State Quake Insurance Agency Plan Gets OK on Tax-Exempt Status

The Internal Revenue Service has approved tax-exempt status for the proposed California Earthquake Authority, a vital step toward a plan to provide homeowners with at least limited quake insurance.

Insurance Commissioner Chuck Quackenbush, who has assembled commitments from many insurance companies to participate in the state-run agency, and $1.7 billion to support it, will formally announce the IRS approval today, sources said.

It means that federal taxes will not need to be paid on accumulating surpluses in the years before a damaging earthquake strikes. Quackenbush sought for months to get IRS agreement on the concept, saying the Earthquake Authority could not work without it.

The decision allows the California Legislature--which must still give final approval to Quackenbush’s plan--to push ahead with its own decision whether to actually create the agency.

But before then, there might be quite a fight. Several consumer groups in the state, including Consumers Union, have been bitterly critical of Quackenbush’s plan, saying premium prices could soar and other alternatives ought to be tried first.

Quackenbush was authorized last year by the Legislature to formulate plans, and the idea of the agency was given conditional approval by lawmakers.

The Earthquake Authority--which would cap damage payments in an earthquake from all insurance sources at $10.5 billion--is strongly supported by the insurance industry. Quackenbush, a Republican, was elected two years ago with major industry support.

Soon after the 1994 Northridge earthquake, which has seen an insurance industry payout of $12.5 billion, the industry began seeking to reduce its exposure in California to paying for earthquake damage.

Insurance, in some instances, became hard to get, and some insurers dropped all homeowner coverage rather than go along with the state law requiring that earthquake coverage be offered along with homeowners policies.

Quackenbush has stated that to avoid an availability crisis for all kinds of homeowners policies, creation of the Earthquake Authority is necessary.

However, consumers groups have suggested that a mini-policy with restricted coverage limits, also approved by the Legislature last year, be given a chance to demonstrate its potential first.

While the chairman of the Senate Insurance Committee, Hershel Rosenthal (D-Los Angeles), has expressed doubts that the Legislature will approve Quackenbush’s plan, other legislative sources have suggested that in the end it will go along.

However, Quackenbush wants approval quickly, by March 31, when some of his insurer support commitments are due to expire. This, the sources say, may be more doubtful.