Two to Watch

The old saying goes, “No man’s life, liberty or property are safe while the legislature is in session.” We can all breathe easier and let the children out of the house, now that the Texas Legislature is finally out of session. Unlike most states where legislators meet year-round, every year, thinking of new things to legislate and tinker with, in Texas our legislature meets only once every two years, and then they close down the people’s business.

This year, the general session of the Legislature was uncharacteristically followed by two special sessions when the legislature failed to pass education finance reform. The two special sessions also failed to meet that goal, so it appears the governor has thrown in the towel and the legislature has dissolved sine die until it meets in 2007 (assuming the governor doesn’t invoke a new special session on school finance.)

The big two insurance bills

The 2005 legislature passed numerous bills modifying the insurance code and the insurance related business on such issues as insurance fraud reporting (HB 2388), recovery of costs covered by personal auto coverage (HB 1572), and denial of homeowners policies (HB 363). Unquestionably, two of the most important pieces of legislation involve massive reform of toxic tort and workers’ compensation claims. One bill, signed by Governor Perry, adopts strong asbestos/silica reform (SB 15). A second bill provides a comprehensive overhaul of the workers’ compensation statute-rewriting it and dissolving the Texas Workers’ Compensation Commission (whose functions will now become a separate branch of the Texas Department of Insurance) (HB 7). While these two statutes are being widely reviewed and considered, this column is not about those two bills.

Rather, there are two mostly ignored new laws insurance professionals should know about and consider. One deals with the usually mundane topic of document destruction and the other with the regulation of insurance company receiverships.

Safe destruction

House Bill 698, effective Sept. 1, 2005, requires the proper disposal of business records that contain personal identifying information (i.e. the confidential kind). The bill requires most businesses, excluding certain financial institutions (which have been defined by federal law to include insurance companies and agents), to effectively dispose of business records that contain “personal identifying information” of a person or customer, by shredding, erasing or using other means to make the personal
identifying information either unreadable or undecipherable.

Now that may not sound too onerous or much of a risk, but consider that each business record that is not properly disposed of by this standard is treated as a separate violation subject to a $500 fine for each record. For instance, say you are moving your office and decide to destroy four or five boxes of records, which may or may not include personal information of your customers. You decide, to avoid the expense or problems of standing next to a shredder for an hour, to simply take those boxes and throw them into the trash. The boxes are found by someone and the records are identified as containing personal records. You, then, are cited for the violation. The boxes each contain 300 to 400 records each and the fine is $20,000. Got your attention now?

Fortunately, the statute does contain a safeguard that the business is not liable for the penalty if the record was reconstructed, in whole or part, through “extraordinary means.” In other words, if you use a shredder and some nefarious soul spends hours reconstructing the shredded document-that is not a violation of the statute. Furthermore, the use of a document destruction company is likely a safe harbor. The best advice I can give is to go to your local office supply store and buy a cheap shredder. Have it ready in case the need arises. This may be the best financial decision you make today if you periodically destroy documents that may be subject to this statute.

Insolvent insurers

There was a time when insurance company receiverships were rare beasts. Unfortunately, Texas has seen more than its fair share of substantial receiverships in recent years, and it is anticipated that there will be quite a few more in coming years. House Bill 2157 attempts to address an anticipated increase in volume with a massive restructuring of Texas statutes governing the receivership of insurance carriers. The bill repeals the current statute, Article 21.28 of the Texas Insurance Code, and adopts the draft (yes, I did say draft) NAIC Insurer Receivership Model Act. The bill intends to promote cooperation in multi-state receiverships, but I anticipate the Texas Department of Insurance and the Texas Property and Casualty Guaranty Association will spend much of the next year figuring out what this massive overhaul means and how it applies.

The new law amends the Property Casualty Guaranty Act in many ways, some major, some not. For example, one significant change is that transactions involving captive insurers (other than workers’ compensation), in which the deductible or self-insurer retention is substantially equal to the amount of liability, are not covered by the guaranty act. Also, a covered claim shall not include any amount that is directly or indirectly due any reinsurer, insurer or self-insurer.

For large employers’ insureds, the bill clarifies the net worth exclusion such that an employer with a net worth of more than $50 million will have its workers’ compensation claims handled by the Guaranty Fund and recover workers’ compensation claims, but the Guaranty Fund will not handle any claims other than workers’ compensation for these large employers. The Guaranty Association has been given authority to establish procedures for requesting and obtaining financial information from an insured or claimant on a confidential basis for the purpose of applying the net worth provisions in the law. Notably, it is the insured or claimant who bears the burden of establishing its net worth at the relevant time.

These bills will not have the immediate and broad impact of the asbestos or workers’ compensation statutes; but they will lurk, mostly unnoticed, just below the radar screen. But beware-if you are involved in claims involving any insolvent (or near insolvent) insurer, you should acquaint yourself with this new receivership scheme. Likewise, if your customers or insureds deal with confidential personal information, tell them about this new statute.

Thompson, Coe, Cousins & Irons, L.L.P. He
has extensive experience in insurance coverage

and defense matters, specializing in environ-
mental, toxic tort and products cases. Martin is a frequent author and CLE speaker on insurance topics, including coverage and bad faith issues.