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California insurance crisis: Bill to lure insurance companies dies before vote

Legislators gather in the California State Senate in Sacramento. | Gina Ferazzi/Los Angeles Times via Getty Images

Controversial efforts to pass a last-minute bill through the California Legislature to ease the state’s home insurance crisis have failed, according to the advocacy organization Consumer Watchdog.

Legislators were unable to submit the little-understood proposal in time before the current session ends on Thursday. Under the California constitution, a bill must be read by name in both chambers for three days before becoming law.

The death of the proposal is a victory for consumer advocates who argued it would lead to sharp rises in insurance premiums and would constitute a “bailout” for the industry. But it may also mean that insurance companies will continue to retreat from the state, making it more difficult for Californians to find coverage for their homes. 

This year, several major insurers—including State Farm, Allstate, Farmers, USAA and others—have stopped signing new policies in California or pulled out of the state entirely. The industry has blamed these moves on increasingly damaging wildfires, runaway construction costs and burdensome legislation that makes it difficult for them to get rate increases approved.

Consumer advocates have countered that the insurance companies are simply trying to increase their profits and accused them of unlawfully coordinating their exits.

While never publicly disclosed, the bill reportedly proposed to allow insurers to raise rates more easily and pass other costs onto consumers. The goal was to lure insurance companies back to the state.

The legislation gained wider public attention when the president of Consumer Watchdog surreptitiously recorded an insurance lobbyist on a flight to Sacramento talking about plans to jam a bill benefitting the industry through the legislature.

But the bill in question was struggling to find a legislator willing to sponsor it, Politico reported last month.

Despite the bill’s failure, Harvey Rosenfield, founder of Consumer Watchdog, said he believes the struggle to alter California’s regulatory framework for insurance is not over. 

He said Insurance Commissioner Ricardo Lara could try to permit insurers to pass the cost of reinsurance—insurance for the insurance companies—onto consumers or to use privately created algorithms to set rates without legislative action.

But that, he argued, would violate the rules of Proposition 103, the 1988 law Rosenfield authored that regulates the industry.

“The head of the legislature seems to have kicked the ball—or the hot potato—over to the [insurance] commissioner,” he said.

In a statement, Lara said that California, alongside the country and world, is at an “insurance crossroads.”

“I have always been clear: Legislation is one of many options that we have been pursuing,” he said. “We also are moving forward with a package of regulatory solutions that will streamline the [Department of Insurance's] rate review process, opening it equitably to public input—not just the entrenched interests that have benefited materially from the status quo.”

Although the bill’s death may prevent a sharp jump in insurance premiums, it also means that insurance availability may remain low.

That can make it difficult—or even impossible—for some Californians to purchase homes.

Frank Villanueva, a San Francisco-based agent with Compass Real Estate, told The Standard that the insurance retreat has hit realty particularly hard, even though he has yet to see a sale fall through because the buyer couldn’t secure coverage.

“On our end, we have to do a lot more pre-work before putting an offer together,” he said.

His company now includes a contingency in its contracts that allows the buyer to get the deposit back if they can’t find insurance for the property. 

Legislators "need to do something,” Villanueva said, “because we’re all going to be affected, and it’s going to trickle down to auto insurance, too.”

This is a developing story and will be updated.