would have an adverse effect on employees, beneficiaries, or the holders of or insured under policies issued under Article 5.76, Insurance Code, or under Article 5.76-2, Insurance Code, as that article existed prior to repeal. (h) Authorizes the Converted Facility to audit the books and records of each company that services Facility insurance policies. Limits any such audit to (1) the books and records relating to policies described in subsection (h); and (2) claims paid on behalf of or charged to the Converted Facility. SECTION 1.07. APPLICABLE LAW. Specifies that except as otherwise provided by Part 1, Article 5.76-2, Insurance Code ceases to apply to the Facility on the closing date and does not apply to the Converted Facility. Prohibits the Converted Facility or any other insurer from use of the Facility's right to assess. SECTION 1.08. COMPLIANCE; CAPITALIZATION REQUIREMENTS. (a) Requires the Converted Facility to comply with the Insurance Code, and rules adopted by the commissioner except as provided by Part 1. Provides that if the Converted Facility does not issue any insurance policies after the closing date, it: (1) is exempt from both the risk-based capital and surplus regulations adopted under Article 2.02, Insurance Code and the minimum insurance requirements under Article 21.45, Insurance Code; (2) may discount the reserves for losses and loss adjustment expenses in a manner and to the extent authorized by the commissioner in the order approving the conversion agreement; (3) may reflect accounts receivable as an admitted asset in an amount up to $15 million in a manner and to the extent authorized by the commissioner in the order approving the conversion agreement, if the accounts receivable are guaranteed by an insurance company authorized to do business in Texas; (4) may receive full credit for reinsurance contemplated in the conversion agreement to the extent ordered by the commissioner. (b) Requires the commissioner to set the capitalization requirements of the Converted Facility in the order approving the conversion agreement. SECTION 1.09. FINAL ASSESSMENT. (a) Authorizes the Facility Governing Committee to make a final assessment in the amount the Governing Committee determines is necessary to consummate the transactions contemplated by the conversion agreement. Requires any such assessment to be made at a time to allow the assessment to be paid in full on or before the closing date. (b) Authorizes the Facility Governing Committee to bind those insurance carriers licensed in this state to either reinsure a portion of the Facility's liabilities in lieu of payment of any or all of a final assessment, or defer payment on any or all of a final assessment. (c) Requires any reinsurance arrangement approved by the governing committee to compute a member insurer's participation in reinsurance in the same manner used to compute an assessment under Article 5.76-2, Insurance Code. SECTION 1.10. IMMUNITY. Continues the immunity provisions of Sections 2.05(h) and 2.12, Article 5.76-2, Insurance Code to each act or omission occurring before, on, or after the closing date, including an act or omission related to the powers and duties contained in Part 1. SECTION 1.11. DEFENSES; INDEMNIFICATION. Requires the Converted Facility to defend, indemnify, and hold harmless from liability, the Facility, or the Facility Governing Committee, executive director, staff, agents, servants, or employees of the Facility, to the extent set forth in the conversion agreement. SECTION 1.12. CONTROLLING LAW. Provides that Part 1 shall control in the event of conflict between Part 1 and any other statutory provision relating to the Facility. SECTION 1.13. CONFORMING AMENDMENT. Adds new Sections 26 and 27 to Article 21.28-C, Insurance Code as follows: Sec. 26. COVERAGE FOR WORKERS' COMPENSATION INSURANCE POLICIES ISSUED BY TEXAS WORKERS' COMPENSATION INSURANCE FACILITY. (a) Provides that Article 21.28-C, Insurance Code, applies to any insurance policies issued by the Facility under Article 5.76, Insurance Code, or under 5.76-2, Insurance Code, as it existed before repeal. (b) Provides that the Converted Facility shall be considered an impaired insurer if any of the actions described by Section 5(9)(A) or (B)of Article 21.28-C, Insurance Code occur to the Converted Facility. (c) Provides that if the Converted Facility becomes an impaired insurer, any claims shall be a covered claim as defined under Section 5(8) of Article 21.28-C, Insurance Code. (d) Provides that if a conflict exists between Section 26 and any other statute relating to the Facility or the Association, Section 26 controls. Sec. 27. IMMUNITY. Provides immunity for any member insurer of the Association, the Association, an agent or employee of the Association, a member of the board of directors of the Association, or the commissioner or the commissioner's representative for any acts or omissions relating to Facility privatization negotiations. SECTION 1.14. EFFECTIVE DATE FOR PART 1. Specifies that Part 1 takes effect immediately. PART 2. CONTINGENT TRANSFER SECTION 2.01. TRANSFER TO TEXAS PROPERTY AND CASUALTY INSURANCE GUARANTY ASSOCIATION. (a) Requires the Association to take control of the operations, assets, liabilities, and obligations of the Facility on September 1, 1997, if the conversion of the Facility contemplated in Part 1 does not occur. (b) States that Part 2 takes effect on September 1, 1997, only if the conversion of the Facility described in subsection (a) does not occur before that date. States that Part 2 has no effect if the Facility is converted before September 1, 1997. SECTION 2.02. CONFORMING AMENDMENT. Amends Article 21.28-C, Insurance Code, by adding a new Section 26 creating the Texas Workers' Compensation Insurance Facility Account and outlining the requirements for its maintenance by the Association. Sec. 26. TRANSFER OF FACILITY TO ASSOCIATION. (a) States that the purposes of Section 26 are to (1) provide the authority for the Association to take control of the Facility's assets, liabilities, and obligations and (2) provide the Association with full authority to enforce the rights of the Facility, except as expressly provided elsewhere in Section 26. (b) Defines "comptroller," "facility," "fund," "insurer," and "Texas Workers' Compensation Insurance Facility Account." (c) Requires the Association to take control of the Facility's assets, liabilities, and obligations and authorizes the Association to administer all remaining aspects of the Facility's operations. Gives the Association full authority to enforce the contract or statutory rights of the Facility under any servicing company agreements. States that Section 26 may not be construed as an assignment of the Facility's rights or obligations under any servicing company agreements. (d) Requires the Association to maintain the Account separate from the Association's current accounts. Requires that all claims, expenses, and other liabilities related to the Facility's assets, liabilities, and obligations be paid from, and all collections and receipts be deposited into, the Account. States that Account funds shall be maintained outside the state treasury. (e) Requires the Association to report to the commissioner, not later than June 1 of each year, the Account's operating results on a calendar year premium and an accident year loss basis. (f) For claims with an accident date before January 1, 1992, establishes authority and mechanism through which the Association assesses or rebates to member insurers. Excludes the Fund. (g) For claims with accident dates on or after January 1, 1992, establishes authority and mechanism through which the Association assesses or rebates to member insurers. Includes the Fund. (h) Authorizes the Association to redistribute all or part of an assessment under Subsection (f) or (g) if a member insurer is unable to pay the full assessment because it is in liquidation at the time of the assessment (I) Allows the Association to authorize deferment of assessment payments only if the Account's cash flow is adequate to meet all needs. (j) Requires an Account member insurer, who elects to defer any portion of an assessment, to include as a liability the entire unpaid portion and any accrued interest on all of its financial and annual statements. (k) Prohibits any member insurer of the Account from taking a credit against any tax levied by the State as a result of a paid assessment. (l) Requires the Association to invest Account funds only in investments authorized by law for the investment of state funds. Requires the Association to develop and submit investment policy to the comptroller for approval. (m) Requires the Association to submit to the commissioner of insurance for approval a plan of operation for the administration of the Account not later than October 1, 1997. Requires the commissioner to approve or disapprove the plan of operation not later than the 60th day after the date on which the plan is submitted to the commissioner. (n) Requires the Association to submit an amended plan of operation along with any necessary amendments to the commissioner if the original plan of operation is not approved. States that the amended plan of operation and its amendments take effect upon written approval by the commissioner. Authorizes the commissioner, after notice and hearing, to adopt rules to implement Section 26 if the Association fails to submit suitable amendments to the plan of operation. (o) Provides that in addition to all immunities and protections provided elsewhere in Article 21.28-C, Insurance Code, the Association succeeds to all rights, defenses, immunities, and liabilities of the Facility in any cause of action or other proceeding pending by or against the Facility on September 1, 1997, or filed thereafter. Continues application of the immunity provisions of Article 5.76-2, Sections 2.05(h) and 2.12, Insurance Code, to all persons or entities covered by those provisions. (p) Requires the Association to defend, indemnify, and hold harmless from liability, the Facility, the Facility's Governing Committee, the Executive Director of the Facility, member insurers, agents, servants, attorneys, consultants, or employees of the Facility in certain instances. Specifies that Section 26, Article 5.76-2, Insurance Code, as it existed prior to repeal, and the applicable Bylaws, Rules and Regulations of the Facility, continue to govern any cause of action or other proceeding described in this section. (q) Authorizes the Association to enter into negotiations for the privatization of all of the assets, liabilities, and obligations maintained in the Account to a single insurer. Requires that the Association receive written approval from the commissioner prior to consummating a transaction, if it determines that privatization is in the best interests of the State. (r) Requires that any net proceeds from the privatization of the Account be rebated in accordance with Subsection (g) of Section 26. (s) Provides that if, after privatization, the acquiring insurer becomes an impaired insurer, any remaining Facility claims are deemed covered claims within the meaning of Article 21.28-C, Insurance Code. (t) States that Section 26 shall control in the event of a conflict between Section 26 and any other statutory provisions relating to the Facility or the Association. PART 3.REPEALER; TRANSITION; EMERGENCY SECTION 3.01. REPEALER. Repeals the following laws: (1) Article 5.76-2, Insurance Code; and (2) Section 18.24(b), Chapter 12, Acts of the 72nd Legislature, 2nd Called Session, 1991, as amended by Section 8, Chapter 885, Acts of the 73rd Legislature, Regular Session, 1993. SECTION 3.02. SEVERABILITY CLAUSE. Deems the provisions of the Act severable. SECTION 3.03. SAVINGS CLAUSE. Continues Article 5.76-2, Insurance Code, for the purposes expressly provided by this Act, Section 26, Article 21.28-C, Insurance Code, as added by this Act, and for the purpose of governing any rights and liabilities accruing before the effective date of this Act. SECTION 3.04. EFFECTIVE DATE. States that Part 3 takes effect either: (1) on the closing date of the conversion of the Facility under Part 1; or (2) on September 1, 1997, if Part 2 takes effect. SECTION 3.05. Suspends three day rule.