BILL NUMBER: AB 3232 CHAPTERED
BILL TEXT
CHAPTER 969
FILED WITH SECRETARY OF STATE SEPTEMBER 27, 1996
APPROVED BY GOVERNOR SEPTEMBER 26, 1996
PASSED THE ASSEMBLY AUGUST 28, 1996
PASSED THE SENATE AUGUST 23, 1996
AMENDED IN SENATE AUGUST 22, 1996
AMENDED IN SENATE AUGUST 21, 1996
INTRODUCED BY Assembly Member Knowles
FEBRUARY 23, 1996
An act to amend Sections 10089.23, 10089.29, and 10089.40 of, and
to add Section 10089.54 to, the Insurance Code, relating to
earthquake insurance.
LEGISLATIVE COUNSEL'S DIGEST
AB 3232, Knowles. Earthquake insurance: California Earthquake
Authority.
Existing law creates the California Earthquake Authority, which is
authorized to become operational and issue policies of basic
residential earthquake insurance, as defined, under certain
conditions.
This bill would:
(1) Revise the amount of the aggregate assessment of participating
insurers authorized under existing law, as specified.
(2) Require a notice to policyholders of the right to cancel or
nonrenew an earthquake policy if a policy issued by the authority
includes a premium surcharge.
(3) Provide that scientific information shall be used by the
authority to set earthquake insurance rates only if the information,
assumptions, and methodology used are consistent with the available
geophysical data and the state of the art of scientific knowledge
within the scientific community, as specified, and would further
provide that this information shall not be conclusive to support the
establishment of different rates between the most populous rating
territories in the state unless there is a clear showing of higher
risk of earthquake frequency, severity, or loss between those most
populous rating territories to support those differences, as
specified.
(4) Require the authority to cease writing new earthquake
insurance policies 180 days after implementation by both the Federal
National Mortgage Association ("Fannie Mae") and the Federal Home
Loan Mortgage Association ("Freddie Mac") of policies to require
earthquake insurance for any single-family residential structure,
other than a condominium unit or townhome, as a condition of
purchasing a mortgage or trust deed secured by that structure, except
as specified.
The bill would also provide that it shall not become operative
unless AB 2086 and SB 1993 are also enacted and become operative. It
would declare the intent of the Legislature that certain provisions
in this bill shall supersede and prevail over conflicting provisions
in those other bills.
THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:
SECTION 1. Section 10089.23 of the Insurance Code, as amended by
Senate Bill 1993 of the 1995-96 Regular Session, as amended July 7,
1996, is amended to read:
10089.23. (a) (1) If at any time following the payment of
earthquake losses the authority's available capital is reduced to
less than three hundred fifty million dollars ($350,000,000), or if
at any time the authority's available capital is insufficient to pay
benefits and continue operations, the authority shall have the power
to assess participating insurance companies subject to the maximum
limits as set forth in this section and Section 10089.30. The
assessment shall be limited to the amount necessary to pay the
outstanding or expected claims of the authority and to return the
authority's available capital to three hundred fifty million dollars
($350,000,000), as determined by the board, subject to approval by
the commissioner.
(2) Each participating insurer's assessment shall be determined by
multiplying its residential earthquake insurance market share, as of
December 31 of the immediately preceding year or the most recent
year for which premium data not more than one year old are available,
by the amount of the total assessment sought by the authority.
(3) Maximum permissible insurer assessments pursuant to this
section and Section 10089.30, maximum permissible earthquake
policyholder assessments pursuant to Section 10089.29, and maximum
permissible bond issuances or other debt financing issued or secured
by the Treasurer pursuant to Section 10089.29 shall be reduced
uniformly by multiplication of the maximum assessments and other
amounts provided in those sections by the percentage of the total
residential property insurance market share participation attained by
the authority upon its commencement, as described in Section
10089.15. The total amount of all assessments levied on
participating insurance companies by the authority pursuant to this
section shall not exceed three billion dollars ($3,000,000,000),
regardless of the frequency or severity of earthquake losses at any
and all times subsequent to the creation of the authority. Once a
participating insurer has paid amounts equal to its residential
earthquake insurance market share multiplied by three billion dollars
($3,000,000,000) pursuant to this section, the authority's power to
assess that insurer under this section shall cease and the authority
shall be prohibited from levying additional assessments on that
insurer pursuant to this section.
(4) Beginning December 31 of the first year of operations, and
each December 31 thereafter, the board shall adjust the maximum
permissible insurer assessments pursuant to this section and Section
10089.30, the maximum permissible authority policyholder assessment
pursuant to Section 10089.29, and the maximum permissible bond
issuances or other debt financing issued or secured by the Treasurer
pursuant to Section 10089.29 to reflect the market share of new
insurers entering into the authority as authorized by Sections
10089.15 and 10089.16 and participating insurers withdrawing from the
authority as authorized by Section 10089.19. The adjustments shall
be made in the same manner as authorized by paragraph (3).
(b) In the case of any insurer assessment, the authority shall
cause to be sent to each participating insurer a notice of that
insurer's assessment, and full payment shall be due within 30 days
and shall be overdue after 30 days. Penalties and interest shall be
assessed for late payments in the same manner as provided for late
payments of the insurer gross premium tax pursuant to Section 12258
of the Revenue and Taxation Code. The board may waive the penalties
and interest for good cause shown. The board shall make every effort
to assess insurers only for funds reasonably anticipated to be
necessary for claims payments and to return the authority's available
capital to three hundred fifty million dollars ($350,000,000).
(c) Notwithstanding the other provisions of this section, the
aggregate assessment authorized by this section shall be reduced to
zero 12 years following the commencement of authority operations.
SEC. 2. Section 10089.29 of the Insurance Code, as amended by
Assembly Bill 2086 of the 1995-96 Regular Session, as amended July 7,
1996, is amended to read:
10089.29. (a) If benefits paid by the authority following an
earthquake event exhaust the total of (1) the authority's available
capital, (2) the maximum amount of all insurer capital contributions
and assessments pursuant to Sections 10089.15 and 10089.23, (3) all
reinsurance actually available and under contract to the authority,
and (4) all capital committed and actually available by contract to
the authority from private capital markets, the Treasurer, as agent
for sale of bonds for the authority, may sell investment grade
revenue bonds or issue or secure other debt financing of the
authority or any combination of the revenue bonds or debt financing
in an amount up to one billion dollars ($1,000,000,000), in an amount
determined by the board pursuant to Section 10089.32. The Treasurer
shall make available the net proceeds of the revenue bonds or debt
financing as funding for the authority. These funds shall not be
used to replenish the fund. Failure of the authority to obtain such
funding for any reason shall not obligate the State of California to
provide or arrange replacement funding for the authority. The
Treasurer may sell revenue bonds for the purpose of refunding the
revenue bonds or other debt financing when authorized to do so by the
board, and the surcharge authorized by this section may be used to
repay that refunding.
(b) (1) In the event of a revenue bond sale or debt financing
arrangement pursuant to this section, the authority shall have the
power annually to surcharge all authority policies to secure funds
solely to repay the bonded indebtedness or other debt. The net
surcharge collected shall not exceed the sum calculated pursuant to
paragraph (3) of subdivision (a) of Section 10089.23, and in no event
exceed one billion dollars ($1,000,000,000), plus costs of issuance
and sale of those revenue bonds or other debt and amounts paid or
payable to bond issuers and providers of credit support and letters
of credit for and interest on those revenue bonds or other debt. In
no event shall the surcharge on any authority policy exceed 20
percent of the annual basic residential earthquake insurance premium
in any one year for the policy.
(2) If a policy issued by the authority includes a premium
surcharge pursuant to this subdivision, the participating insurer
shall provide the insured a notice in a stand-alone document stating
that the policyholder may cancel or nonrenew the earthquake policy.
The notice shall specify that cancellation or nonrenewal of the
earthquake policy will not affect the underlying residential property
insurance policy. The statement shall be provided with the premium
billing and shall include the following statement in 14-point
boldface type:
NOTICE OF SURCHARGE ON CEA EARTHQUAKE INSURANCE POLICY AND
RIGHT TO CANCEL
A SURCHARGE HAS BEEN INCLUDED IN THE PREMIUM FOR YOUR CEA EARTHQUAKE
INSURANCE POLICY. YOU MAY CHOOSE TO RENEW THIS POLICY AT THE NEW
RATE OR YOU MAY CANCEL OR NONRENEW YOUR CEA EARTHQUAKE INSURANCE
POLICY. CANCELLATION OR NONRENEWAL OF YOUR CEA POLICY WILL HAVE NO
AFFECT ON YOUR HOMEOWNERS' OR FIRE INSURANCE POLICY. HOWEVER, IF YOU
WANT EARTHQUAKE INSURANCE TO BE PROVIDED BY THE CEA, YOU MUST PAY
THE FULL PREMIUM FOR THE CEA POLICY, INCLUDING THE SURCHARGE.
(c) The total amount of indebtedness and policy surcharges
authorized under this section shall not exceed the sum calculated
pursuant to paragraph (3) of subdivision (a) of Section 10089.23, and
in no event exceed one billion dollars ($1,000,000,000) plus costs
of issuance and sale of those revenue bonds or other debt and amounts
paid or payable to bond issuers and providers of credit support and
letters of credit for, and interest on, those revenue bonds or other
debt, regardless of the frequency or severity of earthquake losses at
any and all times subsequent to the creation of the authority. Once
the authority has levied policy surcharges in an amount equal to the
sum calculated pursuant to paragraph (3) of subdivision (a) of
Section 10089.23, and in no event more than one billion dollars
($1,000,000,000) plus costs of issuance and sale of those revenue
bonds or other debt and amounts paid or payable to bond issuers and
providers of credit support and letters of credit for, and interest
on, those revenue bonds or other debt, the authority's power to
surcharge policies shall cease and the authority shall be prohibited
from levying additional surcharges pursuant to this section.
(d) Consistent with the provisions of Section 676, the authority
shall cancel the policy of basic residential earthquake insurance if
the policyholder fails to pay the earthquake policy surcharge
authorized by the authority, and the insurer shall cancel the policy
of residential property insurance if the policyholder fails to pay
the policy surcharge authorized by the authority.
SEC. 3. Section 10089.40 of the Insurance Code, as amended by AB
2086 of the 1995-96 Regular Session, as amended July 7, 1996, is
amended to read:
10089.40. (a) Rates established by the authority shall be
actuarially sound so as to not be excessive, inadequate, or unfairly
discriminatory. Rates shall be established based on the best
available scientific information for assessing the risk of earthquake
frequency, severity, and loss. Rates shall be equivalent for
equivalent risks. Factors the board shall consider in adopting rates
include, but are not limited to, the following:
(1) Location of the insured property and its proximity to
earthquake faults and to other geological factors that affect the
risk of earthquake or damage from earthquake.
(2) The soil type on which the insured dwelling is built.
(3) Construction type and features of the insured dwelling.
(4) Age of the insured dwelling.
(5) The presence of earthquake hazard reduction factors, including
those set forth in subdivision (a) of Section 10089.2.
(b) (1) If scientific information from geologists, seismologists,
or similar experts that assesses the frequency or severity of risk of
earthquake is considered in setting rates or in arriving at the
modeling assumptions upon which those rates are based, the
information may be used to establish differentials among risks only
if the information, assumptions, and methodology used are consistent
with the available geophysical data and the state of the art of
scientific knowledge within the scientific community.
(2) Scientific information from geologists, seismologists, or
similar experts shall not be conclusive to support the establishment
of different rates between the most populous rating territories in
the northern and southern regions of the state unless that
information, as analyzed by experts such as the United States
Geological Survey, the California Division of Mines and Geology, and
experts in the scientific or academic community, clearly shows a
higher risk of earthquake frequency, severity, or loss between those
most populous rating territories to support those differences.
(3) It is not the intent of the Legislature in adopting this
subdivision to mandate a uniform statewide flat rate for California
Earthquake Authority policies.
(c) The classification system established by the board shall not
be adjusted or tempered in any way to provide rates lower than are
justified for classifications that present a high risk of loss or
higher than are justified for classifications that present a low risk
of loss.
(d) Policyholders who have retrofitted their homes to withstand
earthquake shake damage according to standards and to the extent set
by the board shall enjoy a premium discount or credit of not less
than 5 percent on the authority-issued policy of residential
earthquake coverage, as long as the discount or credit is determined
actuarially sound by the authority.
(e) All rates shall be approved by the commissioner prior to their
use.
SEC. 4. Section 10089.54 is added to the Insurance Code, to read:
10089.54. (a) Unless authorized by a statute enacted subsequent
to the effective date of this section, the authority shall cease
writing new earthquake insurance policies 180 days after
implementation by both the Federal National Mortgage Association ("
Fannie Mae") and the Federal Home Loan Mortgage Association ("Freddie
Mac") of policies to require earthquake insurance for any
single-family residential structure, other than a condominium unit or
townhome, as a condition of purchasing a mortgage or trust deed
secured by that structure. Notwithstanding this restriction, the
authority shall continue to renew its existing earthquake insurance
policies and shall accept applications for earthquake insurance from
residential property insurance policyholders of participating
insurers in accordance with subdivision (b) of Section 10086.
(b) In the event that both the Federal National Mortgage
Association ("Fannie Mae") and the Federal Home Loan Mortgage
Association ("Freddie Mac") have proposed to implement policies to
require earthquake insurance for any single-family residential
structure, other than a condominium unit or townhome, as a condition
of purchasing a mortgage or trust deed secured by that structure, it
is the intent of the Legislature that the Legislature should convene
to consider whether the authority should continue to write new
earthquake insurance policies, with or without modification, or to
cease writing new earthquake insurance policies.
SEC. 5. This act shall not become operative unless Assembly Bill
2086 and Senate Bill 1993 of the 1995-96 Regular Session are also
enacted and become operative.
SEC. 6. It is the intent of the Legislature that Sections 10089.23
and 10089.40 of the Insurance Code, as amended by this act, shall
supersede and prevail over any conflicting provisions in Assembly
Bill 2086 and Senate Bill 1993 of the 1995-96 Regular Session, if
either or both of those bills are enacted after this act.