BILL ANALYSIS �
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THIRD READING
Bill No: AB 2064
Author: Cooley (D)
Amended: 6/12/14 in Senate
Vote: 21
SENATE INSURANCE COMMITTEE : 10-0, 6/25/14
AYES: Monning, Corbett, Correa, DeSaulnier, Lieu, Mitchell,
Nielsen, Roth, Torres, Vidak
NO VOTE RECORDED: Gaines
SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8
ASSEMBLY FLOOR : 78-0, 5/15/14 (Consent) - See last page for
vote
SUBJECT : Earthquake insurance: mandatory offer
SOURCE : Author
DIGEST : This bill revises and recasts statutory notice
requirements relating to the mandatory offer of earthquake
insurance; revises and recasts the mandatory notice to
California Earthquake Authority (CEA) policyholders; increases
the cap on CEA operating expenses from 3% to 6% and includes all
expenses in that cap except those expenditures specifically
excluded, as specified; changes CEA loss assessment coverage for
condominiums from mandatory to optional; and requires CEA
participating insurers to send CEA marketing materials to
homeowners' policyholders at least once a year.
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ANALYSIS :
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 days 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.
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.Requires, when a homeowner has not purchased earthquake
coverage pursuant to the mandated offer, 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
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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 CEA, 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;
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.Requires, if an earthquake insurance policy is issued by the
CEA, 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.Authorizes, in the event the CEA has exhausted its capital
resources available to pay claims, 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.Allows, if all available capital is exhausted and no
additional funds are available, the CEA to pay policyholder
claims on a pro-rata basis or in installment payments;
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15.Limits the operating expenses of the CEA to not more than 3%
of premium income.
This bill:
1.Revises and recasts statutory notice requirements relating to
the mandatory offer of earthquake insurance, taking effect as
of January 1, 2016;
2.Increases the cap on CEA operating expenses from 3% to 6%, and
includes all expenses in that cap except those expenditures
specifically excluded, effective January 1, 2015;
3.Changes CEA offer of earthquake loss assessment coverage as
part of condominium policies from a mandated coverage to
optional coverage;
4.Revises and recasts the mandatory notice to homeowners who
have purchased a CEA earthquake policy, to take effect January
1, 2016; and
5.Requires CEA participating insurers to provide homeowners'
insurance policyholders with CEA marketing documents at least
once each year, to take effect January 1, 2016.
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
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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 discourage people from
choosing to purchase earthquake insurance.
Unlike private insurance companies who are required to join 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.
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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
SUPPORT : (Verified 7/30/14)
California Earthquake Authority
Personal Insurance Federation of California
United Policyholders
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ARGUMENTS IN SUPPORT : According to the CEA, the current
mandatory offer regime is 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 e-mail and Web sites, 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.
ASSEMBLY FLOOR : 78-0, 5/15/14
AYES: Achadjian, Alejo, Allen, Ammiano, Bigelow, Bloom,
Bocanegra, Bonilla, Bonta, Bradford, Brown, Buchanan, Ian
Calderon, Campos, Chau, Ch�vez, Chesbro, Conway, Cooley,
Dababneh, Dahle, Daly, Dickinson, Donnelly, Eggman, Fong, Fox,
Frazier, Beth Gaines, Garcia, Gatto, Gomez, Gonzalez, Gordon,
Gorell, Gray, Grove, Hagman, Hall, Harkey, Roger Hern�ndez,
Holden, Jones, Jones-Sawyer, Levine, Linder, Logue, Lowenthal,
Maienschein, Medina, Melendez, Mullin, Muratsuchi, Nazarian,
Nestande, Olsen, Pan, Patterson, Perea, John A. P�rez, V.
Manuel P�rez, Quirk, Quirk-Silva, Rendon, Ridley-Thomas,
Rodriguez, Salas, Skinner, Stone, Ting, Wagner, Waldron,
Weber, Wieckowski, Wilk, Williams, Yamada, Atkins
NO VOTE RECORDED: Mansoor, Vacancy
AL:e 8/4/14 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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