BILL ANALYSIS Ó
SENATE INSURANCE COMMITTEE
Senator William W. Monning, Chair
SB1205 (Monning) Hearing Date: April 24, 2014
As Amended: April 3, 2014
Fiscal: Yes
Urgency: No
SUMMARY Would require the California Department of Insurance
(CDI) curriculum board to develop or recommend course of study
on commercial earthquake risk management, including courses
relating to understanding risk zones, options for insurance
coverage to cover potential loss, mitigation strategies, and
post-event recovery to ensure insurance agents and brokers have
access to training on the complex issues of commercial
earthquake insurance and mitigation.
DIGEST
Existing law
1. Establishes a curriculum board, appointed by the Insurance
Commissioner (IC), consisting of representatives of insurance
agents, brokers, and life agents trade associations,
representatives of insurance companies, consumer groups, bail
agents, and insurance adjusters to develop the pre-licensing and
continuing education curriculum, including a list of
pre-approved courses of study;
2. Specifically requires the curriculum board to develop courses
of study for long-term care insurance, Medi-gap policies,
disability insurance products, business management practices,
and ethics;
3. Requires the curriculum developed and the courses of study
approved by the board to be submitted to the IC for final
approval;
4. Requires the CDI to adopt regulations setting standards for the
training of insurance adjusters in evaluating damage caused by
earthquakes, and requires insurers to train and accredit
adjusters in accordance with those standards (IC Section
SB 1205 (Monning), Page 2
10089.3).
This bill
1. Would require the curriculum board to develop or recommend
course of study on commercial earthquake risk management,
including courses relating to understanding risk zones,
options for insurance coverage to cover potential loss,
mitigation strategies, and post-event recovery.
COMMENTS
1. Purpose of the bill . According to the author, there has
been little attention paid to commercial earthquake
insurance, despite the threat underinsured or uninsured
businesses pose to the economy following a major earthquake.
It is wrong to assume that all businesses, and particularly
small businesses, understand their risks, and many may not
know that their business policy does not cover the peril of
earthquake. The first step to ensuring that agents and
brokers discuss the importance of earthquake insurance is
for them to have a better understanding of the issues. This
legislation will ensure agents and brokers have access to
approved training to fully understand and assist their
clients in managing their earthquake risk.
2. Background . This committee held an informational hearing on
March 26, 2014 looking at the risks a major earthquake poses
to California businesses and the economy. A major earthquake
in the San Francisco Bay Area or in southern California
could have an even greater impact on businesses, employees,
and payrolls in the area than Hurricane Katrina had in
Louisiana and Mississippi.
Insurance is the primary mechanism to spread losses and
rapidly pay defined amounts for the repair of earthquake
damage. Nonetheless, according to data from the California
Department of Insurance (CDI), only about 8.3 percent of
California businesses have earthquake insurance.
Unlike in the homeowners' market, there is no mandate to
offer commercial earthquake insurance in the state, and no
requirement for agents and brokers to actually discuss
earthquake insurance with their commercial clients.
SB 1205 (Monning), Page 3
The magnitude 6.7 Northridge earthquake in 1994 was the
costliest natural disaster in the history of California, and
the fourth largest economic loss caused by a natural
disaster in the nation's history. It caused over $25 billion
in damage, and $49 billion in economic losses to the region
and state. At least 50% of small businesses were still not
open nine months after the disaster. As a result of the
significant damages from that moderate earthquake, the
homeowners' insurance market was thrown into turmoil when
insurers, rather than comply with the mandatory offer of
earthquake insurance to homeowners, ceased writing
homeowners insurance in California. In order to return
stability to the homeowners' insurance market, the
California Earthquake Authority was created by the
Legislature. No such mechanism was created for California's
businesses.
Japan's March 11, 2011, earthquake and the tsunamis it
generated made the event the most expensive earthquake on
record, with economic losses of $210 billion, only $35
billion of which was insured loss. That earthquake raised
increased awareness of the economic challenges of recovery
beyond the prevailing concerns for protecting human lives
and property to protecting economic interests. Three years
later it continues to impact domestic and multi-national
business operations and has had long term economic
consequences such as loss of market share, higher
unemployment, and loss of business entirely.
If left inadequately prepared, disasters of similar severity
paired with our low level of insured risk could cripple
California's economy, and impact global business operations
for a prolonged period of time. The impact and damage to
commercial operations is very different, and more complex,
than in the residential market. Factors to be considered by
a business include physical damage to structures, workforce
availability, infrastructure damage, disruptions to supply
lines, reduced productivity, loss of market share, loss of
customer base and lost profits.
Building owners bear the costs of repairs, as well as other
costs, such as costs to relocate while damage is being
repaired. Commercial owners lose income from rents. Existing
lenders continue to expect payments. Owners' ability to
repair their buildings depends on their ability to continue
SB 1205 (Monning), Page 4
making payments on existing debt and to fund repairs from
savings, liquidating other assets, or borrowing additional
sums. Those without sufficient assets and with limited
income might not qualify for additional loans.
Large businesses are more likely to recover given their
resources and size. They may have other locations, have the
ability to access funds to absorb a short term closure, or
be able to relocate to a new location. However, when they do
fail, these same large businesses leave a much larger
negative impact on the surrounding community in terms of
high job losses, indirect losses to suppliers, impacts to
tax revenue, blighted areas, and general quality of life and
community services. Small businesses face an even bigger
challenge. Even a short period without cash flow can
significantly damage a small business as they have limited
reserve funds.
The California Earthquake Authority offers agent continuing
education training on residential earthquake insurance
issues, but there is no similar program for commercial
earthquake risk. Almost half of the projected damage of a
major earthquake is expected to be business losses.
3. Support None received.
4. Opposition None received.
POSITIONS
Support
None received
Oppose
None received
Consultant: Erin Ryan (916) 651-4110