2021-22 Norwood Legislative Report

GROUND HOG DAY

During the last couple of months of the 2021 Legislative session, things were opening up. In-person, rather than virtual, fundraisers were becoming the norm again. More legislators opened their offices to in‐person meetings and lobbyists were again seen at the gates to the Senate and Assembly during legislative sessions.

If a poll of legislators, staff, and lobbyists had been conducted at the end of the last legislative session, most would have opined that the Legislature would be back to normal operating procedures by the beginning of the 2022 legislative session. There was similar sentiment prior to the start of the 2021 Legislative session, but those hopes were dashed by delays in
vaccinations and the development of COVID Delta variant.

With the high infection rates of the Omicron COVID variant, it is expected that business
between lobbyists and legislators will be done virtually for another session year of the California Legislature. Complicating the situation even more, legislators and their staff moved out of the office wing of the State Capitol, which is being torn down for renovation, and moved two blocks away into what is known as the “Swing Space.” Although there are hearing rooms in
the Swing Space, hearings will be conducted in the historic wing of the State Capitol as well as the new legislative office building. As such, lobbyist will be tracking down legislators in two buildings.

In 2021 the Legislature passed, and the governor signed, 776 new statutes into law. They also budgeted tens of billions of dollars into state reserves and funded programs addressing homelessness, broadband expansion, stimulus checks for individuals and small businesses, rent
and eviction relief, utility bill deficiencies, clean water and drought programs, climate change, early childhood education, and wildfire programs.

In a recent press release, the Governor touted the following bills as those which he was most proud.

AB 37 by Assemblymember Marc Berman (D‐Menlo Park) makes permanent the measure implemented last year to send a vote‐by‐mail ballot to every active registered voter.
AB 338 by Assemblymember James C. Ramos (D‐Highland) allows the placement of a monument in Capitol Park honoring Sacramento‐area tribes, replacing the sculpture of missionary Junípero Serra.
AB 600 by Assemblymember Joaquin Arambula (D‐Fresno) ensures that crimes targeting people due to their immigration status are considered hate crimes.
AB 652 by Assemblymember Laura Friedman (D‐Glendale) bans the use of toxic PFASs in products for children, such as car seats and cribs, and AB 1200 by Assemblymember Philip Ting (D‐San Francisco) prohibits their use in disposable food packaging.
AB 701 by Assemblymember Lorena Gonzalez (D‐San Diego) establishes measures for companies to disclose warehouse production quota descriptions and prohibits the use of algorithms that disrupt basic worker rights.
AB 855 by Assemblymember James C. Ramos (D‐Highland) removes Columbus Day as a judicial holiday and replaces it with Native American Day in September.
AB 1084 by Assemblymember Evan Low (D‐Campbell) requires retail department stores to provide a gender‐neutral section for toys and childcare items.
SB 2 by Senate President pro Tempore Toni Atkins (D‐San Diego) and Senator Steven Bradford (D‐Gardena) creates a system within the Commission on Peace Officer Standards and Training (POST) to investigate and revoke or suspend peace officer certification for serious misconduct.
SB 8 by Senator Nancy Skinner (D‐Berkeley) extends the provisions of the Housing Crisis Act of 2019 through 2030 to accelerate the approval process for housing projects and curtail local governments’ ability to downzone, among other provisions.
SB 9 by State Senate President pro Tempore Toni G. Atkins (D‐San Diego) facilitates the process for homeowners to build a duplex or split their current residential lot.
SB 10 by Senator Scott Wiener (D‐San Francisco) creates a voluntary process for local governments to implement streamlined zoning for new multi‐unit housing near transit or in urban infill areas.
SB 16 by Senator Nancy Skinner (D‐Berkeley) expands public access to police misconduct records related to unreasonable or excessive use of force, discriminatory or prejudiced behavior, and other misconduct.
SB 62 by Senator María Elena Durazo (D‐Los Angeles) ends the garment industry’s practice of piece‐rate compensation and expands fashion brands’ liability for unpaid wages.
SB 389 by Senator Bill Dodd (D‐Napa) allows restaurants, bars, breweries, and wineries that sell food to continue offering to‐go alcoholic beverages with food orders, building on state regulatory relief announced in June.

Having endured two years of COVID‐related consequences, the degree to which California citizens and businesses agree with the Governor’s priorities is another discussion. Generally, it would seem hard to justify the tens of millions of dollars it takes to operate the California Legislature based on the enactment of these few top tier measures!

Insurance Industry Outcomes for 2021

The insurance industry fared very well in 2021. Three very difficult workers’ compensation bills that would have undermined important workers’ compensation reforms were either amended, delayed, or defeated last session.

Legislators did not pass any adverse underwriting or claims bills or mandates on property and casualty insurers. Legislators did pass legislation allowing the state’s FAIR Plan to underwrite certain property on farms, ranches, wineries, and vineyards. The legislature also enacted a bill raising the liability standard to gross negligence in order for a person conducting a prescribed burn to be responsible for fire suppression costs if the burns get out of control.

Lastly, the Governor budgeted almost $3 billion in funds for wildfire mitigation and a pilot program to provide some level of state insurance for property liability claims resulting from prescribed burns.

Looking Forward to 2022

So, what is in store for the 2022 legislative session relative to insurance issues?

The good news is there were no major wildfires during the fall months, so wildfires are not top of mind as legislators return to Sacramento. In addition, legislators passed several bills last session to address wildfire mitigation by directing state agencies to undertake programs aimed at reducing the risk of wildfires, implementing more technology to address early detection and suppression. Lastly, as indicated above, the Governor devoted billions of dollars in additional state funds for equipment, additional wildfire crews, and for early mitigation efforts.

The bad news is that legislators detest a void and will do whatever they can to throw out options to address insurance issues, old or new. As an example, just before the end of last year’s legislative session, Assemblyman Marc Levine introduced amendments to AB 1522 that propose what some would call a radical approach to wildfire insurance.

The Catastrophic Wildfire Act proposes the following:

The California Wildfire Insurance Authority – A nonprofit entity that is privately funded and publicly managed, to serve as a marketplace for catastrophic wildfire insurance. The California Wildfire Insurance Authority will provide catastrophic wildfire insurance to homeowners who are unable to secure catastrophic wildfire insurance elsewhere.
The Catastrophic Wildfire Insurance Fund – A state‐administered reinsurance program providing a stable and ongoing source of reimbursement to insurers for a portion of their catastrophic wildfire losses, capped at $100 million incurred each year.
The California Wildfire Mitigation Program – Will provide home inspections and guidance to homeowners on how to harden their homes against wildfires, and will offer grants for costs associated with the recommended wildfire mitigation improvements.
Catastrophic Wildfire Insurance Policies – The Insurance Commissioner will oversee the approval and regulation of new catastrophic wildfire insurance products for Californians, which are separate and distinct from any coverage included in traditional homeowners’ and commercial insurance policies. These new policies will be offered to cover damage caused by catastrophic wildfires during a Department of Forestry declared wildfire, or a state of emergency as declared by the Governor and contain up to a 20% discount for wildfire mitigation and protective measures.

This bill will likely be re‐introduced as a new bill for the 2022 session as the current legislative deadlines for two‐year bills make it impractical to move this bill through the Assembly by the end of January. That puts the industry in the position of just outright opposing the AB 1522 or its predecessor or dusting off AB 2167 from 2020 which allows insurers to submit rate proposals to the Commissioner based on the risk of future wildfires.

Consumer Watch Dog, the organization that brought insurance rate regulation to California in 1988, has also indicated that an intent to pursue a broad‐based legislative agenda in 2022, with several insurance‐related proposals. They intend to sponsor legislation this session to:

Adjust the $250,000 cap on injured patients’ compensation for quality of life and wrongful death damages established in 1975 by passing the “Fairness For Injured Patients Act” on the November California ballot.
Usher in strong new rules from the California Privacy Commission that prevent car manufacturers and insurance companies from collecting data about your precise geolocation.
Provide new rules for the California Insurance Commissioner that curb the use of education and occupation in automobile insurance rates and that give homeowners discounts when homeowners fire‐proof their homes.
Continue to roll back insurance rates and hold insurance companies accountable for unreasonable rate hikes.

Several commentators have also predicted 2022 would be the year organized labor makes a major push for changes to the state’s workers’ compensation laws. Labor invested roughly $14 million to oppose the Governor’s recall election. As such, they are in a strong position to request increases in benefits, changes in employer control of medical care, alterations in the current use of Medical Provider Networks, decreases in time frames for acceptance of claims and provision of medical care, and increases of various penalties on employers for failure to meet any new shortened time frames.

The insurance industry will be forced to play defense against these proposals and/or introduce competing proposals. In 2021, insurers and the California Department of Insurance (CDI) instituted an informal truce on sponsoring competing legislative proposals. Instead, representatives of the major insurance trade associations, the Commissioner, and his senior staff participated in bilateral discussions aimed at developing new regulations to allow the use of modeling in rate increase applications, insurer recognition of home hardening discounts, and other concepts aimed at insurers achieving rate adequacy.

Under current law, insurers must base their rates on losses incurred. They cannot include modeling of future risks or increased costs of reinsurance in their rate applications. In addition, catastrophic losses incurred by insurers must be spread over 20 years. The insurance industry contends rates are inadequate, some 40 percent below other similarly situated states such as Florida, Texas, and Louisiana. The insurance industry is pushing for a new model that would account for future climate change risks — an approach that California has been alone among other states in resisting.

California’s wildfire problems are fueled by decades of fire suppression, climate change, and a persistent desire to escape city life. The state has seen the largest conflagrations in state history and approximately 40,000 structures destroyed since 2017.

Many property owners are already struggling to find insurers willing to renew their policies. The state also has intervened, demanding insurers continue covering at‐risk homeowners for the time being. However, insurers dropped about 212,000 California properties in 2020, and about 50,000 homeowners — many in the Sierra Nevada foothills on the eastern side of the state — have been unable to find another option on the private market.

That has led to a reckoning over whether California should allow insurers to account for future climate change risks.

The industry argues the state should let the market reflect the true risk. Insurers say the time is ripe to unlock a long‐sought policy approach to base rates on estimates of fire damages to come, rather than actual damages from the previous 20 years. That would let them recover costs based on anticipated increases in fire damages, whether from climate change, overgrown forests, or people moving further into risky areas. Premiums would likely go up, but insurers would be more likely to stay in the state.

Consumer Watchdog, the group that wrote a 1988 law that made the state’s insurance regulator an elected position, strongly opposes allowing insurers to include modeling in the rates. They argue that such a change would provide insurers carte blanche to raise rates because they get some actuary to utilize black box science to argue for rate increases.

It’s a long‐running dispute in California. While all other states allow catastrophic modeling, California does not allow insurers its use to estimate wildfire losses. Insurance Commissioner Ricardo Lara and his staff are reluctant to change that position.

Lara commissioned a 2021 report that recommends he consider it, but he still harbors reservations. “My concern is, are these models going to be used to discriminate [between] who gets insurance and who doesn’t?” commented Commissioner Lara. “Or do these models increase the cost of insurance already on communities that are disproportionately affected by wildfires?”

Market experts and some property owners agree with insurers that projection‐based modeling could help the state respond to the rising risks.

Commissioner Lara has taken some steps to entice insurers to stay. His agency has so far approved a steady series of modest premium increases for some of the biggest insurers. Rate hikes have been as much as 14 percent in risky areas — enough to stanch the exodus of insurers without pricing out property owners. He also got some companies to give discounts for property owners who upgrade their roofs or clear brush around their homes. However these actions have not been implemented across the board so many insurance agents and brokers and their clients are still struggling to find appropriate property and fire insurance.

In addition, the Commissioner is proposing to expand the FAIR Plan by requiring it to offer full coverage, not just for wildfires. At the same time, at least one legislator wants to establish a state‐backed reinsurance fund to compensate insurers for losses over $100 million. Both ideas would distribute the costs across a wider pool of payers.

The insurance Commissioner also wants insurers to give more discounts to property owners who lower their risks. Experts note he first needs to let insurers make enough of a profit that they can afford to give those discounts.

What is interesting about this entire debate is that insurers in the non‐admitted market have no restrictions on their ability to use future modeling, increased costs of reinsurance, or other policy restrictions such as large deductibles for wildfires to achieve rate adequacy. However, there does not seem to be an overwhelming interest in providing residential or commercial property insurance in California. It makes one wonder whether anything but rate adequacy and years of wildfire mitigation will bring insurers back to the property insurance marketplace in California.

The debate involving modeling, home hardening discounts, and rate adequacy will, without doubt, be affected by the fact that 2022 is a general election year and the Commissioner is up for re‐election. The Commissioner has drawn with one announced Democratic opponent. And there have been rumors that another statewide official might join the race. Given the election dynamics, it is hard to see how there could be any regulatory resolution between the CDI and industry prior to the June primary election so the debate over modeling and home hardening discounts may well be left to the legislative process.