BILL ANALYSIS                                                                                                                                                                                                    


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          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.

          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  

          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.


          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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