HOUSE BILL REPORT

SSJR 8207

BYSenate Committee on Financial Institutions & Insurance (originally sponsored by Senators West and Stratton)

Immunity for members of Washington guarantee association.

House Committe on Financial Institutions & Insurance .

Majority Report:  Do pass.  (14)

      Signed by Representatives Dellwo, Chair; Zellinsky, Vice Chair; Chandler, Ranking Republican Member, Anderson, Baugher, Beck, Crane, Day, Dorn, Inslee, P. King, Nutley, K. Wilson and Winsley.

House Staff:John Conniff (786-7119)

AS REPORTED BY COMMITTEE ON FINANCIAL INSTITUTIONS & INSURANCE

MARCH 31, 1989

BACKGROUND:

In 1971, the Washington State Legislature created two guaranty associations: the Washington Insurance Guaranty Association (WIGA) and the Washington Life and Disability Insurance Guaranty Association (WLDIGA). WIGA covers property and casualty insurance and WLDIGA covers life and health insurance. When an insurance company becomes insolvent and is ordered liquidated, the associations pay certain kinds of claims by policyholders of the liquidated company. Money to pay these claims comes from the other insurance companies doing business in Washington.

Every insurance company which is authorized to do business in Washington is required to be a member of one or both of the associations depending upon the type of insurance that the company sells. When a member company is liquidated, all of the other member companies must contribute money to pay claims of the liquidated company. The associations calculate each member's contribution based upon the amount of insurance the member sells in Washington. If these contributions are not enough, the associations assess the members again the following year and so on until there is enough. Eventually, the state pays for these assessments; since, funds contributed to the guaranty associations by an insurance company are gradually deducted from any premium taxes owed by the company.

The Washington State Constitution provides that stockholders in a domestic stock insurance company are personally liable for the company's debts up to an amount equal to the par value of the stock held by the stockholder. A stock insurance company organized under Washington law may not issue stock at a par value of less than $10. In other words, the price printed on each share of stock cannot be less than $10. The requirement ensures that an additional source of money is available to protect policyholders if the company fails. However, companies may lower the par value of the stock to $1 per share after the company has been in business for more than five years thus, reducing the liability of stockholders.

In a recent court case, stockholders of an insolvent life insurance company challenged the standing of the Washington life and disability guaranty association to bring an action to recover money from stockholders of the failed life insurance company. The court held that the guaranty association had standing to enforce the state constitutional provision imposing liability upon shareholders for the debts of an insolvent domestic insurance company.

SUMMARY:

The Washington State Constitution is amended to provide that stockholders of a domestic stock insurance company are relieved of liability for the debts of a failed insurance company to the extent that such debts are satisfied through payment by the state insurance guaranty associations.

The amendment must be submitted for ratification by the public at the next general election.

Fiscal Note:      Not Requested.

House Committee ‑ Testified For:    Senator West, and Basil Badley, Washington Life and Disability, Washington Guaranty Association.

House Committee - Testified Against:      None Presented.

House Committee - Testimony For:    No other corporation's stockholders are held personally responsible for the debts on the insolvent corporations.  Washington's constitutional provision imposing liability for debts of insurance companies upon stockholders pre-dates the state's creation of guaranty funds for the protection of stockholders.  The constitutional provision is no longer necessary and traps unwary stockholders of domestic stock insurance companies.

House Committee - Testimony Against:      None Presented.