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No fiscal implication to the State is anticipated.
SB 1227 would add a new subsection to Chapter 462 (Texas Property and Casualty Insurance Guaranty Association), Section 202, of the Insurance Code. Specifically, a person would have a covered claim under Chapter 462 if the person holds a valid assignment of a covered claim for unearned premiums.
The Texas Property and Casualty Insurance Guaranty Association (TPCIGA) is a non-profit, unincorporated association that is composed of all property and casualty insurers licensed in Texas. The Texas Legislature created this association to provide protection to insurance policyholders in case an insurer becomes insolvent.
In other words, if an insurer goes out of business its assets are liquidated to the Texas Department of Insurance, which allows TPCIGA to continue covering claims that were in effect when the insurer went under, this is known as a “covered claim.” If a policyholder has already paid their premium on a policy for a certain period of time that extends past when the insurer became insolvent then TPCIGA treats that policy as a covered claim for an unearned premium. However TPCIGA can provide no more than $25,000 of unearned premium coverage.
An unearned premium is the portion of an insurance premium that has yet to be paid or earned by the insurer because the policy has not expired. For example, assume an insurer writes a three-year insurance policy. The annual premium for that policy is $1,000 per year, which would make the whole three-year policy worth $3,000. If a policyholder pays for one year of this policy, the insurer would have earned $1,000 but it would have an unearned premium of $2,000.
The issue this bill aims to fix is based off a prior court ruling that affected how premium finance companies were paid. Specifically, a premium finance company that had loaned money to a borrower to prepay an insurance policy could not collect on the unearned premium that was paid to an insolvent insurer. The court ruled that a premium finance company could not be paid the remaining sum of an unearned premium because the premium finance company did not qualify as a “person” in current language.
HB 2071 would give a premium finance company a right to that covered claim for unearned premiums on the basis of “a valid assignment” to that insurance policy.
Although this legislation would be correcting a problem that was caused by regulations, we stand neutral on HB 2071 because ultimately TPCIGA is a government safety net that is funded by tax payers. If TPCIGA was not in place a premium finance company would not be able to recoup any money. Ultimately, a premium finance company should not use TPCIGA as its own financial safety net.