BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                            



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                                    THIRD READING


          Bill No:  AB 2064
          Author:   Cooley (D)
          Amended:  6/12/14 in Senate
          Vote:     21


           SENATE INSURANCE COMMITTEE  :  10-0, 6/25/14
          AYES:  Monning, Corbett, Correa, DeSaulnier, Lieu, Mitchell,  
            Nielsen, Roth, Torres, Vidak
          NO VOTE RECORDED:  Gaines

           SENATE APPROPRIATIONS COMMITTEE  :  Senate Rule 28.8

           ASSEMBLY FLOOR  :  78-0, 5/15/14 (Consent) - See last page for  
            vote


           SUBJECT  :    Earthquake insurance:  mandatory offer

           SOURCE  :     Author


           DIGEST  :    This bill revises and recasts statutory notice  
          requirements relating to the mandatory offer of earthquake  
          insurance; revises and recasts the mandatory notice to  
          California Earthquake Authority (CEA) policyholders; increases  
          the cap on CEA operating expenses from 3% to 6% and includes all  
          expenses in that cap except those expenditures specifically  
          excluded, as specified; changes CEA loss assessment coverage for  
          condominiums from mandatory to optional; and requires CEA  
          participating insurers to send CEA marketing materials to  
          homeowners' policyholders at least once a year.

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           ANALYSIS  :    

          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 days 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. 

            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.Requires, when a homeowner has not purchased earthquake  
            coverage pursuant to the mandated offer, 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  

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            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 CEA, 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;

          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.Requires, if an earthquake insurance policy is issued by the  
            CEA, 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.Authorizes, in the event the CEA has exhausted its capital  
            resources available to pay claims, 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.Allows, if all available capital is exhausted and no  
            additional funds are available, the CEA to pay policyholder  
            claims on a pro-rata basis or in installment payments;


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          15.Limits the operating expenses of the CEA to not more than 3%  
            of premium income.



          This bill:

          1.Revises and recasts statutory notice requirements relating to  
            the mandatory offer of earthquake insurance, taking effect as  
            of January 1, 2016;

          2.Increases the cap on CEA operating expenses from 3% to 6%, and  
            includes all expenses in that cap except those expenditures  
            specifically excluded, effective January 1, 2015;

          3.Changes CEA offer of earthquake loss assessment coverage as  
            part of condominium policies from a mandated coverage to  
            optional coverage;

          4.Revises and recasts the mandatory notice to homeowners who  
            have purchased a CEA earthquake policy, to take effect January  
            1, 2016; and

          5.Requires CEA participating insurers to provide homeowners'  
            insurance policyholders with CEA marketing documents at least  
            once each year, to take effect January 1, 2016.

           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  

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          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 discourage people from  
          choosing to purchase earthquake insurance.

          Unlike private insurance companies who are required to join 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.

          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.

           FISCAL EFFECT  :    Appropriation:  No   Fiscal Com.:  Yes    
          Local:  No

           SUPPORT  :   (Verified  7/30/14)

          California Earthquake Authority
          Personal Insurance Federation of California
          United Policyholders

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           ARGUMENTS IN SUPPORT  :    According to the CEA, the current  
          mandatory offer regime is 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 e-mail and Web sites, 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.


           ASSEMBLY FLOOR  :  78-0, 5/15/14
          AYES:  Achadjian, Alejo, Allen, Ammiano, Bigelow, Bloom,  
            Bocanegra, Bonilla, Bonta, Bradford, Brown, Buchanan, Ian  
            Calderon, Campos, Chau, Chávez, Chesbro, Conway, Cooley,  
            Dababneh, Dahle, Daly, Dickinson, Donnelly, Eggman, Fong, Fox,  
            Frazier, Beth Gaines, Garcia, Gatto, Gomez, Gonzalez, Gordon,  
            Gorell, Gray, Grove, Hagman, Hall, Harkey, Roger Hernández,  
            Holden, Jones, Jones-Sawyer, Levine, Linder, Logue, Lowenthal,  
            Maienschein, Medina, Melendez, Mullin, Muratsuchi, Nazarian,  
            Nestande, Olsen, Pan, Patterson, Perea, John A. Pérez, V.  
            Manuel Pérez, Quirk, Quirk-Silva, Rendon, Ridley-Thomas,  
            Rodriguez, Salas, Skinner, Stone, Ting, Wagner, Waldron,  
            Weber, Wieckowski, Wilk, Williams, Yamada, Atkins
          NO VOTE RECORDED:  Mansoor, Vacancy


          AL:e  8/4/14   Senate Floor Analyses 

                           SUPPORT/OPPOSITION:  SEE ABOVE

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