BILL ANALYSIS �
SENATE INSURANCE COMMITTEE
Senator William W. Monning, Chair
AB 2064 (Cooley) Hearing Date: June 25, 2014
As Amended: June 12, 2014
Fiscal: Yes
Urgency: No
VOTES: Asm. Floor (05/15/14)78-0/Pass
Asm. Appr. (05/07/14)17-0/Pass
Asm. Ins. (04/23/14) 13-0/Pass
SUMMARY Would revise and recast statutory notice requirements
relating to the mandatory offer of earthquake insurance; would
revise and recast the mandatory notice to California Earthquake
Authority (CEA) policyholders; would increase the cap on CEA
operating expenses from 3% to 6% and include all expenses in
that cap except those expenditures specifically excluded, as
specified; would change CEA loss assessment coverage for
condominiums from mandatory to optional; and would require CEA
participating insurers to send CEA marketing materials to
homeowners' policyholders at least once a year.
DIGEST
Existing law
1. Provides that no homeowners' insurance policy may be offered or
sold in California unless the homeowner is offered earthquake
coverage, either as part of the homeowners' policy, or as a
separate policy;
2. Requires the offer of earthquake insurance to be made prior to,
concurrent with, or within 60 following the issuance or renewal
of a homeowners' insurance policy;
3. Specifies language that must be included in the offer of
earthquake coverage in at least 10-point boldface type,
beginning with:
"YOUR POLICY DOES NOT PROVIDE COVERAGE AGAINST THE PERIL OF
EARTHQUAKE.
AB 2064 (Cooley), Page 2
CALIFORNIA LAW REQUIRES THAT EARTHQUAKE COVERAGE BE OFFERED TO
YOU AT YOUR OPTION.
WARNING: THESE COVERAGES MAY DIFFER SUBSTANTIALLY FROM AND
PROVIDE LESS PROTECTION THAN THE COVERAGE PROVIDED BY YOUR
HOMEOWNERS' INSURANCE POLICY?.";
4. Establishes a conclusive presumption that the insurer, agent or
broker complied with the offer disclosure requirement if it
delivers the offer and the homeowner does not return the signed
acknowledgement of receipt within 60 days of the date it was
provided;
5. Establishes a conclusive presumption that the insured elected
not to accept the coverage if the insurer establishes proof of
mailing or delivery of the offer and the insured has not
accepted coverage within 30 days from date of mailing or
delivery;
6. When a homeowner has not purchased earthquake coverage pursuant
to the mandated offer, requires the insurer to notify the
homeowner that the homeowners' policy does not include
earthquake coverage, offer such coverage and provide such a
notice of non-coverage on at least an every other year basis
prior to or concurrent with renewal of the homeowners' insurance
policy;
7. Establishes minimum requirements for the offer of earthquake
insurance, also known as the "mini-policy," that fulfills the
mandatory offer requirement; specifies that the policy must
cover the dwelling, but may exclude outbuildings, fences,
swimming pools and other structures not critical to the
structural integrity of the dwelling, as specified; and allows
more limited contents coverage and additional living expenses;
8. Establishes the California Earthquake Authority, a privately
financed, publicly managed entity to sell only earthquake
insurance;
9. Allows insurers to fulfill their mandatory offer obligation by
joining the CEA as a participating insurer, and offering CEA
policies to their insureds;
10. Prohibits the CEA from selling earthquake insurance policies
directly to homeowners;
AB 2064 (Cooley), Page 3
11. Provides that the CEA is not a member of the California
Insurance Guaranty Association (CIGA), and that neither CIGA,
nor the state, is liable for any CEA claims;
12. If an earthquake insurance policy is issued by the CEA,
requires a notice be provided to the policyholder disclosing
that the policy is issued by the CEA; the CEA is not part of the
homeowners' insurance company; if losses exceed the available
resources of the CEA, CIGA will not pay claims; and that if the
CEA becomes insolvent and unable to pay claims, the policyholder
may be subject to future surcharges up to an additional 20% of
the premium, as specified;
13. In the event the CEA has exhausted its capital resources
available to pay claims, authorizes the Treasurer to issue up to
$1 billion in revenue bonds or other debt financing that would
be repaid through a post-event surcharge imposed on CEA
policyholders up to an additional 20% of their annual premium;
14. If all available capital is exhausted and no additional funds
are available, allows the CEA to pay policyholder claims on a
pro-rata basis or in installment payments;
15. Limits the operating expenses of the CEA to not more than 3% of
premium income.
This bill
1. Would revise and recast statutory notice requirements
relating to the mandatory offer of earthquake insurance,
taking effect as of January 1, 2016;
2. Would increase the cap on CEA operating expenses from 3% to
6%, and would include all expenses in that cap except those
expenditures specifically excluded, effective January 1,
2015;
3. Would change CEA offer of earthquake loss assessment
coverage as part of condominium policies from a mandated
coverage to optional coverage;
4. Would revise and recast the mandatory notice to homeowners
who have purchased a CEA earthquake policy, to take effect
January 1, 2016;
AB 2064 (Cooley), Page 4
5. Would require CEA participating insurers to provide
homeowners' insurance policyholders with CEA marketing
documents at least once each year, to take effect January 1,
2016.
COMMENTS
1. Purpose of the bill According to the author, homeowners
have the right to purchase earthquake insurance but very few
Californians take advantage of that right. The current law
requires insurers to make the offer of earthquake insurance
in a form that is written at a twelfth grade reading level,
uses insurance industry jargon, and intimidates many
consumers. An updated offer that is written in a more
consumer-friendly fashion may encourage more consumers to
buy earthquake insurance. In addition, existing statute
limiting CEA operating expenses is unclear and is preventing
the CEA from being more effective in reaching out to
Californians who don't have earthquake insurance.
2. Background In order to ensure that both homeowners' and
earthquake insurance were readily available in California,
and to avoid a withdrawal of insurers from the California
homeowners' insurance market following the Northridge
earthquake, the Legislature created the CEA, operative on
December 1, 1996, allowing the transfer of the obligation of
homeowners' insurers to offer earthquake insurance from
participating insurance companies to the CEA. CEA
participating insurers retained the process of offering and
selling CEA insurance products to the public, but the risk
of those policies would be borne by the CEA. Also as part of
the process, the mandatory earthquake coverage requirements
were reduced into a more limited "mini-policy" that could be
provided by the CEA or private insurers, and would be
actuarially sound, yet catastrophic in nature. The CEA
currently writes about 73% of all residential earthquake
insurance in the state, with about 840,000 policies, but
there are still more than 150 private insurers writing at
least some residential or commercial earthquake policies.
The mandatory earthquake insurance offer that must be
provided was written in the statute, and has not been
changed since the mid-1990s. It has been criticized as not
being easy to understand, full of legal and insurance
jargon, and presented in a negative way that actually could
AB 2064 (Cooley), Page 5
discourage people from choosing to purchase earthquake
insurance.
Unlike private insurance companies who are required to join
the California Insurance Guarantee Association (CIGA) as a
condition of doing business in California-including those
who sell earthquake insurance, the CEA is not a member of
CIGA. If the CEA's liability for losses exceeds its
resources, neither CIGA, nor the state, will step in to pay
CEA claims. Instead, the CEA is authorized to issue up to $1
billion in revenue bonds that would be repaid through a
post-event surcharge imposed on CEA policyholders up to an
additional 20% of premiums, and, if no additional resources
are available, to pay claims on a pro-rata basis. Currently,
when a CEA policy is issued, the homeowner must be provided
with a disclosure that describes these limitations of the
CEA policy. Like the mandatory offer notice described above,
this notice was written in statute in the mid-1990's and has
not been changed. This bill would make this disclosure more
consumer-friendly and easier to understand.
Existing law caps the "operating expenses" of the CEA at 3%
of the premium collected by the CEA. This cap was
established based on an expectation that the take-up rate
for earthquake insurance would be approximately 30% instead
of the approximately 10% experienced in recent years. As a
result, the CEA has a lower cap figure than expected,
creating significant budgetary pressure. In response to
that pressure, the CEA made a number of adjustments to how
it classifies expenses to create space under the cap. This
bill increases the cap to 6% of premium collected to reflect
the lower take-up rate and free the CEA from the need to
engage in budgetary maneuvers to stay under the 3% cap. The
bill also defines "operating expenses" to provide the CEA
with clearer guidance regarding the cap on operating
expenses. These changes should relieve the pressure that
has driven the reclassification of expenses in previous
budgets.
3. Support . According to the author, the current offer of
earthquake insurance is written at a 12th grade reading
level, and is intimidating. A more consumer-friendly,
updated offer may support greater take-up rates for
earthquake insurance.
According to the CEA, the current mandatory offer regime is
AB 2064 (Cooley), Page 6
broken. California's 20-year-old requirement for
participating insurers to offer earthquake insurance to
their policyholders every two years simply doesn't do the
job. It doesn't tell policyholders what they need to know
about the importance of purchasing earthquake insurance. It
doesn't take advantage of modern electronic communications,
like email and websites, to share information about
earthquake insurance, and it creates unnecessary confusion
about the availability of earthquake insurance. AB 2064 will
modernize and update the mandatory offer, and the mandatory
CEA policy notice, so that they are easier to read and
understand.
United Policyholders supports AB 2064 because the fact that
90% of California homes are not financially protected
against the risk of an earthquake is a looming crisis of
serious proportions. People need to be more effectively
reminded and educated about their earthquake options and
make informed decisions not based on outdated information
and rumors.
4. Opposition None received.
5. Suggested Amendments . Both this bill and AB 2735 (Assembly
Insurance Committee), also being heard in this committee
today, amend Insurance Code section 10083. If both are
agreed to, chaptering language will be required to prevent
chaptering out of one of the bills.
6. Prior and Related Legislation
AB 2735 (Assembly Insurance Committee) would provide that if
an insurer issues an earthquake insurance policy not meeting
the minimum statutory offer requirements that is approved by
the Insurance Commissioner, no further offer of earthquake
coverage meeting the minimum requirements and no notice of
non-coverage is required if a renewal of the earthquake
policy is offered and written notice is provided regarding
the availability of additional coverage that meets the
minimum statutory offer requirements.
POSITIONS
Support
AB 2064 (Cooley), Page 7
California Earthquake Authority
Personal Insurance Federation of California
United Policyholders
Oppose
None received
Consultant: Erin Ryan (916) 651-4110