Quake insurance plans knocked for a loop.

IRS withdraws tax exemption for planned pool

SACRAMENTO - The sudden and mysterious withdrawal of the California Earthquake Authority's tax-exempt status by the Internal Revenue Service will force state Insurance Commissioner Charles Quackenbush to rebuild the public-private insurance pool from scratch, a process that will take at least several months.

Although department officials concede there is no other acceptable alternative to solving the homeowners insurance crisis, Quackenbush has yet to decide whether to lift an order effective the end of this month that would bar further statewide policy sales by the Fair Access to Insurance Requirements (FAIR) Plan.

Consumer groups which have objected to the plan expressed delight at the ruling. "It's a major stumbling block, and hopefully this will allow the Legislature to consider other alternatives," said Betsy Imholz, special projects advocate for the Consumers Union in San Francisco. "The insurance industry has been pushing the CEA to the exclusion of all else."

Proposed by Quackenbush last summer as a solution to the homeowners insurance availability crisis triggered by the Northridge earthquake, the CEA would provide $10.5 billion worth of earthquake coverage through a pool of cash contributions from insurers, reinsurance, bonds and other investment instruments. Equity in the pool would be amassed through returns from the investment instrument.

However, the IRS - which initially granted the CEA a crucial tax-exempt status ruling earlier this year - withdrew it on April 30 pending further review.

"This whole thing is hanging by a thread," said Insurance Department spokesman Richard Wiebe, who added that $2 billion in reinsurance commitments to the CEA have vaporized. "There are really no other plans that will accomplish our goals."

No word from IRS

The department has so far been unsuccessful in querying the IRS about the reasons behind the withdrawal. "They haven't returned our phone calls as of yet," Wiebe said early last week.

"It's hard to speculate when they don't give you a clue," said Bill Packer, spokesman for the Association of California Insurance Companies, an industry lobbying group that strongly supports the CEA.

Packer did venture that the IRS reacted to changes made in the CEA legislation since it was presented to the agency. The original bill, AB 13, authored by Assemblyman David Knowles, R-Placerville, has been replaced by SB 1993, authored by Sen. Charles Calderon, D-Whittier.

The Calderon legislation asks insurers for a longer time commitment to the CEA, reduces coverage by $2 billion, shifts around some of the layers of funding and reinsurance, and allows coverage for condominiums.

"There are material differences in the bills," Wiebe concurred. "The commissioner believes the CEA as constructed in AB 13 is sound, and when you deviate from that, you take the risk of losing the exemption. He's certainly not happy with the legislation at this point."

Wiebe claimed there were few alternatives to the CEA. He noted one possibility to loosen up the homeowners insurance market is pending legislation that would remove the requirement that insurers offer earthquake coverage with homeowners policies.

Also authored by Knowles, AB 3237 cleared the Assembly insurance committee late last month but has yet to be voted on by the Assembly.

Prospects are dim

"I don't think there are enough votes in the Legislature to get it passed," Wiebe said.

At this point, Quackenbush will take a wait-and-see approach on the CEA, Wiebe noted. He has no intention of shopping for reinsurance commitments "until he has a signed bill in his pocket and the tax exemption secured."

Although Quackenbush's second attempt at rebuilding the CEA will be more cautious, he has yet to review an order he issued last April barring statewide FAIR Plan policy sales as of the end of this month. Prior to the Northridge quake, the FAIR Plan was authorized to write barebones policies only in selected inner-city and brush fire areas.

Quackenbush had reluctantly extended the FAIR Plan coverage statewide since his election in November 1994, a continuation of predecessor John Garamendi's policy. Last year the FAIR Plan said nearly 110,000 policies, more than quadruple the 1993 total. Its exposure in Los Angeles County is now $10 billion, nearly the entire coverage total for the CEA.

"The FAIR Plan is not an acceptable alternative, and the commissioner feels it's not responsible to have it as one," Wiebe said.

Although private carriers were allowed at the beginning of this year to offer a stripped-down earthquake policy with a 15 percent deductible and minimal reimbursement for contents or relocation expenses, few are writing in heavily populated, seismically active areas.

"We're hopeful the Legislature will go back and rework the CEA to meet the IRS requirements," said Farmers spokeswoman Diane Tasaka. "It's the best alternative available."