BILL NUMBER: AB 964 CHAPTERED 10/10/99 CHAPTER 715 FILED WITH SECRETARY OF STATE OCTOBER 10, 1999 APPROVED BY GOVERNOR OCTOBER 6, 1999 PASSED THE ASSEMBLY SEPTEMBER 3, 1999 PASSED THE SENATE SEPTEMBER 2, 1999 AMENDED IN SENATE AUGUST 23, 1999 AMENDED IN SENATE JULY 13, 1999 AMENDED IN SENATE JUNE 28, 1999 AMENDED IN ASSEMBLY APRIL 27, 1999 AMENDED IN ASSEMBLY APRIL 14, 1999 INTRODUCED BY Assembly Member Aroner (Coauthor: Assembly Member Torlakson) FEBRUARY 25, 1999 An act to amend Sections 10089.39 and 10089.40 of, and to amend, repeal, and add Section 10089.27 of, the Insurance Code, relating to earthquake insurance. LEGISLATIVE COUNSEL'S DIGEST AB 964, Aroner. Earthquake insurance. (1) Existing law governing the California Earthquake Authority prohibits an insurer from participating in the authority unless every insurer affiliated with that insurer, as defined, or under common control with that insurer, as defined, also participates in the authority. This bill would provide, until January 1, 2004, that if a person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing less than 33% of the voting securities of an insurer that writes earthquake insurance, but does not write homeowners or dwelling fire insurance in the state, and the insurer became part of an affiliated group which includes one or more participating insurers as a result of an acquisition or merger which occurred after the effective date of the provisions governing the authority, then the insurer is not required to participate in the authority even though an insurer affiliated with it or under common control with it does participate in the authority, provided the insurer does not transact residential earthquake insurance business with agents exclusively appointed or employed by the participating insurer. This bill would impose reporting requirements on the exempted insurer and the Insurance Commissioner related to this exemption. (2) Existing law establishes the Earthquake Loss Mitigation Fund, which may be used to supply grants and loans or loan guarantees to dwelling owners who wish to retrofit their homes to protect against earthquake damage. Existing law requires the operational rules of that fund to be a part of the authority's plan of operations. This bill would require the authority, on or before July 1, 2000, to establish in the operational rules of the Earthquake Loss Mitigation Fund, a plan for the expedited expansion of the residential retrofit program statewide, as specified. (3) Existing law provides a premium discount or credit, as specified, to policyholders of authority-issued policies of residential earthquake coverage who have retrofitted their homes to withstand earthquake shake damage, as specified. This bill would require the authority, on or before July 1, 2000, to issue a report to the Legislature on the status of the Earthquake Loss Mitigation Fund, the residential retrofit program, and the application of the retrofit premium discount or credit, as specified. THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS: SECTION 1. Section 10089.27 of the Insurance Code is amended to read: 10089.27. (a) Every participating insurer that has inforce residential earthquake insurance policies in the state as of the date of commencement of authority operations shall renew each inforce residential earthquake insurance policy or earthquake coverage provided by endorsement into the authority at the time the policy or endorsement comes up for renewal. The effective date of each policy renewal into the authority shall be the renewal date of the policy as recorded in the records of the insurer and disclosed to the policyholder. The risk of loss under the insurance policy does not transfer to the authority until 12:01 a.m. of the policy renewal date. (b) (1) All policies of residential earthquake insurance written by any participating insurer shall have been renewed into the authority within one year of the commencement of operations of the authority or the date an insurer elects to participate in the authority, whichever is later, and after that date, no participating insurer shall be permitted to write a policy of insurance that provides coverage within the terms and limits of a policy of basic residential earthquake insurance for any qualifying residential property in the state. Participating insurers may sell residential earthquake insurance products that supplement or augment the basic residential earthquake insurance provided by the authority. (2) Upon application to the authority demonstrating good cause and approval of the commissioner, a participating insurer may take up to 60 days beyond that one-year period to complete its renewal of earthquake policies into the authority. No extension of time to complete earthquake policy renewals into the authority shall serve to extend the due date by which an insurer is to make its initial capital contribution, as set forth in Section 10089.15. The commissioner shall not approve any extension if the effect of the extension would allow an insurer to selectively transfer earthquake policies with high risks to the authority while retaining policies with lower risks during that interim period. (3) After policies of residential earthquake insurance are renewed in the authority, insurers shall have no responsibilities or liabilities regarding those policies for losses incurred after the date of renewal of those policies, except for duties and responsibilities to the authority and policyholders under the terms of this chapter. (4) No insurer may participate in the authority unless every insurer affiliated with that insurer (as defined in subdivision (a) of Section 1215) or under common control with that insurer (as defined in subdivision (b) of Section 1215) also participates in the authority. (5) If a person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing less than 33 percent of the voting securities of an insurer that writes earthquake insurance, but does not write homeowners or dwelling fire insurance in the state, and the insurer became part of an affiliated group which includes one or more participating insurers as a result of an acquisition or merger which occurred after the effective date of this chapter, notwithstanding paragraph (4), the insurer is not required to participate in the authority even though an insurer affiliated with it or under common control with it does participate in the authority, provided the insurer does not transact residential earthquake insurance business with agents exclusively appointed or employed by the participating insurer. (6) On or after October 1, 2002, but before January 1, 2003, each insurer exempted from participation in the authority by paragraph (5) shall report to the commissioner and the Legislature on the number of residential earthquake insurance policies written by that insurer where a participating insurer affiliated or under common control with that insurer has written the policies of residential property insurance on the same residential properties, the geographic distribution of those residential properties, and the percentage of that insurer's total residential earthquake insurance business represented by those policies. The commissioner shall compare the information received from each insurer exempt pursuant to paragraph (5), with the number and geographic distribution of residential earthquake insurance policies placed with the authority where the participating affiliated insurer has written the policy of residential property insurance. The commissioner shall report this data to the Legislature, together with a determination of whether or not there has been material adverse selection. (c) This section shall become inoperative on January 1, 2004, and as of that date is repealed, unless a later enacted statute, that is enacted before that date, deletes or extends that date. SEC. 1.5. Section 10089.27 is added to the Insurance Code, to read: 10089.27. (a) Every participating insurer that has in-force residential earthquake insurance policies in the state as of the date of commencement of authority operations shall renew each in-force residential earthquake insurance policy or earthquake coverage provided by endorsement into the authority at the time the policy or endorsement comes up for renewal. The effective date of each policy renewal into the authority shall be the renewal date of the policy as recorded in the records of the insurer and disclosed to the policyholder. The risk of loss under the insurance policy does not transfer to the authority until 12:01 a.m. of the policy renewal date. (b) (1) All policies of residential earthquake insurance written by any participating insurer shall have been renewed into the authority within one year of the commencement of operations of the authority or the date an insurer elects to participate in the authority, whichever is later, and after that date, no participating insurer shall be permitted to write a policy of insurance that provides coverage within the terms and limits of a policy of basic residential earthquake insurance for any qualifying residential property in the state. Participating insurers may sell residential earthquake insurance products that supplement or augment the basic residential earthquake insurance provided by the authority. (2) Upon application to the authority demonstrating good cause and approval of the commissioner, a participating insurer may take up to 60 days beyond that one-year period to complete its renewal of earthquake policies into the authority. No extension of time to complete earthquake policy renewals into the authority shall serve to extend the due date by which an insurer is to make its initial capital contribution, as set forth in Section 10089.15. The commissioner shall not approve any extension if the effect of the extension would allow an insurer to selectively transfer earthquake policies with high risks to the authority while retaining policies with lower risks during that interim period. (3) After policies of residential earthquake insurance are renewed in the authority, insurers shall have no responsibilities or liabilities regarding those policies for losses incurred after the date of renewal of those policies, except for duties and responsibilities to the authority and policyholders under the terms of this chapter. (4) No insurer may participate in the authority unless every insurer affiliated with that insurer (as defined in subdivision (a) of Section 1215) or under common control with that insurer (as defined in subdivision (b) of Section 1215) also participates in the authority. (c) This section shall become operative on January 1, 2004. SEC. 2. Section 10089.39 of the Insurance Code is amended to read: 10089.39. (a) The operational rules of the Earthquake Loss Mitigation Fund shall be part of the authority's plan of operations. (b) On or before July 1, 2000, the authority shall establish in the operational rules of the Earthquake Loss Mitigation Fund, a plan for the expedited expansion of the residential retrofit program statewide. The program shall include personnel and administrative requirements and all other programmatic specifications necessary to the implementation of the plan. SEC. 3. Section 10089.40 of the Insurance Code 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 5 percent on the authority-issued policy of residential earthquake coverage. For residential dwellings, the 5-percent discount shall be applicable if the dwelling, at a minimum, meets the following requirements: the dwelling was built prior to 1979, is tied to the foundation, has cripple walls braced with plywood or its equivalent, and the water heater is secured to the building frame. For mobilehomes, the 5-percent discount shall be applicable if the mobilehome, at a minimum, is reinforced by an earthquake resistant bracing system certified by the Department of Housing and Community Development. The board may approve a premium discount or credit above 5 percent, as long as the discount or credit is determined actuarially sound by the authority. (e) On or before July 1, 2000, the authority shall issue a report to the Legislature on the current status of the Earthquake Loss Mitigation Fund established by Section 10089.37, the residential retrofit program authorized by Section 10089.38, and application of the retrofit premium discount or credit established in subdivision (d). The report shall include a financial report on fund deposits, income, and expenditures. The report shall also include statistics about the number of counties which are eligible for the retrofit program, the number of homeowners who have applied for the program, the number of retrofits which have been approved and completed, a breakdown of the amount of authority funds and private funds which have been expended in the program, the dollar amount of insurance rate reductions which have been provided, and other information concerning the status of the program. The report shall also include a copy of the plan for the expedited expansion of the residential retrofit program required by subdivision (b) of Section 10089.39 and any specifications for additional statutory authority or regulations necessary for the implementation of the plan. (f) All rates shall be approved by the commissioner prior to their use.