The California foster care crisis you know nothing about

In the frantic final moments of the end of session in August, the legislature pushed through a little-noticed and hopelessly technical bill concerning foster family agencies, private nonprofits that vet and oversee a portion of the foster parents in California.

Despite its low profile, this bill, AB 2496 by Assemblymember Gail Pellerin (D-Santa Cruz), could not have had higher stakes. It was intended to literally stave off a potential existential crisis for California’s foster care system – a crisis that appears as though it may have been manufactured by an obscure organization that insures nonprofits.

Gov. Gavin Newsom is expected to sign AB 2496, but it’s now unclear if the bill’s short-term fix to the foster care crisis will even work, to say nothing of the larger problems that still need to be resolved. There is little doubt the legislature will have to act in the next session if it doesn’t want the bottom to fall out on child welfare in the state. Things are that dire.

This is a story about a niche within a niche, technical-but-crucial matters concerning an arcane subdivision of the foster care system, a system that policymakers and the public already don’t pay much attention to but may be teetering on the edge of failure because of what appears to be the actions of one vital insurance carrier that took a gamble on a child abuse case and lost big time.

An economic model with perverse incentives baked in
On the rare occasions when people even think about foster care, they often imagine a single ecosystem of foster parents who take in children who have been removed from their homes. This mental construct does not reflect reality, either in California or nationwide.

In some states, foster care is overseen by one statewide agency. Not in California. Here, each county operates its own foster care system, which means there are actually 58 distinct foster care systems within the Golden State.

But it’s even more complicated than that, because foster care in California and across the country is no longer solely the purview of government. Yes, only the government has the authority to remove abused or neglected children from their homes, but now both governments and private organizations are in the business of recruiting and screening potential foster parents and then overseeing those foster homes when wards of the state are placed there.

In some states, these private foster care agencies are for-profit companies. In California, privately operated foster care agencies may only be nonprofits – known as the aforementioned foster family agencies.

These private foster care agencies exist because government-run foster care is often underfunded and neglected by policymakers, and because of the public’s general distrust of government.

Becoming a foster parent requires a lot of screening, involving loads of personal, invasive questions. Some would-be foster parents are more comfortable with a private organization asking those probing questions than the government.

So, in California and across the country, there are actually two flavors of fosters homes: foster homes recruited and vetted by the government and foster homes screened by a private agency. There are problems with both, as countless news stories have shown, but private foster agencies have a particular problem that government agencies don’t: they need to make money to stay in business, even if they are nonprofits.

Private foster care agencies only get paid when a foster child is placed in one of their homes. Therefore, private agencies have an economic incentive not to turn away children referred to them by a county and to accept as many foster parents as they can, so they always have a pipeline for making more money by serving more children.

As you might imagine, this arrangement can create perverse incentives for private agencies to cut corners in their screening process, which sometimes results in children who have already been removed from their homes because of abuse and neglect becoming victimized again in a foster home supervised by a private foster care agency. (Editor’s note: Capitol Weekly reporter Brian Joseph previously spent more than a year investigating privatized foster care during a fellowship at the University of California, Berkeley. The results of that investigation were published in a 2015 story in Mother Jones magazine that you can read here.)

Private foster care agencies only get paid when a foster child is placed in one of their homes. Therefore, private agencies have an economic incentive not to turn away children referred to them by a county and to accept as many foster parents as they can, so they always have a pipeline for making more money by serving more children.

The problems facing California’s foster care system today seem to have started several years ago when one private agency apparently skimped on screening a foster parent and three young children were sexually abused.

Failures at multiple levels
In 2017, Mark Martinez and his wife Marta applied to become foster parents through the private foster care agency Alternative Family Services of Northern California, based in the Bay Area. The nonprofit agency’s screening and subsequent oversight of the couple apparently departed in many ways from the laws governing the screening of foster parents. In violation of state law, Alternative Family Services failed to not only conduct the majority of its screenings of the Martinez family at their home, but also failed to assess Mark’s mental health – and he had a delusional disorder.

On an intake form, the agency left nine of 12 critical assessments questions for Mark blank and didn’t pick up on a major red flag when he told the agency that he and Marta had conflict over their sexual relationship, which could suggest that he’d be inclined to take out his sexual frustrations on children brought into his home.

Alternative Family Services approved Mark and his wife as foster parents and four foster children – all under 7 – were placed in their home. Mark sexually abused three of them, crimes for which he is currently serving a 15-years to life sentence.

The three foster children filed suit against Mark Martinez and Alternative Family Services in 2019. On several occasions, the plaintiffs attempted to settle the case with the agency’s insurance provider, the Nonprofit Insurance Alliance, which, as its name implies, insures nonprofit organizations. The alliance insures 90 percent of all private foster family agencies in California.

Alternative Family Services’ policy limit with the alliance was $11 million and the three children several times sought to settle the case below and at that amount.

But the alliance rejected the children’s settlement offers and opted instead to go to a jury trial. In December 2023, a jury issued a judgement of $24.8 million against Alternative Family Services and the Nonprofit Insurance Alliance.

The private foster care agency’s insurance company rolled the dice on going to court and lost – costing itself and the agency dearly.

Help sought in Sacramento
In June, the Nonprofit Insurance Alliance approached Assemblywoman Pellerin about carrying a bill to address what the alliance said was a shift in the legal landscape that was resulting in juries awarding damages against foster family agencies for unforeseeable harms caused by technical violations.

Because of this change, the alliance said it would be forced to stop insuring private foster care agencies in the state unless something was done. When foster family agencies heard that, they joined in supporting the alliance’s plans.

On June 10, Pellerin introduced language at the alliance’s urging into AB 2496 through the gut-and-amend process. The bill was a shock to some child welfare advocates, who were caught flat-footed by the proposal and by the private agencies’ sudden demand for action on an issue they had never heard about.

But while Pellerin’s new bill was portrayed as an effort to help foster family agencies keep their insurance under harsh legal conditions, the bill actually did nothing to stop insurers from cancelling or nonrenewing insurance policies for foster family agencies.

Instead, AB 2496 as originally amended by Pellerin would have required a judge to determine whether a private foster care agency was to blame if a child was abused in one of the homes they oversee. In all other negligence cases in California, that determination is made by a jury. AB 2496 would have created at least a separate process solely for foster children allegedly abused in homes supervised by foster family agencies. (Some critics contend the bill would have created an entirely different negligence standard for children abused in homes overseen by private foster care agencies.)

The bill was a shock to some child welfare advocates, who were caught flat-footed by the proposal and by the private agencies’ sudden demand for action on an issue they had never heard about.

The original version of Pellerin’s AB 2496 also included, according to some interpretations of the language, a provision that would have made it impossible, under certain conditions, for private foster care agencies to sue their insurance companies if the insurance company failed to accept a reasonable legal settlement. (The alliance claims that provision simply would have required transparency in settlement offers.)

Jeff Wiemann, the executive director of Angels Foster Family Network in San Diego County, which originally supported AB 2496, said he felt that the bill was a “bait and switch,” that the alliance inaccurately portrayed what the proposal was truly about.

“I’m frustrated with (the Nonprofit Insurance Alliance),” he said.

Amended, then amended again
In early July, AB 2496 was heard by the Senate Judiciary Committee, which amended the bill to simply say that foster family agencies couldn’t be held liable for what counties do. (In contracts with foster family agencies, counties have sought to hold themselves harmless for their own actions, placing liability on the nonprofits.)

Then the legislature went on summer recess. During that time, child welfare advocates got together and dug more into the bill and came to the conclusion that while the reinsurance industry has become skittish about backing foster family agencies, there is no evidence that juries have started awarding damages against private agencies for unforeseen harms caused by technical violations.

Indeed, the only case that advocates could find was the lawsuit against Martinez, which hardly seemed to qualify as an example of a foster family agency being hit with damages for unforeseen harm caused by technical violations. The jury awarded damages against Alternative Family Services for what appears to be substantive violations that anyone familiar with child welfare would have known could cause harm.

To some, AB 2496 looked as though it was initially drafted to cover the Nonprofit Insurance Alliance’s backside for screwing up that case and to prevent foster family agencies from retaliating against it.

After the legislature returned from break, the Nonprofit Insurance Alliance announced on August 21 that it would be sending out notices of nonrenewal for all coverages of private foster care agencies in California. The alliance’s president and CEO, Pamela Davis, said in a statement that without the changes it had requested, foster family agencies in California are “uninsurable” under current conditions.

With the alliance being the insurer of the vast majority of private foster care agencies in California, its sudden exit from the market has jeopardized the future of all of the state’s foster family agencies, which currently house a little more than 15 percent of California’s roughly 60,000 foster kids.

So Pellerin had to amend AB 2496 a third time in late August. The final version of the bill, which lawmakers endorsed on August 31st, streamlines the process of transferring a foster home certified by one private agency to another private agency or to a county foster agency, in the event private foster care agencies across the state start failing because they can’t get insurance.

In the short term, AB 2496 is intended to keep California’s balkanized foster care system going. But now it faces a real crisis: a critical source of foster homes – private foster care agencies – may no longer be able to stay in business, all because their primary insurer, the Nonprofit Insurance Alliance, has suddenly and unilaterally declared them uninsurable.

A legitimate problem or a manufactured crisis?
Davis, the head of the Nonprofit Insurance Alliance, said her company had no ulterior motives in seeking this legislation or in leaving the foster family agency market. Rather she insisted private foster care agencies in California have become uninsurable because juries unfairly hold them liable for unforeseeable problems or mistakes made at the county level.

Despite the judgement against Alternative Family Services in the Mark Martinez case, Davis strongly refuted any notion that the agency did anything wrong. She said Mark Martinez met the criteria to become a foster parent. When doctors meet the criteria to be licensed but then hurt a patient, the Medical Board of California isn’t held responsible, Davis said. In that light, she asks, why should foster family agencies like Alternative Family Services bear the responsibility for problems they did not create?

In the short term, AB 2496 is intended to keep California’s balkanized foster care system going. But now it faces a real crisis: a critical source of foster homes – private foster care agencies – may no longer be able to stay in business, all because their primary insurer, the Nonprofit Insurance Alliance, has suddenly and unilaterally declared them uninsurable.

That’s why the alliance took the case to trial, Davis said, because it was convinced Alternative Family Services did nothing wrong and the insurance company had already paid out on cases that it felt weren’t legitimate.

“It was a little bit like a frog in hot water,” she said. The alliance was slowly being boiled in what she said was an unfair legal system and the loss of the Martinez case signaled that it was time to jump out. Davis said it’s simply impossible to insure foster family agencies in a legal environment in which they’re held accountable for things they can’t control.

“That’s not insurable,” she said.

Some child welfare advocates, however, think the alliance is really just looking out for its own interests and attempted to manufacture a crisis (or at least exacerbate one) to create conditions to allow it to jam through a bill that would benefit itself.

For example, Davis told Capitol Weekly the Nonprofit Insurance Alliance knew there could be a problem obtaining re-insurance for foster family agencies around the turn of the year. Davis said the alliance wasn’t thinking in terms of legislative calendars when it sought help from Sacramento, but critics contend that the right thing to do in this case would have been to sound the alarm with counties as soon as possible, especially if child welfare was its top priority.

“If they truly knew about this in January, we didn’t know anything about it,” said Wiemann, the head of Angels Foster Family Network

He said in late March he heard from another foster family agency that the Nonprofit Insurance Alliance wanted to reduce its coverage for foster homes with bodies of water on or near the property, like a fountain or a pool. Wiemann said he and other foster family agency leaders in San Diego County worked with the county government to accept a lower coverage amount and eventually the county agreed.

Never during that time did the alliance mention that there was a larger problem with reinsurance looming, Wiemann said.

“Why didn’t they bring it up sooner?” Wiemann asked. “If this truly went back went to January when we were talking about pools, why didn’t they bring up the larger liability insurance?”

On his own, Wiemann has examined the Nonprofit Insurance Alliance’s annual reports, and he said he can’t see why it’s so desperate to leave the market.

“Where’s the crisis on their end?” he asked.

No one knows what’s next
The future of foster family agencies was already in peril because of a lack of funding. But now with their primary insurer bluntly and publicly calling them “uninsurable,” it’s anyone’s guess how much longer these private foster care agencies may continue to exist in California.

“I think we’re going to see (foster family agencies) that will close,” Wiemann said.

In a statement to Capitol Weekly, Pellerin, the author of AB 2496, stressed that the bill is a “temporary solution.”

“I hope that all stakeholders can work together between now and January 2025 and come back with an urgency bill to ensure the continued operation of (foster family agencies) in California,” she said in the statement. “I also join Insurance Commissioner Ricardo Lara in his call to action to urge all property and casualty insurance companies operating in California to find a way to offer coverage to (foster family agencies) and help stabilize the state’s foster system.”

On September 9, Davis, the CEO of the Nonprofit Insurance Alliance, put out another statement saying that the version of AB 2496 “will be worse than if the state had done nothing.”

“It is our opinion that the new provisions of AB 2496 — drafted by someone unknown to us — materially and substantially increase the risk for California FFAs,” Davis said. “Subsequently, NIA is now left with no choice but to nonrenew the Directors & Officers (D&O) coverage, as well as the Social Services Professional (SSP) and Improper Sexual Conduct and Physical Abuse (ISCPA) coverages, for all California FFA risks.

“In addition to the ISCPA, SSP, and D&O nonrenewals, we will not be accepting any additional California FFA exposures under existing policies done under the new provisions of AB 2496.”

Davis goes on to write that the alliance will not insure homes that have been ported from one foster family agency to another, which the legislature approved as part of the final version of AB 2496 to put a bandage on the looming foster care crisis.

“These modifications will result in a material change in operations that falls outside of our underwriting guidelines,” she said. “If your organization has, is in the process of, or plans to consolidate with, acquire, or accept the transfer of cases from another FFA or a county, this must be reported to NIA immediately as you will not have coverage for this additional exposure.  If you take on any additional responsibilities related in any way to resource homes under the provisions of AB 2496, we will consider this a material change in your operations and grounds for immediate cancellation (rather than nonrenewal) of all of your policies in-force with us.”

In short, the alliance’s position is that AB 2496 makes foster family agencies even harder to insure than they were before and it’s taking action to negate any temporary benefits the bill might have.

At best, AB 2496 will just allow California’s private foster agencies to stay afloat until the next legislative session, when a more permanent fix must be found. But even then, the leaders of the California Alliance of Child and Family Services said they were concerned that foster family agencies will start closing due to their inability to secure insurance.

Chris Stoner-Mertz, the CEO of the California Alliance of Child and Family Services, an organization representing foster family agencies, said her organization is unsure how the Nonprofit Insurance Alliance has come to this conclusion as the logistics of implementing AB 2496 have not yet been worked out.

Adrienne Shilton, the vice president of public policy and strategy for the foster family group, also noted that insurance alliance has long maintained that the originally proposed language of AB 2496 was the only solution it was willing to accept in order to continue insuring foster family agencies.

As a result, the women said, foster family agencies are now facing a severe crisis. At best, AB 2496 will just allow California’s private foster agencies to stay afloat until the next legislative session, when a more permanent fix must be found. But even then, Shilton said her organization is very concerned that foster family agencies will start closing due to their inability to secure insurance, saying the situation “has the potential to disrupt” all child welfare in California.

Stoner-Mertz admitted her organization does not know what the solution is yet, but said it’s working as hard as it can to speak with insurance brokers and build a coalition to support a sweeping legislative proposal to address the situation.

“We are very, very concerned that we don’t have good solutions in place to help these organizations be insured,” she said.