BILL ANALYSIS Ó SENATE INSURANCE COMMITTEE Senator William W. Monning, Chair AB 2064 (Cooley) Hearing Date: June 25, 2014 As Amended: June 12, 2014 Fiscal: Yes Urgency: No VOTES: Asm. Floor (05/15/14)78-0/Pass Asm. Appr. (05/07/14)17-0/Pass Asm. Ins. (04/23/14) 13-0/Pass SUMMARY Would revise and recast statutory notice requirements relating to the mandatory offer of earthquake insurance; would revise and recast the mandatory notice to California Earthquake Authority (CEA) policyholders; would increase the cap on CEA operating expenses from 3% to 6% and include all expenses in that cap except those expenditures specifically excluded, as specified; would change CEA loss assessment coverage for condominiums from mandatory to optional; and would require CEA participating insurers to send CEA marketing materials to homeowners' policyholders at least once a year. DIGEST Existing law 1. Provides that no homeowners' insurance policy may be offered or sold in California unless the homeowner is offered earthquake coverage, either as part of the homeowners' policy, or as a separate policy; 2. Requires the offer of earthquake insurance to be made prior to, concurrent with, or within 60 following the issuance or renewal of a homeowners' insurance policy; 3. Specifies language that must be included in the offer of earthquake coverage in at least 10-point boldface type, beginning with: "YOUR POLICY DOES NOT PROVIDE COVERAGE AGAINST THE PERIL OF EARTHQUAKE. AB 2064 (Cooley), Page 2 CALIFORNIA LAW REQUIRES THAT EARTHQUAKE COVERAGE BE OFFERED TO YOU AT YOUR OPTION. WARNING: THESE COVERAGES MAY DIFFER SUBSTANTIALLY FROM AND PROVIDE LESS PROTECTION THAN THE COVERAGE PROVIDED BY YOUR HOMEOWNERS' INSURANCE POLICY?."; 4. Establishes a conclusive presumption that the insurer, agent or broker complied with the offer disclosure requirement if it delivers the offer and the homeowner does not return the signed acknowledgement of receipt within 60 days of the date it was provided; 5. Establishes a conclusive presumption that the insured elected not to accept the coverage if the insurer establishes proof of mailing or delivery of the offer and the insured has not accepted coverage within 30 days from date of mailing or delivery; 6. When a homeowner has not purchased earthquake coverage pursuant to the mandated offer, requires the insurer to notify the homeowner that the homeowners' policy does not include earthquake coverage, offer such coverage and provide such a notice of non-coverage on at least an every other year basis prior to or concurrent with renewal of the homeowners' insurance policy; 7. Establishes minimum requirements for the offer of earthquake insurance, also known as the "mini-policy," that fulfills the mandatory offer requirement; specifies that the policy must cover the dwelling, but may exclude outbuildings, fences, swimming pools and other structures not critical to the structural integrity of the dwelling, as specified; and allows more limited contents coverage and additional living expenses; 8. Establishes the California Earthquake Authority, a privately financed, publicly managed entity to sell only earthquake insurance; 9. Allows insurers to fulfill their mandatory offer obligation by joining the CEA as a participating insurer, and offering CEA policies to their insureds; 10. Prohibits the CEA from selling earthquake insurance policies directly to homeowners; AB 2064 (Cooley), Page 3 11. Provides that the CEA is not a member of the California Insurance Guaranty Association (CIGA), and that neither CIGA, nor the state, is liable for any CEA claims; 12. If an earthquake insurance policy is issued by the CEA, requires a notice be provided to the policyholder disclosing that the policy is issued by the CEA; the CEA is not part of the homeowners' insurance company; if losses exceed the available resources of the CEA, CIGA will not pay claims; and that if the CEA becomes insolvent and unable to pay claims, the policyholder may be subject to future surcharges up to an additional 20% of the premium, as specified; 13. In the event the CEA has exhausted its capital resources available to pay claims, authorizes the Treasurer to issue up to $1 billion in revenue bonds or other debt financing that would be repaid through a post-event surcharge imposed on CEA policyholders up to an additional 20% of their annual premium; 14. If all available capital is exhausted and no additional funds are available, allows the CEA to pay policyholder claims on a pro-rata basis or in installment payments; 15. Limits the operating expenses of the CEA to not more than 3% of premium income. This bill 1. Would revise and recast statutory notice requirements relating to the mandatory offer of earthquake insurance, taking effect as of January 1, 2016; 2. Would increase the cap on CEA operating expenses from 3% to 6%, and would include all expenses in that cap except those expenditures specifically excluded, effective January 1, 2015; 3. Would change CEA offer of earthquake loss assessment coverage as part of condominium policies from a mandated coverage to optional coverage; 4. Would revise and recast the mandatory notice to homeowners who have purchased a CEA earthquake policy, to take effect January 1, 2016; AB 2064 (Cooley), Page 4 5. Would require CEA participating insurers to provide homeowners' insurance policyholders with CEA marketing documents at least once each year, to take effect January 1, 2016. COMMENTS 1. Purpose of the bill According to the author, homeowners have the right to purchase earthquake insurance but very few Californians take advantage of that right. The current law requires insurers to make the offer of earthquake insurance in a form that is written at a twelfth grade reading level, uses insurance industry jargon, and intimidates many consumers. An updated offer that is written in a more consumer-friendly fashion may encourage more consumers to buy earthquake insurance. In addition, existing statute limiting CEA operating expenses is unclear and is preventing the CEA from being more effective in reaching out to Californians who don't have earthquake insurance. 2. Background In order to ensure that both homeowners' and earthquake insurance were readily available in California, and to avoid a withdrawal of insurers from the California homeowners' insurance market following the Northridge earthquake, the Legislature created the CEA, operative on December 1, 1996, allowing the transfer of the obligation of homeowners' insurers to offer earthquake insurance from participating insurance companies to the CEA. CEA participating insurers retained the process of offering and selling CEA insurance products to the public, but the risk of those policies would be borne by the CEA. Also as part of the process, the mandatory earthquake coverage requirements were reduced into a more limited "mini-policy" that could be provided by the CEA or private insurers, and would be actuarially sound, yet catastrophic in nature. The CEA currently writes about 73% of all residential earthquake insurance in the state, with about 840,000 policies, but there are still more than 150 private insurers writing at least some residential or commercial earthquake policies. The mandatory earthquake insurance offer that must be provided was written in the statute, and has not been changed since the mid-1990s. It has been criticized as not being easy to understand, full of legal and insurance jargon, and presented in a negative way that actually could AB 2064 (Cooley), Page 5 discourage people from choosing to purchase earthquake insurance. Unlike private insurance companies who are required to join the California Insurance Guarantee Association (CIGA) as a condition of doing business in California-including those who sell earthquake insurance, the CEA is not a member of CIGA. If the CEA's liability for losses exceeds its resources, neither CIGA, nor the state, will step in to pay CEA claims. Instead, the CEA is authorized to issue up to $1 billion in revenue bonds that would be repaid through a post-event surcharge imposed on CEA policyholders up to an additional 20% of premiums, and, if no additional resources are available, to pay claims on a pro-rata basis. Currently, when a CEA policy is issued, the homeowner must be provided with a disclosure that describes these limitations of the CEA policy. Like the mandatory offer notice described above, this notice was written in statute in the mid-1990's and has not been changed. This bill would make this disclosure more consumer-friendly and easier to understand. Existing law caps the "operating expenses" of the CEA at 3% of the premium collected by the CEA. This cap was established based on an expectation that the take-up rate for earthquake insurance would be approximately 30% instead of the approximately 10% experienced in recent years. As a result, the CEA has a lower cap figure than expected, creating significant budgetary pressure. In response to that pressure, the CEA made a number of adjustments to how it classifies expenses to create space under the cap. This bill increases the cap to 6% of premium collected to reflect the lower take-up rate and free the CEA from the need to engage in budgetary maneuvers to stay under the 3% cap. The bill also defines "operating expenses" to provide the CEA with clearer guidance regarding the cap on operating expenses. These changes should relieve the pressure that has driven the reclassification of expenses in previous budgets. 3. Support . According to the author, the current offer of earthquake insurance is written at a 12th grade reading level, and is intimidating. A more consumer-friendly, updated offer may support greater take-up rates for earthquake insurance. According to the CEA, the current mandatory offer regime is AB 2064 (Cooley), Page 6 broken. California's 20-year-old requirement for participating insurers to offer earthquake insurance to their policyholders every two years simply doesn't do the job. It doesn't tell policyholders what they need to know about the importance of purchasing earthquake insurance. It doesn't take advantage of modern electronic communications, like email and websites, to share information about earthquake insurance, and it creates unnecessary confusion about the availability of earthquake insurance. AB 2064 will modernize and update the mandatory offer, and the mandatory CEA policy notice, so that they are easier to read and understand. United Policyholders supports AB 2064 because the fact that 90% of California homes are not financially protected against the risk of an earthquake is a looming crisis of serious proportions. People need to be more effectively reminded and educated about their earthquake options and make informed decisions not based on outdated information and rumors. 4. Opposition None received. 5. Suggested Amendments . Both this bill and AB 2735 (Assembly Insurance Committee), also being heard in this committee today, amend Insurance Code section 10083. If both are agreed to, chaptering language will be required to prevent chaptering out of one of the bills. 6. Prior and Related Legislation AB 2735 (Assembly Insurance Committee) would provide that if an insurer issues an earthquake insurance policy not meeting the minimum statutory offer requirements that is approved by the Insurance Commissioner, no further offer of earthquake coverage meeting the minimum requirements and no notice of non-coverage is required if a renewal of the earthquake policy is offered and written notice is provided regarding the availability of additional coverage that meets the minimum statutory offer requirements. POSITIONS Support AB 2064 (Cooley), Page 7 California Earthquake Authority Personal Insurance Federation of California United Policyholders Oppose None received Consultant: Erin Ryan (916) 651-4110