BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 1205|
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CONSENT
Bill No: SB 1205
Author: Monning (D)
Amended: 4/3/14
Vote: 21
SENATE INSURANCE COMMITTEE : 11-0, 4/24/14
AYES: Monning, Gaines, Corbett, Correa, DeSaulnier, Lieu,
Mitchell, Nielsen, Roth, Torres, Vidak
SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8
SUBJECT : Insurance
SOURCE : Author
DIGEST : This bill requires the 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.
ANALYSIS :
Existing law:
1.Establishes a curriculum board, appointed by the Insurance
Commissioner, consisting of representatives of insurance
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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.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 Commissioner 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.
This bill requires 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.
Background
The Senate Insurance 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 CDI, only about 8.3% 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.
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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 making payments
on existing debt and to fund repairs from savings, liquidating
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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.
Comments
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."
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
AL:k 5/13/14 Senate Floor Analyses
SUPPORT/OPPOSITION: NONE RECEIVED
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