BILL ANALYSIS SENATE RULES COMMITTEE Office of Senate Floor Analyses 1020 N Street, Suite 524 (916) 445-6614 Fax: (916) 327-4478 . THIRD READING . Bill No: AB 1366 Author: Knowles (R) Amended: 7/19/95 in Senate Vote: 21 . SENATE INSURANCE COMMITTEE: NOT RELEVANT SENATE RULES COMMITTEE: 4-0, 6/29/95 AYES: Ayala, Lewis, Petris, Lockyer NOT VOTING: Beverly SENATE, JUDICIARY, COMMITTEE: 9-0, 7/11/95 AYES: Campbell, Lockyer, Mello, O'Connell, Petris, Solis, Wright, Leslie, Calderon SENATE APPROPRIATIONS COMMITTEE: 9-0, 8/28/95 AYES: Johnston, Alquist, Dills, Hughes, Kelley, Leonard, Leslie, Lewis, Mountjoy NOT VOTING: Calderon, Killea, Mello, Polanco ASSEMBLY FLOOR: NOT RELEVANT . SUBJECT: Earthquake insurance SOURCE: Author . DIGEST: NOTE: This bill was amended since Senate Insurance Committee by deleting the contents of the bill and placing the 7/5/95 version of SB 266 into the bill. This bill, AB 13, SB 58, and SB 266 are going into conference. SB 266 passed the Senate 27-7 (Noes: Haynes, CONTINUED AB 1366 Page 2 Johannessen, Johnson, Kelley, Mountjoy, Rogers, Wright). This bill authorizes the Insurance Commissioner to approve policies, riders, or endorsements, as specified, which satisfy the statutory requirement for insurers to offer their policyholders earthquake coverage. In addition, this bill requires insurers to notify policyholders of these new policy alternatives when the company renews an existing policy. The bill specifies the conditions an insurer may use to not renew a policy. In addition, this bill allows a policyholder whose earthquake coverage is not renewed, to purchase a stand-alone earthquake policy issued by the California FAIR Plan. This bill also prohibits insurers, unless approved by the Insurance Commissioner, from using computer models to determine or evaluate the risks associated with the peril of earthquake exposure. The bill becomes operative only if SB 58 is enacted. ANALYSIS: Existing law: Insurance Code Section 530 provides: "An insurer is liable for loss of which a peril insured against was the proximate cause, although a peril not contemplated by the contract may have been a remote cause of the loss." In two cases, State Farm Mutual Auto Insurance v Partridge (1973) 10 Cal.3d 94, and Sabella v Wisler (1963) 59 Cal.2d 21, the California Supreme Court relied upon Section 530 and held that if a cause excluded under the insurance policy and a covered cause combines to cause damage to the insured's property, that loss is covered under the policy. In Premier Insurance Co. v Welch (1983) 140 Cal.App.3d 720, the court held that if a covered cause and an excluded cause are both applicable to a loss, the loss is covered if the covered cause is the moving or efficient cause (citing Sabella) or the covered cause is a concurrent proximate cause (citing Partridge). Under this doctrine of "concurrent causation, a loss which is caused by a "covered" cause and an "excluded" cause is covered under the insurance policy. CONTINUED AB 1366 Page 3 In 1984, in AB 2865 (McAlister), the Legislature enacted Insurance Code Section 10088 to abrogate the doctrine of concurrent causation as it applies to insurance losses caused by earthquake. Section 10088 provides "....no policy which by its terms does not cover the peril of earthquake shall provide or shall be held to provide coverage for any loss or damage when earthquake is a proximate cause regardless of whether the loss or damage also directly or indirectly results from or is contributed to, concurrently or in any sequence by any other proximate or remote cause, whether or not covered by the policy." The repeal of the concurrent causation doctrine was linked to a new requirement that insurers must offer earthquake coverage on residential properties. In the same legislation, Section 10081 was enacted to require all insurers that sell residential property insurance to offer earthquake insurance coverage to its insureds. This "mandatory offer" requirement may be satisfied by issuance of an endorsement on the homeowner's policy or issuance of a separate policy covering earthquakes. This bill: 1. Would provide that the requirement of insurers to offer earthquake coverage to its residential property insureds can be satisfied by offer of a "mini-policy" as established by this bill and approved by the Insurance Commissioner. The specifics of the proposed mini-policy are: A. Dwelling levy coverage up to $400,000 exclusive of the deductible and excluding appurtenant structures, outbuildings, swimming pools, masonry fences and walls other than retaining walls necessary for the safety or integrity of the structure, decks and patios, awnings and patio coverings, custom living features including plaster wall coverings where other coverings would be more cost-effective, landscaping, any walkways other than the primary access to the dwelling walkway which is rendered unsafe for normal usage, and masonry chimneys. CONTINUED AB 1366 Page 4 B. Coverage for additional living expenses of not less than $1,00 which is not subject to any deductible. C. Provides the policyholder with the option of either (1) no contents coverage or (2) coverage for contents damaged or destroyed by the peril of earthquake limited to 10 percent of the dwelling coverage, provided that glassware, china, porcelain or ceramic items, artwork or other decorative items, antiques or other collectibles, and other such items such as business or recreational equipment not normally associated with the habitability of a dwelling shall not be covered. D. It provides a mediation program affording policyholders the right to mediate disputes. E. Specifies notice to the insured in at least 14-point bold type that the insured is being offered a reduced mini-policy in lieu of the coverage previously purchased by the insured. Mini-policy provisions will remain in effect until the enactment of a federal disaster insurance or reinsurance program which is certified by the Insurance Commissioner as sufficient to ensure available earthquake coverage for California homeowners in coverage amounts greater than the mini-policy coverages. 2. Would require insurers, as a trade-off for being authorized to offer a mini-policy with reduced coverages, to continue to offer earthquake insurance to its residential property insureds now buying that coverage. Provides that "no insurer may non-renew a policy of residential insurance where an offer of earthquake insurance has been accepted," except for five specified reasons: A. The policy is canceled by the named insured. B. The non-renewal is based on sound underwriting principles, as adopted by the commissioner by CONTINUED AB 1366 Page 5 regulation, applicable to a particular insured property, which are unrelated to the risk of earthquake losses. C. The commissioner finds that exposure to potential losses will threaten the solvency of the insurer as measured across all lines. If that finding is made, the Commissioner may authorize the non-renewal of "only so much" of an insurer's book of business as is necessary to protect its solvency. Any plan for non-renewal of policies would be on a fair and equitable basis. (See next comment for more discussion, as determined by the commissioner any policyholder whose earthquake coverage is non-renewed pursuant to this paragraph is to have the right to issuance from the California FAIR Plan of a stand-alone earthquake policy providing at least the coverage described above.) D. There is a valid ground for cancellation pursuant to Section 676 (e.g., nonpayment of premium). E. The named insured is no longer a member of the motor club, which is a condition for obtaining the insurance. 3. Prohibits an insurer from using a computer model for purposes of determining or evaluating earthquake risks unless the assumptions of the model have been disclosed to the public, or the insurance commissioner, after public hearing, has approved the use of the model after obtaining access to all assumptions from the modeling company. Requires the commissioner to promulgate regulations governing approval of these models. FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No SUPPORT: (Verified 8/30/95) Association of California Insurance Companies Department of Insurance Insurance Agents and Brokers Legislative Council CONTINUED AB 1366 Page 6 Personal Insurance Federation of California California Association of Life Underwriters California Association of Realtors American Insurance Association State Farm Insurance Companies OPPOSITION: (Verified 8/30/95) California Spa and Pool Industry Education Council ARGUMENTS IN SUPPORT: According to the author, the intent of this bill is to create a "bare bones" earthquake policy in order to provide relief to insurers which maintain that excessive exposure to earthquake losses threatens their solvency and prevents them from writing new homeowners policies. By reducing the scope of mandatory coverage, the author hopes to induce more insurers to return to active writing of homeowners and earthquake insurance. The idea, he says, is to cover the home, not the china and swimming pools. ARGUMENTS IN OPPOSITION: The opposition wants to be kept at the table in discussion of the earthquake insurance issue. California Spa and Pool Industry Education Council believes that "it would be unfair and of adverse effect to our industry for potential pool buyers to be informed that earthquake insurance is not available when they consider purchasing our product. Many families -- including middle-class families -- purchase pools in California so as to provide themselves with safe, healthy, and affordable recreation in their own backyards. AB 1366 could have a chilling effect on the willingness of individuals to purchase such products." NOTE: As expressed in the digest portion of this analysis, the bill has been substantially amended. In its present form the bill contains the prior version of SB 266 which was opposed by insurance groups and supported by the California Association of Realtors. DLW:sl 8/30/95 Senate Floor Analyses CONTINUED AB 1366 Page 7 SUPPORT/OPPOSITION: SEE ABOVE **** END **** CONTINUED