BILL ANALYSIS
SENATE RULES COMMITTEE
Office of Senate Floor Analyses
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THIRD READING
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Bill No: AB 1366
Author: Knowles (R)
Amended: 7/19/95 in Senate
Vote: 21
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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
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SUBJECT: Earthquake insurance
SOURCE: Author
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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,
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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.
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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.
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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
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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
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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
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SUPPORT/OPPOSITION: SEE ABOVE
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