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SB-254 California Earthquake Authority.(2019-2020)

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Date Published: 04/01/2019 09:00 PM
SB254:v98#DOCUMENT

Amended  IN  Senate  April 01, 2019

CALIFORNIA LEGISLATURE— 2019–2020 REGULAR SESSION

Senate Bill No. 254


Introduced by Senator Hertzberg

February 11, 2019


An act to amend Sections 10089.37 and 10089.38 of, and to add Section 10089.315 to, 10089.5, 10089.10, 10089.13, 10089.22, 10089.23, 10089.29, 10089.30, and 10089.34 of, to add Sections 10089.315, 10089.316, and 10089.317 to, to repeal Section 10089.31 of, and to repeal and add Sections 10089.33 and 10089.54 of, the Insurance Code, relating to insurance, and making an appropriation therefor, and declaring the urgency thereof, to take effect immediately.


LEGISLATIVE COUNSEL'S DIGEST


SB 254, as amended, Hertzberg. California Earthquake Authority.

Existing

(1) Existing law establishes the California Earthquake Authority (CEA), administered under the authority of the Insurance Commissioner and governed by a 3-member board. Under existing law, the CEA is authorized to transact insurance in this state as necessary to sell policies of basic residential earthquake insurance. Existing law establishes a capital structure for the CEA, with several sources of financing. Existing law generally makes all moneys and invested assets held in the California Earthquake Authority Fund, subject to specified restrictions, “available capital,” which is the first source of financing used to pay earthquake claims and claim expenses. Under existing law, the California Earthquake Authority Fund is a continuously appropriated fund.
Existing law authorizes the CEA, with the Treasurer as its agent, to issue and sell investment grade revenue bonds or issue or secure other debt financing, or both, in amounts up to $1,000,000,000 plus specified costs, if claims and claim expenses paid following an earthquake event exhaust 4 specified sources of capital, including the CEA’s available capital and all insurer capital contributions and assessments.
This bill would, instead, limit the amount of the investment grade revenue bonds or other debt financing to an amount up to $1,000,000,000 outstanding at any time, excluding those specified costs. The bill would create the Mitigation and Contingent Capital Expense Reserve Fund, a continuously appropriated fund, within the California Earthquake Authority Fund and would require that funds in the Mitigation and Contingent Capital Expense Reserve Fund also be exhausted prior to the CEA issuing and selling the investment grade revenue bonds or issuing or securing other debt financing.
(2) Existing law authorizes the CEA to impose a surcharge on all CEA policies, in a net amount not to exceed $1,000,000,000 plus specified costs, to secure funds to repay the bonded indebtedness or other debt, and requires a CEA policy to include a specified notice of the surcharge to its policyholders. Under existing law, once the CEA levies policy surcharges in a total amount of $1,000,000,000 plus specified costs, the CEA’s power to surcharge ceases and the CEA is prohibited from levying additional surcharges.
This bill would limit the net amount of the surcharge to not more than $1,000,000,000 outstanding at any time, excluding those specified costs.
(3) Existing law additionally authorizes the CEA to assess participating insurers, as defined, up to $2,000,000,000, if claims and claim expenses paid by the CEA due to earthquake events exhaust the 4 specified sources of capital mentioned above, plus exhausts the maximum amount of the CEA policy surcharge.
This bill would limit the initial assessment amount that the CEA could impose on participating insurers to pay expected claims and claim expenses from an earthquake event to 60% of the total assessment authorized. Thereafter, the bill would authorize the CEA to impose a subsequent assessment or total of assessments of an amount equal to the remaining balance of the total assessment to pay expected claims and claim expenses from a subsequent earthquake event.
(4) Existing law further authorizes the CEA to assess participating insurance companies up to $1,780,000,000, if claims and claim expenses paid by the CEA due to earthquake events exhaust the 4 specified sources of capital mentioned above, plus exhaust the maximum amount of both the CEA policy surcharges and the participating insurance company assessments discussed above.
This bill would repeal that assessment authorization and instead, if claims and claim expenses paid by the CEA due to earthquake events exhaust those 6 funding sources, would require the CEA to determine, and the commissioner to instruct all assessing insurers to collect, an assessment on assessable insurance policies, including specified insurance policies that cover a risk in a high seismic risk zone, but exclude, among other policies, life, health, earthquake, or automobile insurance policies. The bill would require the amount of the assessment to be determined by the CEA in its sole discretion, but would limit the amount of an assessment on an individual assessable insurance policy in a year to not more than 5% of the annual insurance premium for that policy and would limit the duration of the assessment to no more than 10 consecutive years. The bill would also require the CEA, if those 6 funding sources are exhausted, to sell investment grade revenue bonds, issue or secure other debt financing, or both, in amounts to be determined by the CEA. The proceeds from the assessment would be used solely to repay the bonds or other debt authorized by the bill, plus specified costs. By creating and adding a new mandatory source of funding for a continuously appropriated fund, the bill would make an appropriation.

Existing

(5) Existing law requires the CEA to set aside in each calendar year, an amount equal to 5% of investment income accruing on the CEA’s invested funds, or $5,000,000, whichever is less, to fund the establishment and operation of an Earthquake Loss Mitigation Fund, which is a subaccount in the California Earthquake Authority Fund. Existing law authorizes money in the Earthquake Loss Mitigation Fund, upon the development and implementation of an economical system satisfactory to the board and the commissioner to prevent misapplication of mitigation funds, to be applied to supply grants and loans or loan guarantees to dwelling owners who wish to retrofit their homes to protect against earthquake damage.

This bill would require the board to evaluate and implement programs and operational changes to enhance the CEA’s sustainability, and to generate demonstrable savings on risk management and transfer strategies, without unduly compromising the CEA’s claim-paying capacity, borrowing capacity, or debt ratings. The bill would require the savings, upon verification by the board, to be transferred to the Earthquake Loss Mitigation Fund. The bill would change the formula for determining the amount the board is required to transfer to the Earthquake Loss Mitigation Fund to 5% of investment income accruing on the CEA’s invested funds plus the savings realized above, but not less than $5,000,000. The bill would authorize money in the Earthquake Loss Mitigation Fund to additionally be used for any other earthquake mitigation or sustainability program authorized directly or indirectly by the board. By authorizing money in the Earthquake Loss Mitigation Fund to be used for a new purpose, the bill would make an appropriation.

This bill would require the CEA to pay an annual contingent capital expense into the Mitigation and Contingent Capital Expense Reserve Fund equal to 2% of the amount of claim-paying capacity available to and actually relied upon by the authority for the preceding calendar year that is based upon and supported by the authority’s ability to impose the assessment authorized above. Under the bill, money in the fund would be periodically disbursed, in amounts to be determined by the board, to the Earthquake Loss Mitigation Fund, the High Seismic Risk Zone Mitigation Fund, which would be created by the bill, and a fund designated by the authority for accrual of a new layer of claim-paying capacity.
The bill would also create within the California Earthquake Authority Fund, the Subsequent Event Segregated Account, which would be funded by protected operating capital, equal to $500,000,000. Funds in the account would be used to conduct the business of the CEA if the board determines, in its sole discretion, that CEA incurred liabilities for claims and claim expenses from any earthquake event or series of earthquake events exhaust any material component of the CEA’s claim-paying capacity or if other good cause exists to use funds for the benefit of new and renewal CEA policyholders.
(6) Existing law prohibits the CEA from writing new earthquake insurance policies 180 days after implementation by both the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) of policies to require earthquake insurance for any single-family residential structure, other than a condominium unit or townhome, as a condition of purchasing a mortgage or trust deed secured by that structure.
This bill would repeal that prohibition.
(7) The bill would make various technical and conforming changes. The bill would also make findings and declarations regarding the necessity for the bill.

This

(8) This bill would declare that it is to take effect immediately as an urgency statute.
Vote: 2/3   Appropriation: YES   Fiscal Committee: YES   Local Program: NO  

The people of the State of California do enact as follows:


SECTION 1.

 (a) The Legislature finds and declares all of the following:
(1) California is home to two-thirds of our nation’s earthquake risk, and Californians are unfortunately all too familiar with devastating earthquakes and the damage they can cause to homes and lives.
(2) The year 2019 marks the 25th anniversary of the 1994 Northridge earthquake, when the Northridge blind thrust fault in the Los Angeles region gave way. The magnitude 6.7 earthquake left 60 people dead, more than 9,000 people injured, and caused more than $40 billion in property damage in today’s dollars. In addition, 7,000 single-family homes, 5,000 mobilehomes, and about 49,000 apartments were destroyed or severely damaged, and 57,000 single-family homes suffered substantial damage from the shaking and subsequent fires.
(3) In 1971, a magnitude 6.6 earthquake originated from the Sierra Madre Fault Zone in Los Angeles, followed by a magnitude 5.8 aftershock. The earthquake and aftershock left 58 people dead, brought down parts of major freeways, including Interstate 5 and Interstate 210, caused severe damage to the Olive View Medical Center in Los Angeles, and displaced thousands of people as 30,000 homes suffered major damage.
(4) In 1989, the Loma Prieta earthquake, a magnitude 6.9 earthquake, killed 63 people, injured more than 3,700 people, damaged or destroyed 12,000 homes, and caused more than $6 billion in property damage. In all, more than 3,000 people were left homeless after the Loma Prieta earthquake.
(5) In 2014, the South Napa earthquake, a magnitude 6.0 earthquake, left more than 100 single-family homes uninhabitable and damaged hundreds more.
(6) According to the latest Uniform California Earthquake Rupture Forecast, the best science holds that there is more than a 99 percent chance that an earthquake of magnitude 6.7 or greater will hit California sometime between today and 30 years from now. An earthquake of that magnitude could result in tens of billions of dollars in damage and render thousands of residences uninhabitable. The same forecast calculates a 93 percent chance of a magnitude 7.0 earthquake occurring within the same period. This would result in an earthquake nearly three times stronger than the Northridge earthquake. Furthermore, there is a 48 percent chance of a magnitude 7.5 earthquake in the next 30 years, which would result in an earthquake nearly 16 times stronger than the Northridge earthquake.
(7) Following the 1994 Northridge earthquake, the Legislature created the California Earthquake Authority (CEA) to manage and mitigate the financial risks to California homeowners from the state’s regularly occurring earthquakes, and to ensure the continued availability of homeowners’ insurance for nonearthquake risks in California. The CEA now supplies more than 1,000,000 insurance policies in California, more than 80 percent of the earthquake insurance coverage for California homeowners.
(8) The CEA governing board has significantly expanded the CEA’s role since its inception, adding wider-ranging and more valuable benefits for Californians. Beginning in 2014, the CEA began funding a “brace and bolt” program to retrofit a certain type of seismically vulnerable single-family home, which greatly reduces a homeowner’s financial risk from earthquake and fire damage, lowers the risk of injury or death, and increases the probability that the home will be habitable either immediately or shortly after a large, damaging earthquake. The CEA has been able to provide between 1,000 and 2,000 retrofit and mitigation grants per year.
(9) However, there are an estimated 1,200,000 single-family homes in California, at risk in even a moderate earthquake, which would potentially qualify for the current CEA retrofit program. The need extends beyond single-family homes to mobilehomes and multifamily structures, including apartment and condominium complexes.
(10) The State of California currently has no reliable estimate of how many residential properties lie in high seismic risk zones of the state. This creates an urgent need to identify every potentially affected home in order to estimate the time and investment needed to save lives and prevent massive destruction of existing housing stock, which would only add to California’s affordable housing crisis.
(11) The National Institute of Building Sciences (NIBS) Natural Hazard Mitigation Saves: 2017 Interim Report, analyzing the results of 23 years of federally funded mitigation grants provided by the Federal Emergency Management Agency (FEMA), the United States Economic Development Administration (EDA), and the United States Department of Housing and Urban Development (HUD), found that every dollar spent on funding mitigation can save the public at least $4 in future earthquake disaster costs.
(12) The time has come to ensure that the CEA can both continue to provide affordable and valuable earthquake insurance, and to make new and much greater contributions to preearthquake mitigation throughout California. The Legislature can accomplish these dual goals by improving the CEA’s enabling statutes and authorizing additional prudent financial options for the CEA.
(b) It is, therefore, the intent of the Legislature to do both of the following:
(1) Restructure aspects of the CEA’s financial and insuring capacity to greatly increase the funding available each year for seismic retrofits and other proactive mitigation measures, with the urgent goal of retrofitting 1,000,000 homes by the end of the year 2025, and helping all Californians be prepared for the next major California earthquake.
(2) Enhance the flexibility of CEA to manage its reinsurance and risk transfer programs to produce material cost savings and devote those savings to earthquake mitigation and preparedness.

SEC. 2.

 This act shall be known and may be cited as the California Resilient Homes Initiative.

SEC. 3.

 Section 10089.5 of the Insurance Code is amended to read:

10089.5.
 As used in this chapter: chapter, the following words have the following meanings:
(a) “Authority” means the California Earthquake Authority.
(b) “Assessable insurance policy” includes both of the following:
(1) An insurance policy, whether or not issued in California, that covers a risk in a high seismic risk zone and is a policy within a class of insurance defined in Chapter 1 (commencing with Section 100) of Part 1 of Division 1, excluding any policy or contract of renter’s, life, health, annuity, earthquake, title, mortgage, financial guaranty, automobile, workers’ compensation, medical malpractice, or insolvency insurance.
(2) An insurance policy issued by an eligible nonadmitted insurer through a surplus line broker that covers a risk in a high seismic risk zone.
(c) “Assessable insured” means a person who procures one or more assessable insurance policies from an assessing insurer and who is subject to assessment by the authority, as provided in Section 10089.315.
(d) “Assessing insurer” means an insurer or surplus line broker, identified by the department at the request of the authority, as an issuer of an assessable insurance policy to an assessable insured.

(b)

(e) “Available capital” means the sum of all moneys and invested assets actually held in the California Earthquake Authority Fund, less loss reserves and loss adjustment expense reserves under all of the authority’s policies of residential earthquake insurance, and less the unearned premium reserve. “Available capital” includes all interest or other income from the investment of money held in the California Earthquake Authority Fund. “Available capital” does not include unearned premium, the proceeds of contracts of reinsurance procured by or in the name of the authority pursuant to subdivision (a) of Section 10089.10, any funds realized on capital market contracts authorized by subdivision (b) of Section 10089.10, or the proceeds of bonds issued by or in the name of the authority. authority, or protected operating capital.

(c)

(f) “Basic residential earthquake insurance” means that policy of residential earthquake insurance described in Section 10089 except as follows: 10089.

(1)(A)If one year after the authority commences operation the authority has available capital equal to or exceeding seven hundred million dollars ($700,000,000), any policy issued or renewed on or after that date shall provide, less any applicable deductible, not less than two thousand five hundred dollars ($2,500) in coverage for additional living expenses.

(B)If the authority met the available capital requirements of subparagraph (A) and two years after the authority commences operation the authority has available capital equal to or exceeding seven hundred million dollars ($700,000,000), any policy issued or renewed on or after that date shall provide, less any applicable deductible, not less than three thousand dollars ($3,000) in coverage for additional living expenses.

(2)(A)If the authority did not meet the available capital requirement of subparagraph (A) of paragraph (1) but, two years after the authority commences operation the authority has available capital equal to or exceeding seven hundred million dollars ($700,000,000), any policy issued or renewed on or after that date shall provide, less any applicable deductible, not less than two thousand five hundred dollars ($2,500) in coverage for additional living expenses.

(B)If the authority met the available capital requirements as provided by subparagraph (A) and three years after the authority commences operation the authority has available capital equal to or exceeding seven hundred million dollars ($700,000,000), any policy issued or renewed on or after that date shall provide, less any applicable deductible, not less than three thousand dollars ($3,000) in coverage for additional living expenses.

(d)

(g) “Board” means the governing board of the authority.

(e)

(h) “Bonds” means bonds, notes, commercial paper, variable rate and variable maturity securities, and any other evidence of indebtedness.
(i) “California Earthquake Authority Fund” means the fund created pursuant to subdivision (b) of Section 10089.22.

(f)

(j) “Capital market contract” means an agreement between the authority and a purchaser pursuant to which the purchaser agrees to purchase bonds of the authority.
(k) “Claim-paying capacity” means the sum of all assets and all other forms of financing and financial capacity available to the authority to pay claims and claim expenses, including, but not limited to, all of the following:
(1) The authority’s available capital.
(2) The maximum amount of all insurer capital contributions and assessments pursuant to Sections 10089.15, 10089.23, and 10089.30.
(3) All reinsurance actually available and under contract to the authority.
(4) Funds generated or realizable through surcharges imposed and collected pursuant to Section 10089.29.
(5) All capital committed and actually available from private capital markets.
(6) Funds generated or realizable through assessments to be imposed and collected pursuant to Section 10089.315.
(l) “Contingent capital expense” means the amount required to be paid by the authority, as established pursuant to subdivision (b) of Section 10089.316.
(m) “Earthquake event” means a seismic event that results in property losses covered under the terms of any policy or contract of residential earthquake insurance issued by or for the authority.
(n) “High seismic risk zone” means any zone within the state identified by reference to Section 2307 of Title 10 of the California Code of Regulations, or any set of zones, identified by the board in or pursuant to a public meeting.
(o) “Mitigation and Contingent Capital Expense Reserve Fund” means the fund created pursuant to subdivision (b) of Section 10089.316.

(g)

(p) “Nonparticipating insurer” means an insurer that elects not to transfer or place any residential earthquake policies in the authority.

(h)

(q) “Panel” means the advisory panel of the authority.

(i)

(r) “Participating insurer” means an insurer that has elected to join the authority.
(s) “Person” means any individual or entity described in Section 19.

(j)

(t) “Policy of residential property insurance” means those policies described in Section 10087.

(k)

(u) “Private capital market” means one or more purchasers of bonds of the authority pursuant to a capital market contract.
(v) “Protected operating capital” means a sum of moneys and invested assets held in the California Earthquake Authority Fund equal to five hundred million dollars ($500,000,000), which the authority shall at all times account for as separate from, and not a part of, available capital. The protected operating capital shall be available solely for the continued operation of the authority, including the authority’s obligations to pay claims from a subsequent earthquake event, in the manner and under the conditions as specified in Section 10089.317.

(l)

(w) “Qualifying residential property” includes all those residential dwellings set forth in Section 10087.

(m)

(x) “Residential earthquake insurance market share” means an individual insurer’s total direct premium received for (1) residential both of the following:
(1) Residential earthquake policies and endorsements written or renewed by the insurer in California and (2) residential California.
(2) Residential earthquake policies written or renewed by the authority for which the insurer has written or renewed an underlying policy of residential property insurance, divided by the total gross premiums received by all admitted insurers and the authority for their basic residential earthquake insurance in California.

(n)

(y) “Residential property insurance market share” means an individual insurer’s total gross premiums received for residential property insurance policies written or renewed by the insurer, divided by the total gross premiums received by all admitted insurers for residential property insurance in California.

(o)

(z) “Revenue” means all income and receipts of the authority, including, but not limited to, income and receipts derived from premiums, bond purchase agreements, capital contributions by insurers, assessments levied on insurers, surcharges applied to authority earthquake policyholders, and all interest or other income from investment of money in any fund or account of the authority established for the payment of principal or interest, or premiums on bonds, including reserve funds.
(aa) “Subsequent event claim-paying capacity” means claim-paying capacity available to the authority to pay incurred claims and claim expenses arising from subsequent earthquake events, following a determination by the board to utilize a Subsequent Event Segregated Account.
(ab) “Subsequent earthquake event” means an earthquake event, independent of and subsequent to a previous earthquake event, resulting in such a financial impact to the authority that the board, in its sole discretion and determination, directs the authority to utilize a Subsequent Event Segregated Account.
(ac) “Subsequent Event Segregated Account” means the account created pursuant to subdivision (b) of Section 10089.317 within the California Earthquake Authority Fund, to hold protected operating capital and any other assets the authority deposits for use in paying claims and claim expenses incurred by the authority on account of a subsequent earthquake event.
(ad) “Total residential property insurance market share participation” means the sum of the individual residential property insurance market shares attributable to all authority participating insurers.

(p)

(ae) “Unearned premium reserve” means an amount equal to the unearned portion of premiums due to, or received by, the authority on all of its policies of residential earthquake insurance, without deduction on account of reinsurance ceded. The unearned premium reserve shall be charged as a reserve liability in determining the authority’s financial condition. Because the unearned premium reserve is established and maintained to protect the interests of authority policyholders in their unexpired authority policies, authority assets in an amount equal to the unearned premium reserve shall not be subject to encumbrance by, or distribution to, creditors of or claimants against the authority unless and until the authority has paid in full all policyholder claims and policyholder liabilities.

SEC. 4.

 Section 10089.10 of the Insurance Code is amended to read:

10089.10.
 To expand the capacity of the authority and achieve maximum capacity for writing earthquake coverage, coverage and conducting other authority operations, the authority shall do both of the following acts, on prior approval of the commissioner: board:
(a) The authority shall purchase contracts of reinsurance at rates and on terms the board considers reasonable and appropriate.
(b) The authority, through the Treasurer, shall enter capital market contracts on terms as the board and Treasurer may consider reasonable and appropriate. The Treasurer shall not withhold approval except for good cause related to the purposes of the authority. Such The terms may include indemnification and contribution provisions protecting parties to the capital market contracts of the authority against material misstatements in or material omissions from the authority’s official statements and other authority documents referred to in the capital markets contracts.
(c) The total annual expenditure for reinsurance contracts and capital market contracts pursuant to this section shall not exceed a reasonable and appropriate percentage of the annual earthquake insurance premiums collected by the authority.

SEC. 5.

 Section 10089.13 of the Insurance Code is amended to read:

10089.13.
 (a) One year following its commencement of operations, and annually thereafter by each August 1, the authority shall report to the Legislature and the commissioner on program operations in a format prescribed by the commissioner. The report shall include, but shall not be limited to, the financial condition of the authority, a description of all rates and rating plans approved for use in the authority, an evaluation of the functioning of the authority in light of its stated purpose of making residential property insurance and residential earthquake insurance more available. The report shall also include an analysis of the growth by market share of residential property insurance of participating insurers compared to nonparticipating insurers, any adverse consequences on the various insurance distribution systems resulting from the operation of the authority or alterations in the growth of the residential property insurance market share between participating insurers and nonparticipating insurers, any adverse consequences of the various insurance distribution systems resulting from the operation of the authority or alterations in the growth of homeowners’ insurance market share between participating insurers and nonparticipating insurers, and an analysis of any recommended program changes to permit the authority to better fulfill its stated purpose. In making this determination the board shall be mindful of the competitive nature of the market and how any decision can negatively impact insurers who are currently competing in the marketplace. The report shall be posted on the authority’s official Internet Web site. internet website.
(b) The annual report shall include full information describing the following matters relating to the authority’s condition and affairs:
(1) The property or assets held by the authority, including the amount of cash on hand and deposited in banks to its credit, the amount of cash in the hands of servicing insurance companies, the amount of any stocks or bonds owned by the authority, specifying the amount, number of shares, and the par and market value of each kind of stock or bond, and all other assets, specifying each.
(2) The liabilities of the authority, including the amount of losses due and unpaid, the amount of claims for losses resisted by the authority and the amount of losses in the process of adjustment or in suspense, including all reported and supposed losses, the amount of revenue bonds or other debt financing issues under Section 10089.29 or Section 10089.50, and all other liabilities.
(3) Income of the authority during the preceding year, specifying premiums received, interest money received, and income from all other sources, specifying the source.
(4) Expenditures of the authority during the preceding year, specifying the amount of losses paid, the amount of expenses paid by category, and the amount of all other payments and expenditures.
(5) The costs and scope of all reinsurance and capital market contracts entered into by the authority under Section 10089.10.
(c) As part of the annual report, the authority shall make a separate, summary report on the financial capacity of the authority to pay claims made against the authority. Copies of this report shall also be made available to the public. The report shall include, but shall not be limited to, the following information, valued as of 30 days prior to the date of the report:
(1) The available capital of the authority.
(2) The liabilities of the authority.
(3) The amount of all assessments previously made and the amount of assessments that may be made in the future under Section 10089.23.
(4) The amount of the reinsurance under contract and actually available to the authority.
(5) The amount of all revenue bonds or other debt financing previously issued or contracted for and the amount of all revenue bonds or other debt financing that may be issued or contracted for in the future under Section 10089.29.
(6) The amount of surcharges previously assessed against policyholders and the amount of surcharges that are currently outstanding against policyholders under Section 10089.29.
(7) The amount of capital committed and actually available by contract from private capital markets that is available to pay claims against the authority.
(8) The amount of all assessments previously made and the amount of all assessments that may be made in the future under Section 10089.30.

(9)The amount of all assessments previously made and the amount of all assessments that may be made in the future under Section 10089.31.

(d) In verification of the matters set forth in the annual report provided for in subdivision (a), the Department of Finance shall approve independent qualified auditors selected by the commissioner to examine the books and accounts relating to all matters concerning the financial and program operations of the authority. The commissioner shall file a certified report of the examination with the President pro Tempore of the Senate, the Speaker of the Assembly, the Chairpersons of the Senate and Assembly Insurance Committees, and the Chairperson of the Senate Committee on Judiciary within 10 days of its receipt. Copies of this report shall also be made available to the public. The expense of examining the books and accounts of the authority shall be paid out of the operating funds of the authority.
(e) The authority shall, within 120 days following a seismic event that results in the payment of claims by the authority, and within one year of a major seismic event that results in the payment of claims by the authority, submit to the President pro Tempore of the Senate, the Speaker of the Assembly, the Chairpersons of the Senate and Assembly Insurance Committees, the Chairperson of the Senate Committee on Judiciary, and the commissioner a concise written report of program operations related to that seismic event. The reports shall include, but not be limited to, progress on payment of claims, claims payments made and anticipated, and the functioning of the authority in response to the seismic event. Copies of this report shall also be made available to the public.

SEC. 6.

 Section 10089.22 of the Insurance Code is amended to read:

10089.22.
 (a) (1) The authority shall be continued in existence for so long as its bonds are outstanding. Unless and until the authority is terminated pursuant to Section 10089.43, the commissioner and the authority shall execute assignments and contracts and take all necessary steps to assure that all revenue of the authority is paid to a trustee appointed by the Treasurer, which trustee may be the treasurer. The revenue of the authority shall be pledged and assigned to and held in trust by the trustee and invested and disbursed by the trustee, to pay, or to set aside funds to pay, principal, interest, and premiums on bonds and amounts due bond insurers and providers of credit support and letters of credit for those bonds, but only in the manner and in accordance with the terms of the constituent instruments defining the rights of the holders of bonds of the authority and the providers of bond insurance, credit support and letters of credit for those bonds. Amounts held by the trustee from time to time after provisions for those payments may be disbursed free of trust to the California Earthquake Authority Fund. Notwithstanding the foregoing provisions of this section, (1) debt
(2) Notwithstanding paragraph (1), both of the following apply:
(A) (i) Debt service payments on bonds of the authority secured by or payable from securities described in Section 16430 of the Government Code shall not be secured by a pledge or assignment of revenue of the authority other than revenue of the authority from (A) the from any of the following:
(I) The proceeds of sale of such bonds, (B) the bonds.
(II) The securities described in Section 16430 of the Government Code, and (C) principal Code.
(III) Principal and interest payments on such securities described in Government Code Section 16430, but debt 16430.
(ii) Debt service payments on such bonds of the authority may also be made payable from revenue of the authority in the California Earthquake Authority Fund, and (2) the Fund.
(B) The constituent instruments defining the rights of the holders of bonds of the authority referred to in paragraph (1) subparagraph (A) shall specify that payment of a portion of the interest on such the bonds is contingent upon payment of policyholder claims for which the bonds are responsible and that the obligation of the authority is to first apply such the assigned or pledged revenue to the payment of such policyholder claims instead of paying that contingent interest.
(b) There is hereby created the California Earthquake Authority Fund, which is not a fund in the State Treasury. Notwithstanding Section 13340 of the Government Code, the fund is continuously appropriated without regard to fiscal years for the purposes of this chapter. The fund shall be administered by the commissioner, subject to the direction of the board, board to pay all costs arising from this chapter, including, but not limited to, premiums payable by the authority under contracts of reinsurance, claims arising under policies of basic residential earthquake insurance issued by the authority, operating and other expenses of the authority, mitigation program related expenses and expenditures, and to establish reserves. At the discretion of the commissioner, board, segregated, dedicated accounts within the fund may be established for those payments.
(c) The board may cause moneys in the fund to be invested and reinvested, from time to time, in accordance with paragraph (4) of subdivision (c) of Section 10089.7 and subject to subdivision (b) of Section 10089.6. Moneys in the fund and not so invested may be deposited from time to time in (1) financial either of the following:
(1) Financial institutions authorized by law to receive deposits of public moneys, or (2) with moneys.
(2) With the approval of the Treasurer, the Surplus Money Investment Fund as provided in Article 4 (commencing with Section 16470) of Chapter 3 of Part 2 of Division 4 of Title 2 of the Government Code.
(d) A national bank shall be custodian of all securities belonging to the fund, except as otherwise provided in this chapter and except as otherwise provided in the constituent instruments that define the rights of the holders of bonds of the authority and the providers of bond insurance, credit support, and letters of credit for those bonds.
(e) The board may, in cooperation with the Treasurer, authorize the establishment of an account or fund in the State Treasury in the name of the authority, but money deposited with the Treasurer in that account or fund is not state money within the intent of Section 16305.2 of the Government Code, and Sections 16305.3 to 16305.7, inclusive, of the Government Code shall do not apply to money drawn or collected by the authority.

SEC. 7.

 Section 10089.23 of the Insurance Code is amended to read:
10089.23.

(a)(1)If at any time following the payment of earthquake claims and claim expenses the authority’s available capital is reduced to less than three hundred fifty million dollars ($350,000,000), or if at any time the authority’s available capital is insufficient to pay benefits and continue operations, the authority shall have the power to assess participating insurance companies subject to the maximum limits as set forth in this section and Section 10089.30. The assessment shall be limited to the amount necessary to pay the outstanding or expected claims and claim expenses of the authority and to return the authority’s available capital to three hundred fifty million dollars ($350,000,000), as determined by the board, subject to approval by the commissioner.

10089.23.
 (a) (1) This section applies to a participating insurer’s assessment authorized pursuant to Section 10089.30.
(2) Each participating insurer’s assessment shall be determined by multiplying the percentage share of the authority’s total gross written premium that is attributable to that participating insurer’s sales of authority insurance policies, as of April 30 of the immediately preceding year or the most recent year for which premium data not more than one year old are available, by the amount of the total assessment sought by the authority.
(3) The maximum permissible insurer assessments pursuant to this section, the maximum permissible insurer assessments pursuant to Section 10089.30 and Section 10089.31 Section 10089.30 shall be reduced uniformly by multiplication of the maximum assessments assessment and other amounts provided in those sections Section 10089.33 by the percentage of the total residential property insurance market share participation attained by the authority. The total amount of all assessments levied on participating insurance companies by the authority pursuant to this section shall not exceed three billion dollars ($3,000,000,000), regardless of the frequency or severity of earthquake losses at any and all times subsequent to the creation of the authority. Once a participating insurer has paid, pursuant to this section, in the aggregate, amounts equal to the percentage share of the authority’s total gross written premium attributable to that participating insurer’s sales of authority insurance policies, as of April 30 of the immediately preceding year or the most recent full year for which premium data not more than one year old are available, multiplied by three billion dollars ($3,000,000,000) the maximum assessment set forth in subdivision (a) or (b) of Section 10089.30, as applicable, reduced as provided in this paragraph Section 10089.33 from the maximum assessment, assessments, the authority’s power to assess that insurer under this section shall cease and the authority shall be prohibited from levying additional assessments pursuant to Section 10089.30 on that insurer pursuant to this section. insurer.
(4) Beginning December 31 of the first year of operations, and as of each December 31 thereafter, the board shall adjust the maximum permissible insurer assessments pursuant to this section, the maximum permissible insurer assessments pursuant to Sections 10089.30 and 10089.31, Section 10089.30, the maximum permissible authority policyholder assessment surcharge pursuant to Section 10089.29, and the maximum permissible bond issuances or other debt financing issued or secured by the Treasurer pursuant to Section 10089.29 10089.29, to reflect the market share of new insurers entering into the authority authority-participation agreements as authorized by Sections 10089.15 and 10089.16 and participating insurers withdrawing from the authority as authorized by Section 10089.19. The adjustments shall be made in the same manner as authorized by in paragraph (3).
(b) In the case of any insurer assessment, the authority shall cause to be sent to each participating insurer a notice of that insurer’s assessment, and full payment shall be due within 30 days and shall be overdue after 30 days. Penalties and interest shall be assessed for late payments in the same manner as provided for late payments of the insurer gross premium tax pursuant to Section 12258 of the Revenue and Taxation Code. The board may waive the penalties and interest for good cause shown. The board shall make every effort to assess insurers only for funds reasonably anticipated to be necessary for claims payments and claim expenses and to return the authority’s available capital to three hundred fifty million dollars ($350,000,000). expenses.

(c)Notwithstanding the other provisions of this section, the aggregate assessment the authority is authorized by this section to impose shall be reduced to zero on December 1, 2008, with respect to earthquake events that commence on or after December 1, 2008.

(d)

(c) The authority shall not assess a participating insurer under this section based on any insurance business that is attributable to the insurer selling the insurer’s insurance products that supplement or augment the basic residential earthquake insurance provided by the authority.

SEC. 8.

 Section 10089.29 of the Insurance Code is amended to read:

10089.29.
 (a) (1) Notwithstanding the prior approval requirement of Section 10089.10, the authority shall issue and sell investment grade revenue bonds or secure other debt financing of the authority, or both, in amounts determined by the board pursuant to Section 10089.32, but not to exceed one billion dollars ($1,000,000,000) plus outstanding at any time, excluding costs of issuance and sale of those revenue bonds, costs of securing that debt financing, and amounts paid or payable to bond issuers and providers of credit support and letters of credit for, and interest on, those revenue bonds or other debt, if claims and claim expenses incurred by the authority from an earthquake event exhaust the total of the following:
(A) The authority’s available capital.
(B) The maximum amount of all contributions of initial operating capital made by participating insurers pursuant to Section 10089.15, and assessments levied and paid pursuant to Section 10089.23. 10089.15.
(C) All reinsurance actually available and under contract to the authority.
(D) All risk transfer provided and any other capital committed through capital market contracts that is actually under contract to the authority from private capital markets.
(E) All funds actually available in the Mitigation and Contingent Capital Expense Reserve Fund that are reserved for the payment of claims and claim expenses pursuant to paragraph (3) of subdivision (c) of Section 10089.316.
(2) The Treasurer shall act as agent for sale of the revenue bonds described in paragraph (1), and shall make available the net proceeds of those revenue bonds as funding for the authority. Failure of the authority to sell those revenue bonds or obtain that debt financing for any reason shall does not obligate the State of California to provide or arrange replacement funding for the authority. The Treasurer may sell revenue bonds for the purpose of refunding the revenue bonds or other debt financing when authorized to do so by the board, and the surcharge authorized by this section may be used to repay that refunding, plus costs of issuance and sale of those revenue bonds or other debt financing being refunded, and amounts paid or payable to bond issuers and providers of credit support and letters of credit for, and interest on, those revenue bonds or other debt being refunded.
(b) (1) In the event of a revenue bond sale or debt financing arrangement pursuant to this section, the authority shall have the power to surcharge annually all authority policies to secure funds, which the authority may use solely to repay the bonded indebtedness or other debt, plus costs of issuance and sale of those revenue bonds or other debt, and amounts paid or payable to bond issuers and providers of credit support and letters of credit for, and interest on, those revenue bonds or other debt. Notwithstanding paragraph (3) of subdivision (a) of Section 10089.23, the total net surcharge collected shall not exceed one billion dollars ($1,000,000,000), plus ($1,000,000,000) outstanding at any time, excluding costs of issuance and sale of those revenue bonds or other debt and amounts paid or payable to bond issuers and providers of credit support and letters of credit for, and interest on, those revenue bonds or other debt. The surcharge on an authority policy shall not exceed 20 percent of the annual authority residential earthquake insurance policy premium in any one year. A surcharge levied and collected pursuant to this section shall not be considered revenue, notwithstanding subdivision (o) (y) of Section 10089.5, including for purposes of the calculation of rates filed with the commissioner pursuant to subdivision (e) of Section 10089.40. A surcharge levied and collected pursuant to this section also shall not be considered basic residential earthquake premium for any purpose, including the calculation of producer commission.
(2) If a policy issued by the authority includes a premium surcharge pursuant to this subdivision, the participating insurer shall provide the insured a notice in a stand-alone document stating that the policyholder may cancel or nonrenew the earthquake policy. The notice shall specify that cancellation or nonrenewal of the earthquake policy will not affect the underlying residential property insurance policy. The statement shall be provided with the premium billing and shall include the following statement in 14-point boldface type:

NOTICE OF SURCHARGE ON CEA EARTHQUAKE INSURANCE POLICY AND RIGHT TO CANCEL

THE CEA IS IMPOSING A SURCHARGE ON THE PREMIUM OF ALL CEA EARTHQUAKE INSURANCE POLICIES. You may choose to renew, to cancel, or not to renew (“nonrenew”) your CEA earthquake insurance policy. If you choose to cancel or nonrenew your CEA earthquake insurance policy, your CEA earthquake insurance policy will be canceled and that cancellation will have no effect on your policy of residential property insurance. If you fail to cancel or to nonrenew your CEA earthquake insurance policy, and if you also fail to pay the CEA earthquake insurance policy premium and surcharge by the payment deadline, both your CEA earthquake insurance policy and your policy of residential property insurance will be canceled. IF YOU WANT EARTHQUAKE INSURANCE PROVIDED BY THE CEA, YOU MUST PAY THE PREMIUM FOR THE CEA EARTHQUAKE INSURANCE POLICY AND THE SURCHARGE.

(c) The total amount of indebtedness and policy surcharges authorized under this section shall not exceed one billion dollars ($1,000,000,000) plus outstanding at any time, excluding costs of issuance and sale of those revenue bonds or other debt and amounts paid or payable to bond issuers and providers of credit support and letters of credit for, and interest on, those revenue bonds or other debt, regardless of the frequency or severity of earthquake losses incurred after the creation of the authority. Once the authority has levied outstanding indebtedness supported by policy surcharges in a total amount of one billion dollars ($1,000,000,000) plus outstanding at any time, excluding costs of issuance and sale of those revenue bonds or securing other debt financing and amounts paid or payable to bond issuers and providers of credit support and letters of credit for, and interest on, those revenue bonds or other debt financing, the authority’s power to surcharge authority policies shall cease and the authority shall be prohibited from levying additional surcharges pursuant to this section.
(d) Consistent with Section 676, the authority shall cancel the policy of basic residential earthquake insurance if the policyholder fails to pay the earthquake policy surcharge authorized by the authority, and the insurer shall cancel the policy of residential property insurance if the policyholder fails to pay the policy surcharge authorized by the authority.

SEC. 9.

 Section 10089.30 of the Insurance Code is amended to read:

10089.30.
 If (a) (1) The board, subject to the approval of the commissioner, shall have the power to assess participating insurance companies subject to the maximum limits in this section if claims and claim expenses paid by the authority due to earthquake events exhaust the total of (a) the all of the following:
(A) The authority’s available capital, (b) the capital.
(B) The maximum amount of all insurer capital contributions and assessments pursuant to Sections 10089.15 and 10089.23, (c) all 10089.23.
(C) All reinsurance actually available and under contract to the authority, (d) the authority.
(D) The maximum amount of all authority policyholder assessments surcharges pursuant to Section 10089.29, and (e) all 10089.29.
(E) All capital committed and actually available from the private capital markets, the board, subject to the approval of the commissioner, shall have the power to assess participating insurance companies subject to the maximum limits in this section. Each markets.
(2) Each participating insurer’s assessment shall be determined by multiplying the percentage share of the authority’s total gross written premium attributable to that participating insurer’s sales of authority insurance policies, as of April 30 of the immediately preceding year or the most recent year for which premium data not more than one year old are available, by the amount of the total assessment sought by the authority. The total amount of all assessments levied against participating insurance companies by the authority pursuant to this section shall not exceed two billion dollars ($2,000,000,000), regardless of the frequency or severity of earthquake losses at any and all times subsequent to the creation of the authority. Once a participating insurer has paid, pursuant to this section, amounts equal to its percentage share of the authority’s total gross written premium, multiplied by two billion dollars ($2,000,000,000) reduced from the maximum assessment as provided in paragraph (3) of subdivision (a) of Section 10089.23, the authority’s power to assess that insurer under this section shall cease and the authority shall be prohibited from levying additional assessments on that insurer pursuant to this section. The assessment shall be limited to the amount necessary to pay the expected claims and claim expenses of the authority and return the authority’s available capital to three hundred fifty million dollars ($350,000,000), authority, as determined by the board, subject to approval by the commissioner. board.
(b) (1) The aggregate assessment amount that the authority may impose on all participating insurers pursuant to subdivision (a) shall be administered pursuant to this subdivision. The authority may impose an assessment, or a total of assessments, of up to 60 percent of the total assessment authorized pursuant to subdivision (a) to pay expected claims and claim expenses from an earthquake event, and may thereafter impose an assessment, or a total of assessments, of an amount equal to the remaining balance of the total assessment authorized under subdivision (a) to pay expected claims and claim expenses from a subsequent earthquake event.
(2) If the authority imposes an assessment or assessments pursuant to subdivision (a), and if the average daily balance of the authority’s available capital in a subsequent event claim-paying capacity exceeds six billion dollars ($6,000,000,000) for the last 180 days of any calendar year, then the remaining balance of the total assessment authorized under subdivision (a) shall be subject to the reduction as provided in paragraph (3) of subdivision (a) of Section 10089.23.
(3) Any unlevied portion or unreduced portion of the aggregate assessment amount authorized by subdivision (a) that remains after an earthquake event or after a subsequent earthquake event shall remain available to the authority.

SEC. 10.

 Section 10089.31 of the Insurance Code is repealed.
10089.31.

If claims and claim expenses paid by the authority due to earthquake events that commence on or after December 1, 2008, exhaust the total of all (a) the authority’s available capital, (b) the maximum amount of all insurer capital contributions and assessments pursuant to Sections 10089.15, 10089.23, and 10089.30, (c) all reinsurance actually available and under contract to the authority, (d) the maximum amount of all authority policyholder assessments pursuant to Section 10089.29, and (e) all capital committed and actually available from the private capital markets, the board, beginning December 1, 2008, for earthquake events commencing on or after December 1, 2008, shall have the power to assess participating insurance companies subject to the maximum limits in this section. Each participating insurer’s assessment shall be determined by multiplying the percentage share of the authority’s total gross written premium attributable to that participating insurer’s sales of authority insurance policies as of April 30 of the immediately preceding year, or the most recent year for which premium data not more than one year old are available, by the amount of the total assessment sought by the authority. The total amount of all assessments levied against participating insurance companies by the authority pursuant to this section shall not exceed one billion seven hundred eighty million dollars ($1,780,000,000), regardless of the frequency or severity of earthquake losses at any and all times subsequent to the creation of the authority. Once a participating insurer has paid pursuant to this section amounts equal to its percentage share of the authority’s total gross written premium, multiplied by one billion seven hundred eighty million dollars ($1,780,000,000) reduced as provided in paragraph (3) of subdivision (a) of Section 10089.23 from the maximum assessment, which is to be reduced periodically pursuant to subdivision (b) of Section 10089.33, or upon the earlier occurrence of the effective date stated in paragraph (6) of subdivision (b) of Section 10089.33, the authority’s power to assess that insurer under this section shall cease and the authority shall be prohibited from levying additional assessments on that insurer pursuant to this section. The assessment shall be limited to the amount necessary to pay the expected claims and claim expenses of the authority and return the authority’s available capital to three hundred fifty million dollars ($350,000,000), as determined by the board.

SEC. 11.

 Section 10089.315 is added to the Insurance Code, immediately following Section 10089.30, to read:

10089.315.
 (a) It is the intent of the Legislature to enhance the authority’s existing claim-paying capacity by adding a new lower cost alternative to reinsurance and other existing financing tools. To accomplish this goal, it is the intent of the Legislature to authorize the authority to establish, but only if necessary following an unprecedented and catastrophic earthquake, a temporary, small assessment on certain property and casualty insurance policies covering risks in areas of California designated as high seismic risk zones.
(b) If claims and claim expenses incurred by the authority due to any earthquake event or subsequent earthquake event exhaust all the funding sources listed in subdivision (c), the authority shall determine, and the commissioner shall instruct all assessing insurers to collect, an assessment on assessable insurance policies, as authorized in this section. The amount of the assessment shall be determined by the board in its sole discretion, subject to the maximum limits in this section.
(c) The authority shall impose the assessment described in subdivision (b) if claims and claim expenses incurred by the authority due to any earthquake event or subsequent earthquake event exhaust all of the following:
(1) The authority’s available capital.
(2) The maximum remaining amount of insurer capital contributions and assessments, if any, pursuant to Sections 10089.15 and 10089.30.
(3) All reinsurance and risk transfer available through capital market contracts that are actually available and under contract to the authority.
(4) The maximum funds actually available to the authority based on the proceeds of postearthquake revenue bonds or other debt financing, repayment of which is supported by premium surcharges on authority policyholders pursuant to Section 10089.29.
(5) All capital committed and actually available from the private capital markets.
(d) (1) In addition to subdivision (b), if claims and claim expenses incurred by the authority due to any earthquake event or subsequent earthquake event exhaust all the funding sources listed in subdivision (c), the authority shall sell investment grade revenue bonds, issue or secure other debt financing of the authority, and issue or secure a combination of revenue bonds and debt financing, in amounts determined by the board.
(2) The Treasurer may act as agent for the sale of revenue bonds and shall make available the net proceeds of the revenue bonds or other debt financing as funding for the authority. Failure of the authority to obtain that funding does not obligate the State of California to provide or arrange replacement funding for the authority. The Treasurer may sell revenue bonds for the purpose of refunding the revenue bonds or other debt financing, and the proceeds of assessments authorized by this section may be used to repay that funding.
(e) The board shall establish the aggregate assessment amount to be collected by assessing insurers and shall determine the effective date on or by which assessment collection shall begin. Assessments shall be collected upon issuance, or upon renewal, of assessable insurance policies. The assessment shall be established as follows:
(1) The assessment on an individual assessable insurance policy in a year shall not exceed 5 percent of the annual insurance premium for that policy and shall not have a maturity of more than 10 consecutive years from the date of issuance.
(2) Subject to the limitation in paragraph (1), the board may redetermine the aggregate assessment amount annually to account for changes in the incurred liabilities of the authority for claims and claim expenses or in other circumstances giving rise to the assessment.
(f) The authority shall determine, and the commissioner shall notify the assessing insurers of, all information reasonably necessary to permit the timely collection and remittance to the authority of the assessment.
(g) The assessment amount shall be separately identified and stated on a billing statement or policy declaration sent to each assessable insured.
(h) The authority shall determine the rate of the assessment pursuant to subdivision (e) and shall determine the assessment collection period, which shall be uniform and mandatory for all assessable insurers and assessable insureds. Assessing insurers who collect assessments in excess of the assessment authorized by this section shall remit the excess to the authority within 30 days after the authority has determined, and given notice to assessable insurers of, the amount of the excess assessment. The excess assessment shall be retained by the authority and deposited into the Mitigation and Contingent Capital Expense Reserve Fund to be used for mitigation program related expenses and expenditures.
(i) Proceeds of assessments made by assessable insurers shall be transmitted to the authority or the authority’s designee within 30 days after the last day of the month in which the proceeds were received. The assessments shall be used solely to repay the bonds or other debt described in subdivision (c), plus costs of arrangement, issuance, and sale of bonds or other debt, and amounts paid or payable to bond issuers and providers of credit support and letters of credit for, and interest on, those revenue bonds or other debt, plus other expenses related to the assessment authorized by this section.
(j) Assessments collected pursuant to this section are not part of an insurer’s rates or rating plan, are not premiums for any purpose, and are not subject to premium tax, fees, or commissions, except that failure by an assessable insured to pay the assessment in a timely manner shall be deemed and treated as failure to pay a premium.

SEC. 12.

 Section 10089.316 is added to the Insurance Code, immediately following Section 10089.315, to read:

10089.316.
 (a) It is the intent of the Legislature to require the authority to make annual payments in exchange for the claim-paying capacity authorized pursuant to Section 10089.315, with the payments to be used for preearthquake retrofit and mitigation programs.
(b) Not later than April 1 of the following calendar year, commencing in the year in which this section becomes operative, the authority shall pay a contingent capital expense for the preceding calendar year, into the Mitigation and Contingent Capital Expense Reserve Fund, which is hereby created within the California Earthquake Authority Fund. The contingent capital expense shall be calculated by the authority as an amount equal to 2 percent of the amount of claim-paying capacity available to and actually relied upon by the authority for the preceding calendar year that is based upon and supported by the authority’s ability, if necessary, to impose an assessment pursuant to Section 10089.315. The board may, in its sole discretion, pay the annual contingent capital expense on a date earlier than required pursuant to this subdivision. The contingent capital expense approved by the board shall be transferred annually by the authority into the Mitigation and Contingent Capital Expense Reserve Fund, which shall be deemed for all purposes to be a required expense of and cost to the authority.
(c) Money deposited into the Mitigation and Contingent Capital Expense Reserve Fund by this section shall periodically be disbursed and reserved by the authority, upon approval and direction of the board, as follows:
(1) To the Earthquake Loss Mitigation Fund established pursuant to Section 10089.37, an amount equal to the amount of the annual contingent capital expense or a greater amount as the board determines appropriate to pay incurred or anticipated mitigation program related expenses and expenditures.
(2) To the High Seismic Risk Zone Mitigation Fund, which is hereby created within the California Earthquake Authority Fund, an amount as the board determines appropriate to pay incurred or anticipated mitigation program related expenses, including expenses in high seismic risk zones.
(3) To a fund designated by the authority for accrual of a new layer of claim-paying capacity that shall be used by the authority as capacity available to pay claims and claim expenses prior to imposing a surcharge on authority policies pursuant to Section 10089.29 or assessments pursuant to Section 10089.315.

SEC. 13.

 Section 10089.317 is added to the Insurance Code, immediately following Section 10089.316, to read:

10089.317.
 (a) It is the intent of the Legislature to empower the authority to establish a subsequent event claim-paying capacity after a major earthquake in order to ensure that the authority may continue to write policies and have resources to pay claims from a subsequent major earthquake.
(b) There is hereby created within the California Earthquake Authority Fund the Subsequent Event Segregated Account, which shall be funded with protected operating capital. The Subsequent Event Segregated Account shall be maintained by the authority to hold, manage, and administer protected operating capital and any rights and benefits pertaining to all other components of subsequent event claim-paying capacity. The board shall instruct the authority to use funds in the Subsequent Event Segregated Account for the purpose of conducting the business of the authority if the board determines, in its sole discretion, either of the following:
(1) That the authority has incurred liabilities for claims and claim expenses from any earthquake event or series of earthquake events that may exhaust any material component of the authority’s claim-paying capacity.
(2) That other good cause exists for the authority to use the Subsequent Event Segregated Account for the benefit of new and renewal policyholders of the authority.
(c) The board shall instruct the authority and the commissioner to create a new subsequent event segregated account within the California Earthquake Authority Fund, and to transfer into that subsequent event segregated account new protected operating capital, together with the rights and benefits pertaining to all other components of subsequent event claim-paying capacity, if the board determines, in its sole discretion, either of the following:
(1) That the authority has incurred liabilities for claims and claim expenses from any earthquake event, subsequent earthquake event, or series of earthquake events that may exhaust any material component of the authority’s subsequent event claim-paying capacity
(2)  That other good cause exists for creation of a new subsequent event claim paying capacity for the benefit of policyholders of the authority.
(d) Upon a determination by the board that it is necessary for the authority to use funds in the Subsequent Event Segregated Account, the authority’s obligation to pay the annual contingent capital expense pursuant to Section 10089.316 shall be suspended. Payments of the annual contingent capital expense shall resume upon a determination by the board that available capital and all other forms of subsequent event claim-paying capacity within the Subsequent Event Segregated Account have increased to the point that annual payments of the contingent capital expense will not materially impair the subsequent event claim-paying capacity of the authority.

SEC. 14.

 Section 10089.33 of the Insurance Code is repealed.
10089.33.

(a)If the average daily balance of the authority’s available capital exceeds six billion dollars ($6,000,000,000) for the last 180 days of any calendar year, the board shall relieve all participating insurers of their obligation to pay additional earthquake loss assessments under Section 10089.30, by an aggregate amount equal to the amount of available capital in excess of six billion dollars ($6,000,000,000). Each December 31 thereafter, the board shall further reduce the aggregate assessment authorized under Section 10089.30 by the net increase in available capital in excess of the previous levels of available capital at which a reduction in the aggregate Section 10089.30 assessment was made. No reduction pursuant to this subdivision shall exceed 15 percent of the original aggregate Section 10089.30 assessment in any year of operation of the authority.

(b)Commencing April 1, 2010, and on each April 1 thereafter, but only in years that such relief is authorized by this subdivision, the board shall reduce the combined assessment obligation of all participating insurers under Section 10089.31 by 5 percent of the maximum aggregate Section 10089.31 assessment authorized as of January 1, 2009, as provided in this subdivision. Each year of Section 10089.31 assessment reduction is referred to in this subdivision as an “assessment-reduction year.” Assessment reductions shall take place as follows:

(1)Unless the authority has made payments and established appropriate reserves for claims and claim expenses, including for losses incurred but not reported, that in the aggregate exceeded five hundred million dollars ($500,000,000) on account of a single earthquake event commencing in 2009, as certified by the authority’s consulting actuary and accepted by the board, and the authority’s available capital as of January 1, 2010, did not exceed the authority’s available capital as of December 1, 2008, then effective April 1, 2010, the maximum aggregate Section 10089.31 assessment shall be reduced by an amount equal to the sum of an amount equal to 5 percent of the initial maximum aggregate Section 10089.31 assessment amount and an amount equal to the retained earnings differential, and 2009 shall be an assessment-reduction year.

(2)Unless the authority has made payments and established appropriate reserves for claims and claim expenses, including for losses incurred but not reported, that in the aggregate exceeded five hundred million dollars ($500,000,000) on account of a single earthquake event commencing in 2010, as certified by the authority’s consulting actuary and accepted by the board and the authority’s available capital as of January 1, 2011, did not exceed the authority’s available capital as of December 1, 2008, then effective April 1, 2011, the maximum aggregate Section 10089.31 assessment shall be reduced by an amount equal to the sum of an amount equal to 5 percent of the initial maximum aggregate Section 10089.31 assessment amount and an amount equal to the retained earnings differential, and 2010 shall be an assessment-reduction year.

(3)Beginning in 2012 and each year thereafter, unless the authority made payments and established appropriate reserves for claims and claim expenses, including for losses incurred but not reported, that in the aggregate exceeded five hundred million dollars ($500,000,000) on account of all earthquake events commencing in the preceding year, as certified by the authority’s consulting actuary and accepted by the board and the authority’s available capital as of January 1 of that year did not exceed the authority’s available capital as of December 1, 2008, then effective April 1 of that year, the maximum aggregate Section 10089.31 assessment shall be reduced by an amount equal to the sum of an amount equal to 5 percent of the initial maximum aggregate Section 10089.31 assessment amount and an amount equal to the retained earnings differential, and the preceding year shall be an assessment-reduction year.

(4)If through operation of this subdivision a year is not deemed an assessment-reduction year, no subsequent year shall be an assessment reduction year unless and until either the authority’s available capital as of a subsequent April 1 exceeds the authority’s available capital as of December 1, 2008; or the limitation established in paragraph (5), below, occurs.

(5)No more than two annual periods may be deemed not to constitute assessment-reduction years.

(6)Effective on the day after the last day of the 10th assessment-reduction year authorized by the board, the remaining maximum aggregate Section 10089.31 assessment shall be reduced to zero.

(7)As used in this section, “retained earnings differential” means the positive dollar-amount difference between: (A) the authority’s positive one-year retained-earnings growth for the preceding calendar year, minus (B) the authority’s capacity growth for the preceding calendar year, both calculated as of December 31. As used in this paragraph, “one-year retained-earnings growth” means the difference between the authority’s cumulative retained earnings at December 31 of the preceding calendar year and the authority’s cumulative retained earnings at December 31 of the year before the preceding calendar year, calculated in accordance with generally accepted accounting principles as of the preceding December 31. As used in this paragraph, the term “capacity growth” is the one-year amount of purchased risk transfer, such as reinsurance, or borrowed risk transfer such as bonds, put in place in the authority’s financial structure to account for the authority’s aggregate exposure growth over the preceding year ending December 31. The board shall be authorized and entitled, in its sole discretion, to make all final decisions regarding the authority’s level of financial strength and security and the authority’s choice and use of financing and risk-transfer mechanisms. As used in this paragraph, the term “aggregate exposure” means the aggregate of the limits of liability under all coverages of all earthquake insurance policies issued by the authority.

(c)In no event shall the board reinstate, in whole or in part, any assessment obligation it has reduced pursuant to this section.

SEC. 15.

 Section 10089.33 is added to the Insurance Code, to read:

10089.33.
 (a) If the average daily balance of the authority’s available capital exceeds six billion dollars ($6,000,000,000) for the last 180 days of any calendar year, the board shall relieve all participating insurers of their obligation to pay additional earthquake loss assessments under subdivision (a) of Section 10089.30, by an aggregate amount equal to the amount of available capital in excess of six billion dollars ($6,000,000,000). Each December 31 thereafter, the board shall further reduce the aggregate assessment authorized under subdivision (a) of Section 10089.30 by the net increase in available capital in excess of the previous levels of available capital at which a reduction in the aggregate assessment under subdivision (a) of Section 10089.30 was made. A reduction pursuant to this subdivision shall not exceed 15 percent of the original aggregate assessment under subdivision (a) of Section 10089.30 in any year of operation of the authority.
(b) The board shall not reinstate, in whole or in part, any assessment obligation it has reduced pursuant to this section.

SEC. 16.

 Section 10089.34 of the Insurance Code is amended to read:

10089.34.
 (a) (1) The policies issued by the authority shall not be are not subject to assessment for, nor shall any authority policyholder be eligible for benefits from, the California Insurance Guaranty Guarantee Association.
(2) Policies of residential earthquake insurance written by participating insurers that supplement, augment, or are in excess of the authority’s policy of basic earthquake insurance shall be are subject to assessment by the California Insurance Guaranty Guarantee Association and shall be covered to the extent provided in Article 14.2 (commencing with Section 1063) of Chapter 1 of Part 2 of Division 1.
(b) (1) Policies of basic residential earthquake insurance written by nonparticipating insurers shall be are subject to assessment by the California Insurance Guaranty Guarantee Association and shall be are covered to the extent provided in Article 14.2 (commencing with Section 1063) of Chapter 1 of Part 2 of Division 1.
(2) Participating insurers of the authority shall have no obligation to pay assessments to the California Insurance Guaranty Guarantee Association for covered claims obligation arising from policies of basic residential earthquake insurance written by nonparticipating insurers.

SEC. 17.

 Section 10089.54 of the Insurance Code is repealed.
10089.54.

(a)Unless authorized by a statute enacted subsequent to the effective date of this section, the authority shall cease writing new earthquake insurance policies 180 days after implementation by both the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Association (“Freddie Mac”) of policies to require earthquake insurance for any single-family residential structure, other than a condominium unit or townhome, as a condition of purchasing a mortgage or trust deed secured by that structure. Notwithstanding this restriction, the authority shall continue to renew its existing earthquake insurance policies and shall accept applications for earthquake insurance from residential property insurance policyholders of participating insurers in accordance with subdivision (b) of Section 10086.

(b)In the event that both the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Association (“Freddie Mac”) have proposed to implement policies to require earthquake insurance for any single-family residential structure, other than a condominium unit or townhome, as a condition of purchasing a mortgage or trust deed secured by that structure, it is the intent of the Legislature that the Legislature should convene to consider whether the authority should continue to write new earthquake insurance policies, with or without modification, or to cease writing new earthquake insurance policies.

SEC. 18.

 Section 10089.54 is added to the Insurance Code, to read:

10089.54.
 It is the intent of the Legislature that if both the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) implement policies to require earthquake insurance for any single-family residential structure, other than a condominium unit or townhome, as a condition of purchasing a mortgage or trust deed secured by that structure, the Legislature should convene to consider the manner and circumstances under which the authority should continue to write new and renewal earthquake insurance policies.

SEC. 19.

 This act is an urgency statute necessary for the immediate preservation of the public peace, health, or safety within the meaning of Article IV of the California Constitution and shall go into immediate effect. The facts constituting the necessity are:
In addition to the facts set forth in the Legislative findings and declarations in Section 1 of this act, the California Earthquake Authority requires significant lead time to fully implement and realize the benefits of the sustainability enhancements to its claim-paying capacity provided for in this act, and to develop and implement new and enhanced earthquake mitigation programs for the benefit of vulnerable homes and citizens in California. Scientific evidence strongly indicates that California is overdue for its next major earthquake, and it is, therefore, necessary and essential that this act take effect immediately.
SECTION 1.

(a)The Legislature finds and declares all of the following:

(1)California is home to two-thirds of our nation’s earthquake risk, and Californians are unfortunately all too familiar with devastating earthquakes and the damage they can cause to homes and lives.

(2)The year 2019 marks the 25th anniversary of the 1994 Northridge earthquake, when the Northridge blind thrust fault in the Los Angeles region gave way. The magnitude 6.7 earthquake left 60 people dead, more than 9,000 people injured, and caused more than $40 billion in property damage in today’s dollars. In addition, 7,000 single-family homes, 5,000 mobilehomes, and about 49,000 apartments were destroyed or severely damaged, and 57,000 single-family homes suffered substantial damage from the shaking and subsequent fires.

(3)In 1971, a magnitude 6.6 earthquake originated from the Sierra Madre Fault Zone in Los Angeles, followed by a magnitude 5.8 aftershock. The earthquake and aftershock left 58 people dead, brought down parts of major freeways, including Interstate 5 and Interstate 210, caused severe damage to the Olive View Medical Center in Los Angeles, and displaced thousands of people as 30,000 homes suffered major damage.

(4)In 1989, the Loma Prieta earthquake, a magnitude 6.9 earthquake, killed 63 people, injured more than 3,700 people, damaged or destroyed 12,000 homes, and caused more than $6 billion in property damage. In all, more than 3,000 people were left homeless after the Loma Prieta earthquake.

(5)In 2014, the South Napa earthquake, a magnitude 6.0 earthquake, left more than 100 single-family homes uninhabitable and damaged hundreds more.

(6)According to the latest Uniform California Earthquake Rupture Forecast, the best science holds that there is more than a 99 percent chance that an earthquake of magnitude 6.7 or greater will hit California sometime between today and 30 years from now. An earthquake of that magnitude could result in tens of billions of dollars in damage and render thousands of residences uninhabitable. The same forecast calculates a 93 percent chance of a magnitude 7.0 earthquake occurring within the same period. This would result in an earthquake nearly three times stronger than the Northridge earthquake. Furthermore, there is a 48 percent chance of a magnitude 7.5 earthquake in the next 30 years, which would result in an earthquake nearly 16 times stronger than the Northridge earthquake.

(7)Following the 1994 Northridge earthquake, the Legislature created the California Earthquake Authority (CEA) to manage and mitigate the financial risks to California homeowners from the state’s regularly occurring earthquakes, and to ensure the continued availability of homeowners’ insurance for nonearthquake risks in California. The CEA now supplies more than 1,000,000 insurance policies in California, more than 80 percent of the earthquake insurance coverage for California homeowners.

(8)The CEA governing board has significantly expanded the CEA’s role since its inception, adding wider-ranging and more valuable benefits for Californians. Beginning in 2014, the CEA began funding a “brace and bolt” program to retrofit a certain type of seismically vulnerable single-family home, which greatly reduces a homeowner’s financial risk from earthquake and fire damage, lowers the risk of injury or death, and increases the probability that the home will be habitable either immediately or shortly after a large, damaging earthquake. The CEA has been able to provide between 1,000 and 2,000 retrofit and mitigation grants per year.

(9)However, there are an estimated 1,200,000 single-family homes in California, at risk in even a moderate earthquake, which would potentially qualify for the current CEA retrofit program. The need extends beyond single-family homes to mobilehomes and multifamily structures, including apartment and condominium complexes.

(10)The State of California currently has no reliable estimate of how many residential properties lie in high-seismic risk areas of the state. This creates an urgent need to identify every potentially affected home in order to estimate the time and investment needed to save lives and prevent massive destruction of existing housing stock, which would only add to California’s affordable housing crisis.

(11)The National Institute of Building Sciences (NIBS) Natural Hazard Mitigation Saves: 2017 Interim Report, analyzing the results of 23 years of federally funded mitigation grants provided by the Federal Emergency Management Agency (FEMA), the United States Economic Development Administration (EDA), and the United States Department of Housing and Urban Development (HUD), found that every dollar spent on funding mitigation can save the public at least $4 in future earthquake disaster costs.

(12)The time has come to ensure that the CEA can both continue to provide affordable and valuable earthquake insurance, and to make new and much greater contributions to preearthquake mitigation throughout California. The Legislature can accomplish these dual goals by improving the CEA’s enabling statutes and authorizing additional prudent financial options for the CEA.

(b)It is, therefore, the intent of the Legislature to restructure aspects of the CEA’s financial and insuring capacity to greatly increase the funding available each year for seismic retrofits and other proactive mitigation measures, with the urgent goal of retrofitting 1,000,000 homes by the end of the year 2025, and helping all Californians be prepared for the next major California earthquake.

SEC. 2.Section 10089.315 is added to the Insurance Code, immediately following Section 10089.31, to read:
10089.315.

The board shall evaluate and implement programs and operational changes to enhance the authority’s sustainability, and to generate demonstrable savings on risk management and transfer strategies, without unduly compromising the authority’s claim-paying capacity, borrowing capacity, or debt ratings. Upon verification by the board, the savings shall be transferred to the Earthquake Loss Mitigation Fund established by Section 10089.37.

SEC. 3.Section 10089.37 of the Insurance Code is amended to read:
10089.37.

The board shall set aside in each calendar year an amount equal to 5 percent of investment income accruing on the authority’s invested funds plus the savings realized pursuant to Section 10089.315, but not less than five million dollars ($5,000,000), if deemed actuarially sound by a consulting actuary employed or hired by the authority, to be maintained as a subaccount in the California Earthquake Authority Fund. The authority shall use those funds to fund the establishment and operation of an Earthquake Loss Mitigation Fund. In the event a set-aside of mitigation-related funds may impair the actuarial soundness of the authority, the board may delay the implementation of this section. Any delay shall be reported to the Legislature and the commissioner and reported publicly.

SEC. 4.Section 10089.38 of the Insurance Code is amended to read:
10089.38.

Upon the development and implementation of an economical system satisfactory to the board and the commissioner to prevent misapplication of mitigation funds, the Earthquake Loss Mitigation Fund may be applied to supply grants and loans or loan guarantees to dwelling owners who wish to retrofit their homes to protect against earthquake damage, or to any other earthquake mitigation or sustainability program authorized directly or indirectly by the board.

SEC. 5.

This act is an urgency statute necessary for the immediate preservation of the public peace, health, or safety within the meaning of Article IV of the California Constitution and shall go into immediate effect. The facts constituting the necessity are:

In addition to the facts set forth in the Legislative findings and declarations in Section 1 of this act, the California Earthquake Authority requires significant lead time to fully implement and realize the benefits of the sustainability enhancements to its claim-paying capacity provided for in this act, and to develop and implement new and enhanced earthquake mitigation programs for the benefit of vulnerable homes and citizens in California. Scientific evidence strongly indicates that California is overdue for its next major earthquake, and it is therefore necessary and essential that this act take effect immediately.