Catastrophe Compensation Fund Proposals for Wildfire-Related Costs

The California Legislature is currently considering two bills, Assembly Bill 235 (Mayes) and Assembly Bill 740 (Burke), that would authorize the creation of “Catastrophe Compensation” Funds for the ultimate purpose of ensuring that victims of wildfires are compensated in a timely manner. Both bills recognize the need to mitigate the economic impacts of catastrophic events on “society as a whole” and to “socialize” the resulting costs.

In its current form, Assembly Bill (AB) 235 would create the “California Wildfire Catastrophe Fund Authority” (“Authority”) overseen by a nine-member Board of Directors, to provide “alternative risk financing” for public and private electric utilities when “traditional insurance is unavailable or uneconomic to mitigate extraordinary costs arising from wildfires in California.” Participation in the Authority would be voluntary and a participating electric utility would be required to contribute an amount to the Authority that is 5-15 times its total underlying wildfire insurance limits. A participating utility could subsequently seek reimbursement from the Authority for wildfire-related costs that exceeded its wildfire insurance limits, up to 5-15 times of those limits. The Authority also could receive and use funds from the Greenhouse Gas Reduction Fund (GGRF) and the Authority’s Board of Directors would be authorized to issue bonds, secured by the Authority, to finance utility reimbursement claims.

As currently drafted, AB 740 would create the “California Climate Change Catastrophe Compensation Fund” (“Fund”) in the California Department of Insurance, to be overseen by a thirteen-member Fund “Commission.” The Fund would be used to “reimburse insurers, insureds, and local governments for their losses after a wildfire caused by climate change or an electrical corporation.” AB 740 also would require private electric utilities to annually reserve “an amount of funding,” to be determined by the Commission, which would be used to reimburse the Fund if CalFire determined that the utility had “caused a wildfire and that determination is sustained by a final judgment.” Similar to the Authority, the Fund could receive and use funds from the GGRF and the Fund’s Commission would be authorized to issue bonds secured by the Fund. In addition, the Fund’s Commission could purchase reinsurance for the Fund and authorize the utility “to securitize the reimbursement” amount sent to the Fund.

For more information about these and other pending legislative and regulatory efforts to prevent and mitigate the impacts of catastrophic wildfires in California, contact Ron Liebert.