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SACRAMENTO, Calif. (BestWire) – Bills that would have banned the use of credit-based insurance scoring by insurers and granted the California Department of Insurance broad authority to regulate underwriting and pricing both failed to pass the state Assembly’s Insurance Committee. This was despite testimony by Insurance Commissioner John Garamendi urging their passage. In lengthy hearings, the committee also received input from insurers, consumer groups and various other interested parties on Sen. Jackie Speier’s S.B. 64, which would have required insurers to seek the department’s prior approval for underwriting criteria, and Sen. Martha Escutia’s S.B. 691, which would have banned the use of credit history “in whole or in part” as a viable criterion in underwriting and rate-setting.

Escutia’s bill earned a 7-6 majority in its favor but failed to garner the 10 committee votes necessary for passage. Speier’s bill, which would have removed from insurers the right to nonrenew a homeowners policy unless the property had become “uninsurable,” was defeated by a 3-5 vote. Escutia, whose bill was backed by a consumer group called the Foundation for Taxpayer and Consumer Rights, and Speier, who is chair of the Senate Insurance Committee, are both Democrats, as are a majority of the Assembly Insurance Committee. Both bills had previously passed the state Senate. In his testimony to the committee, Garamendi argued that California was undergoing a crisis in availability of homeowners insurance, citing insurance-scoring practices that the department considers “discriminatory” toward minorities and the poor, as well as extensive use of reporting databases such as the Comprehensive Loss Underwriting Exchange, currently used by 90% of homeowners insurers nationwide, to deny or nonrenew policies based on claims history.

Separately, Garamendi outlined the department’s stance in an April advisory to the state’s homeowners insurers in which he described “abusive industry practices” on the part of insurers, including rampant nonrenewal of homeowners who had previously filed claims, or even simply made inquiries, on their policies. He threatened to crack down on insurers who operated in this manner (BestWire, April 29, 2003). The advisory sparked a lawsuit filed by insurance trade groups–the Personal Insurance Federation of California, the Association of California Insurance Companies and the American Insurance Association–that argued the advisory constituted an “underground regulation” on the part of the department, as its provisions had never been submitted for public hearing. The suit earned a stay from a Sacramento Superior Court late last month temporarily blocking Garamendi from enforcing the mandates in his advisory. (BestWire, June 25, 2003).

However, an insurance department spokeswoman confirmed that Garamendi plans to petition the state’s Administrative Law courts for permission to impose the restrictions on underwriting practices and use of databases such as CLUE as “emergency regulation.” The petition would be filed the week of July 14, and the courts would have 10 days to render a decision, the spokeswoman said.

The same trade groups currently involved in litigation with Garamendi and the insurance department testified to the Assembly committee and praised them for rejecting the Speier and Escutia bills, with some disputing Garamendi’s contention that the homeowners market was in a significant crisis. “S.B. 64 essentially creates a state-run insurance program, because all aspects of underwriting and pricing would be controlled by state regulation,” said Bill Gausewitz, assistant vice president of the Western region for the AIA. “California’s homeowners insurance market is undergoing a natural adjustment period. While mounting mold claims and litigation expenses are driving up the cost of insurance, California is not facing a homeowners insurance crisis.”

Escutia’s measure on credit-based insurance scoring was opposed by the California Chamber of Commerce, which commissioned a study from the Rosen Consulting Group that contended banning the use of such scores would result in a further reduction in availability of homeowners coverage. According to the study, a 10% reduction in availability of homeowners policies would lead to a $6.1 billion drop in California’s gross annual product, as well as losses of 10,000 jobs and $517 million in business-tax revenues.

The committee also received written testimony opposing the bill from the Black Insurance Professionals Association and from Jose L. Perez, publisher of the political affairs magazine Latino Journal, which took issue with the bill’s rationale that credit-based insurance scoring was inherently discriminatory. “Our market profile of the California Latino community indicates 75% are middle class or higher, have better credit ratings compared to other groups but do tend to pay cash more often than other groups,” Perez wrote. “If insurance companies are offering lower-cost home insurance to Latinos, or anyone else, who are financially responsible and are perceived as lower insurance risk…why would we want to stop that?”

The top five writers of homeowners/farmowners insurance in California in 2001, according to A.M. Best Co.’s state/line data, were State Farm Group, with 22.2%; Zurich/Farmers Group, with 19.1%; Allstate Insurance Group, with 13.9%; California State Auto Group, with 5%; and Nationwide Group, with 4.2%.
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