Planned Quake Agency Loses Tax Exemption

The Internal Revenue Service has withdrawn for now its grant of a federal tax exemption for a proposed state-run California earthquake insurance agency, it was disclosed Thursday, throwing the already controversial plan into jeopardy.

Insurance Commissioner Chuck Quackenbush, who released the letter Thursday, two days after it was received, called it “a kick in the stomach” and said the earthquake authority could not function without the tax exemption.

State officials worry that the IRS review could last for months and stall legislative action on earthquake insurance.

Meanwhile, Quackenbush repeated his fears that California faces a homeowners insurance crisis unless the authority is created, while consumers groups restated their opposition to the entire program.

The IRS letter was addressed to lawyers representing the state Insurance Department and sent by IRS Associate Chief Counsel Judith C. Dunn. It said: “On Feb. 28, 1996, we issued a private letter ruling on the federal income tax status of the California Earthquake Authority. This is to advise you that the . . . ruling is withdrawn pending further review.”

An IRS spokeswoman later declined to say why the tax agency had decided on the withdrawal or how long the review will last.

The tax exemption is important because it would allow the earthquake authority to accumulate reserves for years without paying taxes on them. It is estimated by Quackenbush that this would fortify the authority’s resources over time by 40%.

“I was confident before that the Legislature would eventually pass this,” Quackenbush said. “I’m not confident of anything now.”

The commissioner said $1.8 billion in commitments from reinsurance firms to back the agency have all lapsed. Even if the IRS does come around and the Legislature should approve the authority, it would take an indefinite time to obtain the commitments again, he said.

A legislative conference committee that has been trying to reconcile divergent bills that would establish the authority met again Thursday, but adjourned until at least Wednesday to give Quackenbush a chance to try to find out more about the IRS’ position.

The earthquake authority, which Quackenbush has championed as the best means of averting a homeowners insurance availability crisis in the state this summer, would cap the liability of insurance companies for future quake damage at $6 billion and take over handling most homeowners’ quake insurance policies.

Quackenbush said this would keep the insurance companies in the homeowners business. Now, they must offer earthquake insurance with every homeowners policy. On Thursday, he again raised the specter that the companies, eager to reduce their future exposure to quake damage payments, would dump 1 million homeowners policies.

However, the earthquake authority idea has become increasingly controversial as consumers groups led by the Consumers Union suggested that with it in force, millions of California homeowners would end up paying more for quake insurance and get less coverage when a quake struck.

The Consumers Union have also charged that Quackenbush has been trying to bluff the Legislature into action and that his talk of insurer cancellations of homeowners policies is largely a myth.

State Sen. Charles M. Calderon (D-Whittier), chairman of the legislative conference committee, said Thursday that the committee ought to abandon its efforts until the IRS position is clarified and let market conditions take whatever course they will.

Quackenbush said he had already attempted, without success, to get the IRS to elaborate on its letter. Calderon said he tried to meet with IRS officials when he was in Washington this week, but “had been turned down flat.”

Betsy Imholz, a Consumers Union representative, confirmed that the organization had sent a letter to the California congressional delegation, with a copy to the IRS, on April 10 opposing the authority, but she said she had no information on whether it had influenced the IRS.

In its letter, the Consumers Union said: “We write to inform you that all the major consumer groups in California oppose the creation” of the authority, “because it would shift the risk of loss from private insurance companies to homeowners and to the state of California.”

“Every government and research body that has studied the issue of disaster insurance, other that the California Department of Insurance, has concluded that the responsibility to write primary disaster insurance should remain with private insurers and not be shifted to government,” the letter stated.

Leading insurance lobbyists urged the Legislature to go back to its original version of the authority it tentatively approved last year and which the IRS had conditionally approved in February.