IRS Lifts Roadblock to Insurance Agency

The Internal Revenue Service--reversing course for the second time--says it would allow a crucial tax exemption for California’s proposed $10.5-billion, state-run earthquake insurance program.

The agency, however, stressed that its approval was based on the proposed agency as approved last year by the Legislature.

A spokesman for Insurance Commissioner Charles Quackenbush said the state received word of the IRS’ decision Tuesday in a brief message from Washington.

Quackenbush has said the federal tax exemption is necessary to allow the pool’s assets and accrued interest to grow. Without it, he has maintained, the program cannot succeed. “We are pleased to hear that the IRS has reinstated the tax-exempt status to the CEA. With tax-exempt status . . . the CEA will have more dollars to pay claims following an earthquake,” said Dan Dunmoyer of the Personal Insurance Federation of California.

Months ago, the IRS said it would allow the exemption. On May 2, it withdrew its permission in a terse two-line note. On Tuesday, it reinstated permission, but warned that it was doing so only on basis of the agency as approved by the Legislature last year.

In a letter to lawyers for the Insurance Department, the IRS added: “No opinion is expressed on the federal tax status of the fund if there are any changes to the facts or representations as submitted.”

The earthquake insurance authorization bill being considered by a legislative conference committee has been somewhat altered from last year’s proposal. As a result, the IRS may have to review the current proposal as well. Since the IRS has approved the earlier concept, it will add strength to insurance industry arguments that the bill should not be changed from the form approved last year.

A conference committee vote is expected next week.