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. 




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               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