Consumers Union analysis finds Insurance Commissioner Quackenbush's proposed earthquake insurance authority bad for consumers and taxpayers; good for insurers; group questions authority's solvency & excessive costs to homeowners.

SACRAMENTO, Calif.--(BUSINESS WIRE)--Aug. 28, 1995--Consumers Union, publisher of Consumer Reports, Monday warned homeowners, taxpayers and state lawmakers that Commissioner Quackenbush's recently proposed state-run earthquake insurance company may create more problems than it solves.

The group's analysis revealed that the creation of the new state agency to write residential earthquake insurance policies would:

-- Result in most homeowners losing their current earthquake policies;

-- Result in almost every large insurance company refusing to write new earthquake policies;

-- Absolve participating insurers from ever having to offer earthquake insurance to California homeowners in the future;

-- Establish a new state agency with tax money to write earthquake insurance policies;

-- Offer consumers earthquake coverage that provides less benefits and the same or higher premiums and deductibles than they are now receiving and:

- Allow claim payments that are less than the full value of the

policy; and

- Impose surcharges on homeowners and policyholders, even if

they get no payment from the new state insurance company.

-- Set the state's taxpayers up for huge potential liability and relieve the insurance industry's liability.

With only four weeks before the end of the legislative session, the consumer group cautioned the state Legislature to move slowly on the highly controversial bill and to act on the simpler, more consumer-friendly legislative solutions, including AB 1366 and SB 266, measures that would create a pared-down, no-frills earthquake policy without exposing consumers and taxpayers to added risks.

"The Commissioner's plan is consumer unfriendly," said Special Projects Advocate Betsy Imholz of Consumers Union's West Coast Regional Office. "If earthquake claims to the Authority exceed the available funds, consumers will get only a partial payout on their policy. To add insult to injury, they'll also have to pay potentially costly assessments, that look like taxes. In short, consumers will pay more and get a lot less and still have liability if the big one hits. It's a crap shoot that need not be played when viable, working measures are before the Legislature."

Imholz continued: "By putting $750 million in the Authority, the industry would buy its way out of any additional responsibility to offer earthquake insurance, which exists under current law. This responsibility would be waived even if the new state-run insurance company should fail. This plan would accomplish through the back door what SB 58, the insurance industry bail out bill, seeks to do directly -- absolve insurers of the responsibility to offer homeowners and renters earthquake insurance -- and would leave Californians without meaningful protection from the devastation of earthquakes. If the state company becomes insolvent, homeowners will be left out in the cold without any protection against the next quake because participating insurers will no longer have to offer earthquake policies."

The following is language from Commissioner Quackenbush's plan to absolve insurers from their statutory mandate to offer earthquake insurance:

"All funds contributed to and accumulated by the Authority shall constitute full consideration for the contractual relief granted herein and permanently relieve the participating insurance companies of any obligations to insure residential earthquake risks in the State, or to contribute additional funds to the Authority except as provided in this act."

The proposed California Earthquake Authority (CEA) would create a new government agency that would write residential earthquake policies. The tax-exempt CEA would cause the loss of roughly $23 million annually in state premium taxes to the general fund because participating private insurers would no longer have to pay state taxes on residential earthquake policies. A start-up contribution of at least $750 million by residential property insurers would provide initial funding for the CEA. Additional funding would come from several layers of assessments on insurers, on CEA earthquake policyholders and all homeowners policyholders. Funding also would be sought from private investment sources and from re-insurance.

For the CEA to become operational, insurers who make up 75% of the residential property market must participate in the program, and the federal Internal Revenue Service must grant the CEA tax-exempt status. The CEA would be governed by a three-member board of directors, including the governor, the insurance commissioner, and the state treasurer. A 10-member advisory panel of six insurance industry representatives, a seismologist, a construction expert, and two public members would be given broad responsibility for drafting the operating procedures for the CEA.

CONTACT: Consumers Union, San Francisco 

Mariko Takayasu or Betsy Imholz, 415/431-6747