California officials warn of ‘unsustainable’ taxpayer costs in disaster bill

SACRAMENTO — A bill that state finance officials warn could saddle California taxpayers with expensive and unnecessary premiums for disaster insurance is sweeping toward passage in the Legislature, so far without dissent.

SB290, pushed by Insurance Commissioner Ricardo Lara, would authorize the governor to directly purchase policies and other financial products from insurance companies in hopes of mitigating California’s costs from natural disasters such as wildfires and floods. It would change current law that requires state agencies to buy insurance through a broker selected in a competitive bidding process, something intended to lower costs to taxpayers.

Lara, who promoted the measure at an insurance industry conference last month, has come under fire in recent weeks from critics who charge that he is too cozy with the companies he regulates.

Michael Soller, a spokesman for Lara, said the bill would merely provide the state with more options in dealing with costly disasters.

“Californians really want to see people collaborating to solve the problems of extreme wildfire,” Soller said.

But Consumer Watchdog, an advocacy group whose founder wrote the 1988 ballot initiative that created the elected position of insurance commissioner, called the disaster insurance bill a betrayal of the office.

“This is a very elaborate boondoggle to give the insurance companies a blank check from the state,” said the group’s president, Jamie Court.

Lara’s relationship with insurers has been closely scrutinized since the San Diego Union-Tribune reported last month that soon after becoming insurance commissioner in January, he began accepting contributions from out-of-state donors with industry ties for his 2022 re-election campaign. Most previous California insurance commissioners have declined industry donations to avoid the appearance of a conflict of interest.

Lara pledged during his campaign last year to reject money from insurers. After the story was published, he promised to return more than $54,000 in re-election contributions. Most of the money came from people connected to Applied Underwriters, a workers’ compensation provider that is being sold in a deal that requires the insurance commissioner’s approval.

The Union-Tribune subsequently found that Lara had intervened in at least four cases challenging the cost of Applied Underwriters policies, twice when he overruled decisions against the company by his department’s administrative law judges.

Lara later told KQED-FM that he had met with the CEO of Applied Underwriters, who asked him to review the cases, but that “nothing in that meeting that came out changed the course of my decision.” He said he had intervened to protect injured workers “from losing their coverage” and businesses from being on the hook for major financial losses.

He attended the introduction of the disaster insurance bill in February alongside Sen. Bill Dodd, the primary sponsor and a Napa Democrat whose district was hit hard by the 2017 Wine Country fires. State Treasurer Fiona Ma is also a supporter. Under the bill, the governor could buy policies from insurers, after consulting with the insurance commissioner and treasurer to determine the appropriate product.

Lara, Ma and Dodd argued that a new financial model — relying on insurance to pay for disaster response, rather than dipping into state reserves — would free up resources to do more wildfire prevention work. California spent nearly twice what it budgeted last year to combat blazes.

“It is flat-out wrong to assume the governor, insurance commissioner and state treasurer are not capable of designing and researching various insurance options without being somehow scammed by the insurance industry,” Mark DeSio, a spokesman for Ma, said in a statement.

The bill breezed through the Senate without a single “no” vote and awaits action in an Assembly fiscal committee. Half a dozen insurance industry trade groups support the measure and, until recently, it had no formal opposition.

But in an analysis issued last month, the state Department of Finance opposed SB290 because the governor already has “broad authority” to tap into any available state funds and take other steps to pay for emergency response.

“Finance expects insurers will be wary of the wildfire risk in California, and the premiums would likely be high and financially unsustainable for the state” if the bill passes, the Department of Finance said.

Soller, the insurance commissioner’s spokesman, said the bill does not require the governor to buy insurance if it is not financially practical.

“If that policy becomes too expensive, California can walk away,” he said.

During a speech last month in Los Angeles, at a conference organized by the American Property Casualty Insurance Association, Lara suggested that the bill had been developed alongside the insurance industry. The commissioner’s appearance at the event was first reported by Politico.

“We’ve made several meetings and (are) really working collaboratively in a place that’s open and transparent to figure out how we find new ways to promote prevention and to also allow us to be a little bit more innovative when it comes to the department,” Lara said.

He thanked the insurance executives at the event for “being one of the first organizations to support SB290” and said he looked forward to partnering to ensure the bill was ultimately signed by Gov. Gavin Newsom. The governor said it is one of many ideas he’s looking at.

“I’m ready to get creative, just like all of you have been for so many years,” Lara said. “And now you have somebody who’s receptive to that in the department.”

Those comments raised alarms for Consumer Watchdog. Court said the legislation would let companies develop new types of insurance and related financial products to deal with disaster costs, leaving taxpayers on the hook without the scrutiny that exists in current law.

“This bill is worse than being cozy with the industry. This is becoming their spokesman,” Court said.

Soller said he did not know if Lara consulted with insurers when crafting the proposal, but he said the idea came from successful programs from Oregon and the Federal Emergency Management Agency.

The Oregon Department of Forestry and private timberland owners have paid about $61 million and received $102 million to help cover the costs of fighting wildfires since 1973. FEMA recovered $1 billion for Hurricane Harvey damage in 2017 after buying a flood coverage plan for $150 million.

“The insurance commissioner is speaking for taxpayers. He’s speaking for homeowners who want to see California being proactive with climate risk,” Soller said.

Mark Sektan, vice president of state government relations for the American Property Casualty Insurance Association, said the insurance market was designed to meet challenges like financing California’s firefighting costs.

“An insurer is going to analyze the risk and determine whether they can make a return on the risk,” Sektan said. “There’s nothing wrong with a company that wants to sell a product thinking they could make money off of it.”