BILL ANALYSIS {u AB 427 u} Page 1 Date of Hearing: May 12, 1999 ASSEMBLY COMMITTEE ON INSURANCE Jack Scott, Chair AB 427 (Scott) - As Amended: May 6, 1999 {u SUBJECT u} : Insurance Commissioner: insolvency and delinquency proceedings: {u SUMMARY u} : Clarifies that the need for written consent of the Attorney General (AG) to employ outside counsel applies to insurance insolvency and delinquency proceedings. Specifies that the deputy commissioner for insolvency and delinquency proceedings serves at the pleasure of the commissioner and is subject to Senate confirmation. Specifically, {u this bill u} : 1)Makes clear that written consent of the AG for representation of the Insurance Commissioner by outside counsel is required, not only for insurance delinquency and insolvency proceedings, but also for proceedings that are ancillary or pendent to the insolvency and delinquency matters. 2)Reaffirms that, although the above requirement for written consent applies to use of outside counsel and Department of Insurance (DOI) counsel, it is in the best interest of the state that the AG and the Insurance Commissioner consult and cooperate on the use of DOI counsel in all delinquency proceedings. 3)Provides that the deputy Insurance Commissioner appointed to carry out conservation or liquidation functions against insurance companies serves at the pleasure of the Insurance Commissioner and shall be subject to Senate confirmation. {u EXISTING LAW u} 1)Prohibits state agencies, with certain exceptions, from using legal counsel other than the AG to represent the agency in legal proceedings, absent written consent from the AG, providing in addition that no state agency shall employ any legal counsel other than the AG in any matter in which the agency is interested. 2)With respect to insurance delinquency proceedings, expressly requires the DOI to obtain written consent from the AG prior {u AB 427 u} Page 2 to employing outside counsel. 3)Declares that it is in the best interest of the people of the state and is the Legislature's intent that the AG and the DOI consult and cooperate on the use of DOI counsel in insurance delinquency proceedings, judicial or otherwise. 4)Declares legislative intent that overall efficiency and economy in state government be enhanced by employment of the AG as counsel for representation of state agencies in judicial and other proceedings. 5)Provides that the Insurance Commissioner, subject to approval by the court, fixes the costs of employing deputy commissioners and associated expenses incurred in connection with insolvencies or delinquencies of insurance companies. The activities and budget of the officers and employees of the Conservation and Liquidation offices within the DOI are not generally subject to the state budget process or other Legislative or Administration oversight. {u FISCAL EFFECT u} : No effect on the Insurance Fund. Fees charged to liquidated insurance company estates would offset any increased cost to the AG. {u COMMENTS u} : {u Background and purpose of the bill u} : Senate Bill 87 (Kopp), Chapter 893, Statutes of 1995, expressly prohibited the Insurance Commissioner, when acting as a court-appointed receiver or conservator for an insurance company, from hiring legal counsel without the written approval of the AG. According to the AG, who is sponsoring the provisions of this bill relating to use of counsel in insurance delinquency proceedings, this bill is intended to clarify that consent is required not only in insurance delinquency proceedings, but also to proceedings ancillary and related to the delinquency proceedings. In the 1980's, several property and casualty insurers became statutorily insolvent. The Legislature subsequently enacted the Uniform Insurer Liquidation Act (Ins. Code 1064.1 et seq.) which, among other things, granted the Insurance Commissioner power in his or her role as receiver to retain counsel as necessary, subject to oversight of the court having jurisdiction {u AB 427 u} Page 3 over the proceedings. Later, in the early 1990's, two relatively large life insurers, Executive Life and First Capital Life, became insolvent, and then-Commissioner Garamendi retained outside counsel to handle the litigation and transactions arising out of the delinquency proceedings. A genuine dispute arose as to whether pre-existing law dating back to 1945 that required consent of the AG applied, or if the more recent Uniform Act provisions allowing the commissioner to select outside counsel was intended as an exception to the written consent statute. In response, the Legislature in 1992 enacted SB 1594 (Boatwright), providing that the commissioner, when acting in the role of a receiver, did not need to get written consent from the AG in order to retain outside counsel. However, in 1995, SB 87 (Kopp), supported by Commissioner Quackenbush, reversed the rule to require AG consent. {u Recent developments u} : In 1997, the DOI commenced conservation and liquidation proceedings against Golden Eagle Insurance Co., a large California workers' compensation insurer. The AG was counsel of record, but withdrew in March 1997, granting consent for DOI to retain outside counsel. Shortly thereafter, the DOI retained outside counsel, but later hired additional counsel, citing the need for additional expertise in connection with ancillary proceedings. DOI asserted that the AG's earlier consent to hire counsel also applied for matters ancillary to the delinquency proceeding. When the DOI moved the Superior Court for an order authorizing payment to the additional law firms, the AG opposed the motion. The court denied payment to the additional firms in November, 1997, siding with the AG that the written consent requirements of Insurance Code 1036 and Government Code 11040 were not satisfied. DOI filed a motion to reconsider, alleging among other things that the AG had a conflict of interest and should be disqualified from the case because Attorney General Lungren had accepted a campaign contribution from John Mabee, Golden Eagle's majority shareholder. Prior to the hearing, AG and DOI filed a stipulation with the court in which Commissioner Quackenbush retracted his conflict of interest allegations and AG Lungren retroactively authorized DOI's hiring of the additional law firms. {u Prior Legislation u} : Last year, the Legislature passed SB 213 (Kopp), a measure similar to this bill in that it clarified that {u AB 427 u} Page 4 the need for written consent of the AG to employ outside counsel applies not only to insurance delinquency proceedings, but also to proceedings ancillary to an insurance delinquency proceeding. The bill was vetoed, the Governor raising concerns that the bill might require the AG's consent for the use of agency counsel, "despite existing law's express intent that the AG and the DOI consult and cooperate regarding agency counsel." {u DOI counsel in "other" proceedings u} : Existing law clearly indicates that written consent from the AG is required for state agencies to use agency counsel or outside private counsel in judicial proceedings. With respect to proceedings other than judicial proceedings, existing law states only that it is the intent of the Legislature that {u state government u} be "enhanced" by use of the AG in judicial and "other" proceedings. With respect to {u insurance delinquency u} proceedings, existing law declares legislative intent that the AG and DOI consult and cooperate on the use of agency counsel in delinquency proceedings, both "judicial and otherwise." Thus, existing law appears to require written consent of the AG to use either state agency counsel or outside counsel in a judicial proceeding, and the Legislature declares that state government is enhanced when the AG is used both in judicial and {u other u} proceedings on behalf of state agencies. With respect to DOI, both the written consent requirement for delinquency {u judicial u} proceedings and the intent language regarding {u other u} proceedings apply, but the Legislature has additionally declared its intent that the AG and DOI consult and cooperate on use of DOI agency counsel in delinquency proceedings, {u judicial u} and {u otherwise u} . This bill specifically applies the consent requirements and legislative intent in existing law to proceedings ancillary to a delinquency proceeding, whether judicial or otherwise. Beyond that, this bill does not appear to affect, or clarify, use of DOI agency counsel in delinquency proceedings generally, in that it does not modify existing law expressing the Legislature's intent that the two agencies consult and cooperate. Existing law and the long history of disagreements on this issue between the two agencies tends to indicate that the imprecision in existing law represents a compromise or negotiated standoff, with neither side having been able to persuade the Legislature on the merits for enacting a bright line rule concerning {u AB 427 u} Page 5 representation of DOI in various proceedings on insurance delinquency matters. {u Cost and oversight u} : The cost of legal services, from whatever source, is recovered through administrative fees charged to the estate of liquidated insurers, and therefore does not affect the Insurance Fund, except in cases where the estate has no assets at all. Under existing law, the Insurance Commissioner establishes the compensation of all personnel, and all costs of taking possession of, conserving liquidating or otherwise dealing with the business and property of insurers in delinquency proceedings. {u Court review, none by Legislature, Controller or Governor u} : As noted, the commissioner fixes the compensation of personnel working within the DOI's Conservation and Liquidation Division (CLD), and the expenses and operating costs, subject to approval of the court. In those few estates without any assets, expenses and costs fall within the budget process, coming out of the appropriation for the maintenance of the DOI. Otherwise, the budget and the operations of the CLD are essentially off the books. Historically, the DOI and the CLD have interpreted the code as exempting CLD from budgetary oversight by the Department of Finance and the Legislature, expenditure and financial statement oversight by the Controller's Office, contracting and purchasing oversight by the Department of General Services, and personnel practices, salary administration and travel policy oversight by the Department of Personnel Administration and State Personnel Board. {u Audit of the CLD u} : In a May 1994 audit conducted by the Bureau of State Audits, auditors criticized the personnel policies of the CLD, noting among other things that the CLD had not properly managed its contracts for legal services, and its allocation of costs were resulting in disproportionate charges to the estates of conserved insurers. According to the audit report, the midpoint salary for the chief executive officer of the CLD was then $195,000 per year. The current CEO of the CLD is also the Chief of Staff to the Insurance Commissioner, and it is thus unclear whether that person is compensated as CEO of the CLD, Chief Deputy Commissioner, or both. {u According to the author u} , some measure of ongoing Legislative oversight of the CLO is appropriate, and would be attained by the modest requirement that the Senate confirm the general manager / executive officer of the CLD. {u AB 427 u} Page 6 {u Technical amendment u} : As drafted, the Senate confirmation requirement could be construed to apply not only to the deputy commissioner overseeing all delinquency proceedings carried out by the CLD, but also to a deputy commissioner appointed by the commissioner to serve as receiver of a particular conserved insurer. This is not the author's intent, and the author has agreed to a technical amendment moving the Senate confirmation provisions to a different section of law, specifying that the person serving as the executive officer of the CLO shall be subject to Senate confirmation. {u REGISTERED SUPPORT / OPPOSITION u} : {u Support u} Office of the Attorney General {u Opposition u} None on file {u Analysis Prepared by u} : Paul Donahue / ains / (916) 319-2086