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CEQ-CA Adjuster Earthquake CourseOnline Study Book-2016

41890 Enterprise Cir So #100, Temecula, Ca 92590 (800) 498-5100

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This course has been updated to reflect the new, 2016 CEA Form.

CEQ / CEA CALIFORNIA EARTHQUAKE CERTIFICATION

To be earthquake certified in California, adjusters need to complete this course AND take a small online course direct from the California Earthquake Authority (CEA). Refer to page 5 for

information on the direct CEA Online Training. CEA compiles a list of agents completing these courses and shares it with the California Department of Insurance.

You MUST be on that list to adjust earthquakes in California.

HOW TO GET YOUR CERTIFICATE

When you complete this course, you will receive online or by mail, a CEQ Certificate of

Completion as proof you satisfied CALIFORNIA CODE OF REGULATIONS, Title 10. Chapter 5, Subchapter 7.5.1 Insurance Adjuster Training For Evaluating Earthquake Damage.

This training must be renewed every three years.

We maintain records of all adjusters completing this program, for a period of 5 years. An insurer using an adjuster to evaluate earthquake damage may request a copy of your certificate and must also keep a record of that adjuster's accreditation for a period of 5 years.

CALIFORNIA FAIR CLAIMS

SETTLEMENT CERTIFICATION

Adjusters completing this course will also receive online or by mail, a Fair Claims Practices Certificate to satisfy CALIFORNIA CODE OF REGULATONS, Title 10, Chapter 5, Subchapter

8.7, Section 2695.6 Fair Claims Settlement Practices, Training and Certification

This training must be renewed annually.

A copy of your Certificate shall be maintained at all times at your principal place of business and provided to the Commissioner upon request.

TO EARN THE CERTIFICATES ABOVE, YOU MUST READ THIS COURSE, PASS THE OPEN BOOK COURSE EXAM AND COMPLY WITH ALL REGULATIONS OUTLINED THROUGHOUT THE COURSE. UPON COMPLETION, YOU WILL AUTOMATICALLY RECEIVE YOUR CERTIFICATES ONLINE OR BY MAIL. YOU MAY ALSO OBTAIN COPIES OF THESE CERTIFICATES THROUGH OUR WEBSITE FOR UP TO FIVE YEARS.

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CONTENTS EARTHQUAKE CERTIFICATION California earthquake certification 5 Earthquake training, scope 5 Scope of loss 6 Certificates, maintaining 7 CEA 8 California Earthquake Authority 8 EARTHQUAKE COVERAGE ISO vs. CEA 8 CEA policies, do not cover 9 CEA policies, types 9 CEA coverage comparison 10 Companion policy 11 Participating insurer 11 Policy interpretations 12 Reinspections 13 Claim file review 14 Overlapping coverage 14 Claim reserve 14 Disaster response 15 CEA event code 17 HOMEOWNERS EARTHQUAKE POLICIES Dwelling coverage limit 19 Homeowners, covered losses 20 Homeowners, not covered 20 Homeowners, deductible 21 CEA policy deductible 21 Deductible 21 CEA deductible, calculation 21 Deductible, calculation 21 Homeowners, loss settlement 22 Chimney sublimit 24 CEA, chimney sublimit 24 Walkways, driveways, decks, patios 25 Driveways, walkways 25 Bulkheads, piers, retaining walls 25 Underground systems 26 Awnings and patio covers 27 Swimming pools 28 Garages and outbuildings 28 Plaster 28

Decorative or artistic glass 29 Glass 29 Homeowner, loss of use 29 Emergency repair costs 30 Land stabilization costs 31 Theft 32 COMMON INTEREST (CONDOMINIUM) EARTHQUAKE POLICIES Condominium claims 33 Loss assessment 38 Reduction of value 39 Ordinance and law 39 RENTERS EARTHQUAKE POLICIES Renters Earthquake Policy 41 CLAIMS PROCEDURES CEA Claims procedures 42 CEA consulting 42 Claim file documentation 43 Policyholders 44 Timely adjusting 44 Costs to rebuild 45 Overhead and profit 45 Claim payment ratio 46 Claim payment ability 46 Double coverage 46 Fraudulent claims 46 Reevaluate an estimate 47 Subrogation 47 Coverage disputes 48 Salvage 48 Proof of loss 48 Denial of damages 48 Denial letters 49 CEA name, use of 50 Joint payee 50 Adjuster best practices 51 SCOPE OF LOSS AND ESTIMATES Buildings vulnerable to EQ damage 54 Vulnerable buildings 54 Earthquake vulnerable buildings 54 Earthquakes, how different 54 Northridge earthquake 55 Unbraced cripple walls 55

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Shakemap 56 Documenting earthquake damage 58 Credentials and references, contractors 58 Contractor credentials and references 58 Exterior spaces 58 Unidirectional cracks 60 Interior spaces 59 Technical consult, walls 60 Walls, technical consultant 60 Floors, ceilings, roofs 61 Attic or crawlspace inspections 62 Flue pipe scan 63 Smoke test 63 Electrical plumbing, mechanical 63 Asbestos or lead paint 65 Lead paint 65 Engineers, determining need for 65 Engineers, selecting 66 Engineers, locating 67 Older, pre-existing concrete crack 68 Pre-existing concrete crack 68 Concrete and foundations 68 Old or new concrete 68 Concrete, old or new 68 Concrete, repair or replace 70 Building upgrades required 71 Slab or stem wall cracks 71 Pre-existing code violations 72 Like kind replacement 73 Destructive tests 74 Victim assistance 74 SETTLEMENT AND MEDIATION Calif EQ Claims Mediation Program 75 Loss settlement mediation 75 Fair claims timeline rules 76 Fair claims time line, reply to claim 76 Reply to claim 76 CALIFORNIA FAIR CLAIMS SETTLEMENT PRACTICES LAW Fair claims, files and records 82 Fair claims, policy provisions 83 Fair claims, duties 84 Fair claims settlement, compliance 85 Compliance, fair claims settlement 85 Fair claims training 85

Fair claims, prompt and fair 86 Settlement offer 87 Suggesting, recommending individual 96 Repairs, suggesting or recommending 96 Reasonably uniform appearance 96 Fair claims, first party residential 96 Claims settlement practices 97 Fair claims, penalties 100 Fair claims, severability 101 APPENDIX Deductible calculation sample 104 Coverage review form sample 106 Testing authority agreement sample 107 Advanced pay agreement sample 108 Denial letter sample 109 Property loss claim sample 110 Earthquake policy specimens 111

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CEQ CALIFORNIA EARTHQUAKE CERTIFICATION FOR ADJUSTERS The California Department of Insurance has adopted regulations setting forth standards governing the training of insurance adjusters in evaluating damage caused by earthquakes. Since December 31, 2004, insurers have been obligated to arrange and track adjuster earthquake training in accordance with these standards. An adjuster

trained and certified by one insurer/entity pursuant to this section shall not be required to receive training and accreditation again in order to adjust claims for a different insurer.

Earthquake training regulations can be found in the CALIFORNIA CODE OF REGULATIONS, Title 10. Chapter 5, Subchapter 7.5.1 Insurance Adjuster Training For Evaluating Earthquake Damage, or on the Web at: http://www20.insurance.ca.gov/epubacc/REG/33849.htm

ISO EARTHQUAKE CERTIFICATION

To handle standard, ISO-type earthquake claims in California, adjusters must be:

Earthquake Certified. (Satisfied by completing this CEQ course). Fair Claims Settlement Certified (Satisfied by completing this CEQ course)

CEA EARTHQUAKE CERTIFICATION AND TRAINING

Before adjusters can handle claims for participating insurers of the California Earthquake Authority (CEA), they must be:

Earthquake Certified (Satisfied by completing this CEQ course) Fair Claims Settlement Certified (Satisfied by completing this CEQ course) Take the CEA Claims Representative Online Homeowners Coverage and CEA Deductible

Calculator Training (about 3 hours) at http://www.earthquake authority.com, Choose Adjusters.

SCOPE OF EARTHQUAKE DAMAGE TRAINING

Required adjuster California Earthquake Damage Training shall include the following:

(a) California Fair Claims Settlement Practices Regulations, California Code of Regulations, Title 10, Chapter 5, Subchapter 7.5, Section 2695.1 - 2695.14, inclusive. Demonstration of compliance with the annual training and certification requirements of 10 CCR 2695.6 shall satisfy an insurance adjuster's training requirements prescribed by this subsection. (Completion of this course satisfies Fair Claims Settlement Training. You will receive a Fair Claims Settlement Certificate when finished with this course).

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(b) Determination of Scope of Loss: Adjusters shall be trained how to conduct a thorough examination of the property to be inspected including but not limited to: attics, crawlspaces, roofs, chimneys, foundations, and structural areas. The adjuster shall be trained how to make a complete listing of all recent earthquake damage. Training pursuant to this subsection shall include building code upgrade issues and procedures to be followed if additional hidden earthquake damage is found after repair of earthquake damage has begun. (c) Loss Estimation Techniques: Adjusters shall be trained how to create or obtain an accurate estimate of all covered earthquake damage. The adjuster shall be trained regarding the appropriate level of detail to be contained in the estimate and the documentation necessary to support the estimate. Adjusters shall be trained to re-evaluate the estimate if the actual costs of repair differ from the costs listed on the original estimate. (d) Determination of Necessity for Engineer or Expert: Adjusters shall be trained how to evaluate visible damage and indicia of hidden damage to determine when to consult with an engineer or other expert. (e) California Department of Insurance Earthquake Mediation Program: Adjusters shall receive training regarding the Earthquake Claims Mediation Program of the California Department of Insurance set forth at California Insurance Code Section 10089.70 and California Code of Regulations, Title 10, Chapter 5, Subchapter 7.6, Sections 2696.1 through 2696.10, inclusive. (f) Assessment of Damage to Concrete Surfaces and Foundations: Adjusters shall be trained on the basic techniques used to determine the difference between pre-existing cracks in the concrete of structures and new cracks caused by an earthquake. Complete training pursuant to this subsection shall include methodology for determining when repair or replacement of the concrete is appropriate and proper methods for concrete repair including, but not limited to injected epoxy methods. (g) Subsequently Discovered Earthquake Damage: Adjusters shall be trained on the basic requirements of current law regarding the obligation of the insurer to investigate any earthquake damage that is discovered or reported and when it may be appropriate to seek legal counsel to assist in making this determination. (h) Programs Designed to Assist Earthquake Victims: Adjusters shall be trained regarding the existence of United States Small Business Administration and Federal Emergency Management Agency or other similar programs intended to assist earthquake victims. Training pursuant to this subsection shall include an overview of these programs and deadlines, and how these programs and deadlines interact with the underlying earthquake insurance claim. Note: Authority cited: Section 10089.3, California Insurance Code CERTIFICATES (a) Certificates shall be provided to any student successfully completing adjuster earthquake training and shall contain the following information:

• Name, address and telephone number of the insurer or other entity providing the adjuster

training required by this subchapter; • Full name of adjuster, and license number if applicable;

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• A statement certifying that the adjuster completed training that meets the standards set forth in these regulations;

• Signatures of both adjuster and trainer; and • Completion date of training. • (b) Adjuster Earthquake Training must be renewed every three years by completing this training. Adjusters must also complete detailed training on CEA Coverages and the CEA Claims Manual every three years or within one year after any revised version of the CEA Claims Manual. The CEA online training course must be completed PRIOR to the adjuster being dispatched to handle any CEA claim. MAINTENANCE OF RECORDS (Section 2694.44)

Insurers or other entities providing adjuster training must maintain records of all adjusters completing the program, for a period of five years. An insurer using an adjuster to evaluate earthquake damage must keep a record of that adjuster's accreditation for a period of five years. These records must contain the following information:

• Name of adjuster and license number if applicable; • Date training completed; • Name, address and telephone number of training entity.

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EARTHQUAKE COVERAGE Earthquake coverage changed radically after the 1994 Northridge quake. Until then, companies that wrote homeowners insurance in California were also required to offer earthquake overage. After $12.5 billion in losses from the Northridge earthquake, however, most insurers refused to write this coverage. The state Legislature responded by creating the California Earthquake Authority (CEA), a state-run earthquake insurance pool. Most large insurers (Allstate,

State Farm, Farmers, etc.) are participating members offering CEA ONLY policies. A handful of private companies continue to issue supplemental or stand alone ISO-type earthquake policies (GeoVera, Pacific Select, Safeco, Fireman’s Fund. Hartford, Travelers, etc). ISO vs. CEA A detailed comparison of private versus CEA earthquake coverages is not the main objective of this course. In a nutshell, ISO-type coverages tend to charge higher premiums yet offer building extension coverage (tool sheds, fences, pools, retaining walls, walkways, patios, paintings and antiques, as well as minimal personal property coverage. CEA (California Earthquake Authority) member policies, while the majority of policies sold in California, offer fewer bells and whistles (outbuildings, fences, pools, etc.) and require companion policies (underlying fire insurance). Further, in a large scale quake, the CEA could run underfunded and be forced to pro-rate claim proceeds. Since the vast majority of policies sold in California are CEA Residential Policies, the following discussion of coverage and limitations pertains to CEA policies ONLY. CALIFORNIA EARTHQUAKE AUTHORITY Overview The CEA is a publicly-managed, privately-financed entity, operating much like an insurance company, though with some significant differences. Funds to pay earthquake claims come from premiums collected and investment income, Participating Insurer contributions and assessments, reinsurance purchased by the CEA, and other CEA risk transfer mechanisms. No funds from the public or from the State of California’s General Fund are pledged to cover losses incurred by CEA policyholders. When an earthquake results in a claim against a CEA policy sold by a Participating Insurer, the claim representative or adjuster for that insurer handles the claim on behalf of the CEA. The CEA reimburses the Participating Insurer for the indemnity dollars paid, and pays the Participating Insurer a loss adjustment fee to cover claims-adjusting expenses. All Participating Insurers and their claim representatives (adjusters), whether employees or independent contractors, are required to follow specific claim-handling guidelines. The CEA audits and re-inspects claims to make sure that claims are properly investigated and that appropriate procedures have been followed.

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It is important to understand that CEA policies do not provide the same types of coverages property claim representatives may be accustomed to seeing under a traditional residential policy. Each policy issued by the CEA should be carefully reviewed. Types of CEA Policies The CEA provides earthquake coverage in the State of California through three distinct policies. They are: Basic Earthquake Policy – Homeowner This is the most frequently-sold policy and the one a claim representative should review first. Coverage for dwelling, personal property and loss of use are included. Single-family homes, manufactured homes and mobilehomes are also insured using this policy. Basic Earthquake Policy – Homeowners Choice Under HO Choice, dwelling coverage is mandatory, personal property and loss of use have optional limits. Dwellings, manufactured homes and mobilehomes can be insured. A summary of Homeowners and Homeowners Choice plan coverages and limitations can be found on the next page. Basic Earthquake Policy – Renters This policy provides personal property and additional living expense coverages similar to that in the homeowners policy, although the deductibles work differently from a homeowners policy. It does not cover the dwelling or extensions to dwelling. Basic Earthquake Policy – Common Interest Development In California, a “common interest development” can be a community apartment project, a condominium project, a planned development, or a stock cooperative, all as further defined in California Civil Code section 1351. Since most people equate “common interest development” with a “condominium,” throughout the remainder of this manual we will use the term “condominium” interchangeably with “common interest development.” NOTE: CEA Policies do not cover commercial or office buildings. NOTE: CEA is funded ONLY from premiums collected and investment income -- THERE ARE NO TAXPAYER OR PUBLIC FUNDS TO SUPPORT CEA CLAIMS. Therefore, in the case of a severe or series of earthquakes, CEA’s ability to pay claims may be reduced, i.e., CEA’s Claims Payment Ratio could be less than 100%.

Difference in Deductibles Homeowners vs. Homeowners Choice Under Homeowner Policies, nothing will be paid for personal property until the dwelling deductible is met by covered damage to Coverage A and B (dwelling and real property). In Homeowners Choice, the deductible for personal property is between 5%-25% of the personal property coverage limit. This deductible is waived if Coverage A deductible is met (assuming coverage is purchased).

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COVERAGE COMPARISON CHART HOMEOWNERS & HOMEOWNERS CHOICE

California Earthquake Authority 2016

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Companion Policy Required CEA policies are sold and issued through Participating Insurers. By law (California Insurance Code section 10089.20), a CEA earthquake policy is valid only if an underlying residential fire insurance policy is in force covering the same property. The CEA policy is legally void if no residential fire policy issued by the same Participating Insurer is in force at the time of the loss, regardless of whether a formal notice of cancellation of the CEA policy has been sent or received at the time of loss. Participating Insurer Responsibilities Participating Insurers are responsible for investigating and adjusting claims made under CEA policies. Section 3.2 of Article III of the Insurer Participation Agreement reads in part: “The Participating Insurer may perform Authority services on behalf of the Authority in any reasonable manner that is in compliance with the statutory, regulatory, and case law regarding claims handling practices; provided, however, where the Authority has promulgated specific procedures to govern its operations, the Participating Insurer shall conform its practices to those procedures.” Participating Insurers and their representatives should handle all CEA claims in an expeditious and thorough manner, with at least as much care or diligence as they use in handling their own non-CEA business. Participating Insurers are to report to the CEA all claims from CEA policyholders, whether or not the Participating Insurer expects the claim to exceed the deductible. If the claim is expected to be under the deductible, it should be reported with a zero dollars reserve (or the lowest reserve amount allowed by the Participating Insurer’s claims system). CEA Earthquake Response Manager – Duties and Responsibilities The CEA has an Earthquake Response Manager (ERM). The duties of the ERM include: a. Maintaining and communicating CEA guidelines for adjustment and payment of claims b. Assisting Participating Insurers with earthquake claims training c. Monitoring Participating Insurers’ disaster response procedures d. Maintaining an on-site presence after an earthquake e. Coordinating claims activity with the Participating Insurers after an earthquake f. Chairing and participating in the CEA Claims Coverage Committee g. Initiating and coordinating reinspections and claim file reviews after an earthquake Participating Insurer Claims Liaison – Duties and Responsibilities Each Participating Insurer must designate a single claims liaison to work closely with the ERM in coordinating all activities prior to and after an earthquake. The individual selected should be a property claims professional with the knowledge and the authority within the Participating Insurer’s company to resolve issues in a timely manner, be Earthquake Certified, familiar with the CEA Claim Manual, understand CEA coverage and the calculation of CEA deductibles.

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Policy and Coverage Interpretations The CEA has established the following process for answering and resolving CEA policy coverage questions. a. Participating Insurers should first attempt to resolve policy and claim coverage questions by

consulting the CEA Claims Manual and by using the expertise of their senior claims professionals and claims management.

b. Remaining unresolved claim questions should be referred to the CEA on the CEA Coverage Review Form with a narrative report under each of the applicable headings. An example of a completed form and a blank Coverage Review Form are included in the Appendix.

c. The Coverage Review Form should be submitted to the CEA ERM along with a copy of the claim file and all other materials necessary for the proper review of the issue. Participating Insurers must use overnight mail when sending a file to the CEA for consideration.

d. If relevant to the question, the file should include photographs of the damage, documentation regarding the amount of the loss, transcribed statements of interested parties, a declarations page, endorsements, correspondence, and copies of the electronic notes. All other information pertinent to the coverage question under review should also be provided.

e. Upon receiving a coverage question from a Participating Insurer, the CEA Claims Coverage Committee reviews the question and the CEA ERM notifies the Participating Insurer of its coverage decision.

It is the responsibility of the Participating Insurer to communicate the coverage decision to the policyholder and, when appropriate, to other interested parties. The CEA ERM will endeavor to respond as quickly as possible, given the constraints associated with resource allocation in response to larger earthquake events. The Participating Insurer should notify the CEA ERM if there are circumstances requiring a specific turnaround time (other than the response times required by the California Fair Claim Settlement Practices Regulations). If the participating insurer does not receive a response from the CEA in 15 days, they should follow up with the ERM. During the period of time used for a coverage review, the Participating Insurer’s claim representative must keep the claimant informed in writing, as provided in the Fair Claim Settlement Practices Regulations section 2695.7(c)(1). In order to help achieve the CEA’s goal of claim-handling consistency, Participating Insurers must not send a question regarding coverage for a CEA claim or CEA policy interpretation to counsel for a legal opinion before submitting the question to the CEA and obtaining the CEA’s written consent for the Participating Insurer to seek a legal opinion on that question. In some circumstances, the CEA may have already obtained a coverage opinion on the general or specific topic in question, and may be able to share the conclusions of that opinion with the Participating Insurer. Reinspections and Claim File Reviews The CEA uses both physical claim reinspections and claim file reviews to monitor whether CEA claims are handled in a prompt, consistent, and fair manner. A physical claim reinspection involves actually visiting and evaluating the earthquake-damaged home, while a claim-file review is generally accomplished in an office by looking at the claim file and all supporting electronic records.

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a. Reinspections and Claim File Reviews Performed by the Participating Insurer The CEA expects that Participating Insurers will have their own claims quality assurance programs, including a program for field reinspections of open claims, as well as reviews or audits of claim files. These plans should be documented in the earthquake response plan each Participating Insurer submits to the CEA every year. Reinspections: It is important to conduct reinspections on open claims early in the claimhandling process so that the damage can be viewed before repairs are completed. Of course, the policyholder’s permission must always be obtained. The reinspection program should look at a statistically-valid sample of all claims from a specific earthquake. The ERM or the ERM’s designee may be available to join Participating Insurer inspectors when they are conducting CEA earthquake claim reinspections. Requests to participate in the reinspections should be made through the ERM, who will try to accommodate these requests according to the available resources. Claim file reviews: In addition to physical claim reinspections, Participating Insurers are required to have a regular claim file quality review program. The Participating Insurer should apply the same quality of review and look at the same number of claim files as it would for its own claims. Copies of results should be retained, since the CEA may request copies of any review at a later date. b. Reinspections and Claim File Reviews Performed by the CEA The CEA may conduct field reinspections of open claims and/or reviews of claim files after an earthquake. While field reinspections are generally performed on open claims, claim file reviews may be performed on open or closed claim files. The purpose of these reinspections and claim file reviews is to: 1. Monitor and promote adherence to the CEA claim guidelines, policies, and procedures, 2. Verify the accuracy of claims settlements, and 3. Determine whether claims are being handled in accordance with the California Fair Claims

Settlement Practices Regulations and other applicable regulations and statutes. Reinspections: All CEA claim reinspections will be conducted separately and in addition to any Participating Insurer reinspections. Before the claim reinspection process begins, the CEA will ask for a complete copy of the claim file for each claim it wishes to reinspect. The CEA reinspector may be either a CEA employee or an independently-contracted individual or company. The CEA will endeavor to reinspect a representative sample from each Participating Insurer and to look at claims under each type of CEA earthquake policy. Claim file reviews: The CEA may also elect to conduct claim file reviews on open or closed claim files. These may be done at the Participating Insurer’s office or the CEA may request that copies of the claims files be sent to the CEA office for review. In either case, the CEA will endeavor to give sufficient notice to the Participating Insurer so as not to disrupt the Participating Insurer’s ongoing claims-handling process. It is the CEA’s intent to communicate any issues discovered by the reinspections or claim file reviews to the relevant Participating Insurer.

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c. Claim File Review Elements CEA claim reviews may include, in addition to other elements, an evaluation of some or all of the following elements, depending on what may be appropriate to the facts and circumstances of the particular claim being reviewed: 1. Promptness of first contact 2. Development of initial information 3. Timely and thorough completion of the scope of damage (listing of damage) 4. Repair estimate of damages 5. Statements, if warranted 6. Reserve calculations and adequacy of reserves 7. Full coverage information and how it applies to the claim 8. Effective use of a diary that results in timely claims handling 9. Timeliness of communication with insured regarding claim status 10. Alertness to fraud and prompt notice given to appropriate parties 11. Appropriate use of engineers or other experts 12. Completeness of documentation of the amount of loss – Statement of loss 13. Timeliness of claim payments 14. Quality of written adjuster communications, including log notes and claims memos 15. Compliance with the CEA Claims Manual 16. Compliance with California Fair Claims Practices Regulations 17. Periodic guidance on open files by Claims Management 18. Effectiveness of Participating Insurer’s reinspection program and claim file reviews d. Timing of CEA Claim Reviews Field reinspections: The CEA will typically begin conducting physical reinspections of claims around 30 to 45 days after an earthquake; however they can begin at any time. Office claim file reviews: Claim file reviews can begin at any time after an earthquake, but most likely will begin after a majority of the claims have been completed and closed. Overlapping or Coexistent Insurance Coverage To help resolve issues of overlapping insurance or coexistent insurance coverage, the claim representative should follow the Other Insurance provisions in the CEA policy. Further help can be found in the Guiding Principles for Overlapping Insurance Coverage published in 1963 by a consortium of underwriting organizations. This document should be available from your claim manager. When dealing with condominium policies, pay particular attention to the Other Insurance wording in the policy. This is discussed in more detail later. Claim Reserving The aggregated reserve on reported claims provides the CEA’s first estimate of severity of an earthquake and ultimate exposure for the event. Claim representatives must quickly set reserves that represent the best estimate of a claim’s ultimate cost. Reserves should be adjusted as soon as new information is learned that would affect the ultimate cost. When there

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is a legitimate question of coverage, set the reserve at the estimated amount of damages (minus the deductible amount) until the coverage issue is resolved. If the claim is expected to be under the deductible, it should be reported with a zero ($0) reserve or the lowest reserve amount allowed by the Participating Insurer’s claims processing system. PRE-EARTHQUAKE DISASTER RESPONSE PREPARATION Pre-Earthquake Planning – General Response planning before an earthquake occurs is very important. The CEA ERM is available to the Participating Insurer claim liaison to assist with pre-earthquake training and planning. Participating Insurer Earthquake Response Plan Each Participating Insurer is responsible for its own earthquake catastrophe response planning. By the end of each calendar year, an updated claims-oriented response plan specific to earthquake claims is to be filed with the CEA. It must address, at a minimum, the following aspects of catastrophe planning: a. Processes to make sure staff are trained before they are needed for earthquake catastrophe claims handling duty. It is the Participating Insurer’s responsibility to make sure that every adjuster working on a CEA claim meets the following criteria: • Is trained on the California Department of Insurance Fair Claims Settlement Practice

Regulations • Is accredited on the 1-1-2005 Department of Insurance standards for evaluating damage

caused by earthquakes • Has received training in the handling of CEA claims and at a minimum, has recently taken

the CEA on-line claims coverage and deductible calculation courses • If using any independent adjusters, plans to confirm that all such adjusters are properly

licensed to investigate and adjust claims in California b. Procedures for the initial (first 48 hours) earthquake catastrophe response: • Processes for accepting new earthquake claims • Plans for properly trained and accredited initial response adjusters • Plans for claims management including the ability to determine affected policies-in-force • Resources available - buildings, cars, computers, etc. • Logistical details on how response activities will be coordinated c. Procedures for longer term earthquake catastrophe response: • Plans for a sufficient number of properly trained and accredited earthquake adjusters • Plans for the longer term management of CEA earthquake claims • Resources available – buildings, cars, computers, independent adjusters, etc. • Logistics - details on how response activities will be coordinated d. Procedures for how experts, including engineers, will be used, and details on pre-earthquake

arrangements for these services.

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e. Procedures for handling first reports of CEA claims and other phone-related support

programs, such as the availability of national catastrophe call centers, etc. Claim Representatives Should Handle Claim to Conclusion The Participating Insurer must make every effort to assure that the original claim representative assigned to a claim will handle the claim to conclusion. If reassignment of claims to another claim representative is necessary, the Participating Insurer must have procedures in place to facilitate a proper transfer of the files, including instructions in each file on what remains to be done to complete the handling on each claim. California Insurance Code section 10082.3 addresses this issue where it reads, in part: “Adjusters: If, within a six-month period, the company assigns a third or subsequent adjuster to be primarily responsible for a claim, the insurer, in a timely manner, shall provide the insured with a written status report. For purposes of this section, a written status report shall include a summary of any decisions or actions that are substantially related to the disposition of a claim, including, but not limited to, the amount of losses to structures or contents, the retention or consultation of design or construction professionals, the amount of coverage for losses to structures or contents and all items of dispute.” POST-EARTHQUAKE RESPONSE CEA Earthquake Response Manager Following the occurrence of an earthquake from which a significant number of CEA claims is expected to be presented, the CEA Earthquake Response Manager most likely will travel to the general area of the earthquake and make efforts to be available to consult with the Participating Insurers’ CEA Claims Liaisons. Media Communications Following an Earthquake After an earthquake, the CEA will endeavor to maintain communications with the Participating Insurers in order to provide the public with helpful, accurate, and timely information. Participating Insurer representatives are not authorized to communicate with the media on the CEA’s behalf. The CEA maintains specific guidelines on how the CEA name, logo, and trademarks can be used. All advertising that a Participating Insurer might do must be consistent with CEA directives that have been provided to each Participating Insurer. Copies of these directives are available from the CEA’s Director of Communications. Participating Insurer Claims Liaison Participating Insurers’ key on-site personnel should be determined by the insurer at the outset of the catastrophe, and a list containing their names should be forwarded via e-mail to the ERM within 24 hours of the earthquake.

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The ERM will endeavor to meet with the Participating Insurer claims liaisons near the earthquake site on an as-needed basis. The meetings between the ERM and the Participating Insurer representatives can serve as a forum to resolve issues, such as: a. Updating the ERM with the progress each Participating Insurer has made in establishing its

catastrophe office(s) b. Identifying and sharing information about specific problems encountered by the Participating

Insurers c. Informing the Participating Insurer representatives of the current status of the CEA’s

coordination with governmental agencies d. Discussing general policy coverage issues e. Discussing particular structural elements being encountered on claims in the area Catastrophe Offices Although Participating Insurers must provide adequate staffing and operations, the establishment, number, and location of catastrophe response offices is left to the discretion of the Participating Insurers. Participating Insurers should provide the CEA with the address and telephone number of their catastrophe offices as they are established. Participating Insurers must make it reasonably easy for new CEA claims to be reported by policyholders. This may include the use of agents and/or prominently publicized toll-free telephone numbers. CEA Event Code Immediately following an earthquake of a Richter magnitude of 5.0 or higher, or any event that results in significant claims against CEA policies, the CEA will assign an Event Code. Specific Event Codes have the form YYNNN, where YY is the last two digits of the year in which the earthquake event occurs and NNN numbers events sequentially in 10-unit increments. While the first two digits of the event code change with the new year, the next three digits are sequential over the years. For example, if the last Event Code issued in 2005 had been 05070, the first Event Code issued in 2006 would have been 06080. The CEA will communicate the Event Code to all Participating Insurers as soon as possible following the earthquake event’s initial seismic activity. All claim-related data transmissions to the CEA data repository must include the event code. New Claims Reported to the CEA Presentation of claims directly to the Participating Insurer will result in the most timely claims service, and most claims will be reported directly to the Participating Insurers. However, the CEA may receive calls in which the policyholder or another interested party wishes to report a claim under a CEA policy to the CEA, rather than to the Participating Insurer. Callers will be encouraged to report the claim directly to the appropriate Participating Insurer and will be given the toll-free claim reporting telephone number for the responsible Participating Insurer. If the caller cannot or will not make the report of a claim to the responsible Participating Insurer, the CEA representative will complete a property loss notice form and fax it to the appropriate Participating Insurer’s claims department.

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Pro Rata or Installment Claims Payments If an earthquake or series of earthquakes threatens to exhaust the CEA’s claims-paying capacity, statute provides that the Insurance Commissioner may authorize the CEA to pay policyholder claims on a pro rata basis. Once an earthquake occurs, the CEA estimates probable losses based on in-force coverages and damage models. The CEA will then compare its preliminary overall loss reserve estimate of the earthquake to the claims-paying capacity of the CEA. In case of a severe earthquake, or several significant earthquakes over a relatively short period of time, it is possible that the CEA could declare a Claims Payment Ratio (CPR) of less than 100%. If a CPR is declared, the CPR determines what percentage of the claim is to be paid to the insured by the Participating Insurer. Participating Insurers can assume the CPR is 100% unless the CEA announces otherwise. The CPR may be adjusted during the handling of claims arising out of an earthquake based upon actual paid claim amounts and the resources available to the CEA for payment of claims. If the CPR is adjusted upward, paid claims will need to be recalculated and additional payments forwarded to the insured. This discussion about the CPR does not change the way Participating Insurers are to adjust, report, or seek reimbursement from the CEA for claims payments. Claims reimbursement procedures are found in the CEA Participating Insurer Operating Procedures Manual.

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BASIC CEA HOMEOWNERS EARTHQUAKE POLICY (A specimen policy is provided in the Appendix) The CEA homeowners policy is used to insure residential dwelling structures, manufactured homes and mobilehomes. The CEA homeowners policy has two forms:

1. Basic Earthquake Policy – Homeowners, form BEQ-3B (In this Manual this policy is referred to as the HO Basic policy.) 2. Basic Earthquake Policy – Homeowners Choice, form BEQ-3C (In this Manual this policy is referred to as the HO Choice policy.) The main difference between these two policies is how the policy is structured and as a result how the deductible is applied. All other policy provisions, coverage, sublimits, etc. are the same. See page 10 for an overview of deductibles in these two policies. In contrast to the CEA HO Basic policy, the CEA HO Choice policy provides for three coverage options that can be purchased together in any combination or separately: Coverage A & B CSL: DWELLING Coverage C: PERSONAL PROPERTY Coverage D: LOSS OF USE Optional Coverages under Coverage A & C Coverage A & B CSL: DWELLING is required on a Homeowners Choice policy. Coverage C: PERSONAL PROPERTY is an optional coverage that a policyholder may elect to add to a Choice policy. If selected, the insured may choose limits ranging from $5,000 to $200,000. This coverage has its own 5%-25% deductible that is waived if the damage to coverage A & B CSL exceeds the coverage A & B CSL deductible. Coverage D: LOSS OF USE is an optional coverage that a policyholder may elect to add to a Choice policy. If selected, the insured may choose limits ranging from $1,500 to $25,000. Optional Coverages under A & C: Coverage of Exterior Masonry Veneer- This endorsement applies to dwelling, coverage A and is subject to the dwelling deductible. Coverage for Breakables- Optional coverage under personal property, coverage C can cover items such as dishes and ceramics. The fact that these coverages can be purchased separately and with different coverage limits requires the claim representative to be vigilant in confirming coverage, limits, and deductible amounts. NOTE: The CEA Homeowners earthquake policy has a combined single limit for Coverage A:DWELLING and Coverage B: EXTENSIONS TO DWELLING that will match the amount of the Coverage A: limit in the companion fire policy. Adjusters may need to

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explain this to the insured since this is different from the way most fire policies are structured. OVERVIEW OF COVERED LOSSES The CEA policy is a specified peril policy. It insures against only one peril, specifically: …accidental, direct physical loss from an earthquake that commences during the policy period as part of a seismic event that commences during the policy period… “Seismic event” means one or more earthquakes that occur within a 360-hour period. The seismic event commences upon the initial earthquake, and all earthquakes or aftershocks that occur within the 360 hours immediately following the initial earthquake are considered for purposes of this policy to be part of the same seismic event. (360 hours equals 15 days.) Read the complete policy definitions for “earthquake,” “seismic event,” and “tectonic processes.” In order for a claim to be covered, the earthquake and the seismic event (i.e., the first in time of any series of related earthquakes) both must have commenced during the CEA policy period. OVERVIEW OF LOSSES NOT COVERED As mentioned above, the CEA policy covers only the peril of an earthquake that occurs during the policy period as part of a seismic event that commences during the policy period. Losses caused by any peril other than an earthquake commencing during the policy period do not fall within the insuring agreement of the policy. The policy also contains a list of excluded perils losses caused by these perils are excluded even if an earthquake contributes to the loss. The exclusions should be read carefully as there are exceptions. For example: • Under Losses Excluded, number 2, water damage, the policy reads: This water damage

exclusion, however, does not exclude loss that results from water damage to covered property as a result of an earthquake, which causes: (i) the release of water from water heaters, refrigerators, or water supply pipes within the dwelling; (ii) the displacement of water from a swimming pool, decorative pool, spa, or hot tub; or (iii) the release of water from municipal or other water supply lines on or off the residence premises or the release of water or sewage from sewers or drains on or off the residence premises.

• Under Losses Excluded, number 5, non-earthquake earth movement is excluded, but there are exceptions: That exclusion reads in part:

We do not insure for any loss that is caused by… 5. Earth movement, settling of land, land sliding, subsidence, mudflows, or earth sinking, rising or shifting, unless the earth movement, settling of land, land sliding, subsidence, mudflow, or earth sinking, rising or shifting: a. Is induced by, and would not have occurred in the absence of, an earthquake that commences during the policy period as part of a seismic event that commences during the policy period; and b. Causes loss that manifests within one year after the earthquake that caused the loss.

The above are merely illustrative examples of excluded perils. There are several other excluded perils listed in the policy—carefully read the policy for the complete list.

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DEDUCTIBLE The CEA BASIC EARTHQUAKE POLICY – HOMEOWNERS provides for a deductible option of 5%-25% of the Coverage A and Coverage B combined single limit of insurance. Check the declarations page to see which deductible percentage applies to the particular policy under which the claim is submitted. For losses covered under Coverage A: DWELLING or Coverage B: EXTENSIONS TO DWELLING, there is a combined single limit of coverage and a combined deductible. For example, if the combined single limit for Coverages A and B is $200,000 and the deductible percentage is 15%, the deductible is $30,000. Losses to personal property are not taken into account when calculating the deductible! Only covered loss to real property is counted against the deductible. No payment will be made for any personal property loss until the amount of covered loss to property that is covered under CoverageA: DWELLING or Coverage B: EXTENSIONS TO DWELLING exceeds the deductible shown on the declarations page. Regardless of the amount of loss to personal property, there will be no payment for any loss unless the loss to dwelling and extensions to dwelling exceeds the amount of the deductible. Following are two homeowners policy examples: Example 1: How to calculate proper payment after applying the deductible. Coverages A and B combined single limit = $200,000 Covered damage to dwelling and extensions (Coverages A and B property) = $234,000 Deductible = 15% x $200,000 = $30,000 The following illustration shows that the deductible is applied first, and then covered claims are paid up to the combined single limit, leaving amounts in excess of $230,000 as uninsured losses: $234,000 Total loss to covered items under Coverages A and B - $30,000 Less the deductible $204,000 Remaining loss to covered items $200,000 Coverage Limit and the amount that can be paid on this claim $ 4,000 Loss not paid since coverage limits already paid in full Further, in the above example, the Coverages A and B deductible was exceeded so Coverage C can be paid up to the Coverage C limit without further deductible. Example 2: Here is an example showing significant personal property damage, but no CEA payout since the Coverages A and B damage did not exceed the Coverages A and B deductible. Coverages A and B combined single limit = $200,000 Personal Property limit = $75,000 Damage to dwelling and extensions (Coverages A and B property) = $5,000 Damage to personal property = $20,000 Deductible = 15% x $200,000 = $30,000 $ 5,000 Loss to covered items under Coverages A and B property

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$30,000 Deductible on Coverages A and B $ 0 Payment under Coverages A and B since loss did not exceed the deductible $20,000 Personal property loss 20,000 Personal property loss not covered since Coverages A and B deductible not met $ 0 Total amount paid on this claim for personal property Read the deductible clause in the policy to determine what will be applied to meet the deductible. It reads in part: 2. Only the following will be applied to meet the deductible: a. The reasonable and necessary replacement cost of the covered damage to property

covered under “COVERAGE A: DWELLING,” and b. The reasonable and necessary replacement cost of the covered damage to property

covered under “COVERAGE B: EXTENSIONS TO DWELLING,” but only up to the amount of the applicable sublimit for property for which there is a sublimit under “COVERAGE B: EXTENSIONS TO DWELLING,” and

c. The reasonable and necessary cost of emergency measures covered under “OTHER COVERAGES,” item 1, that you actually take to protect property that is covered under “COVERAGE A: DWELLING” and “COVERAGE B: EXTENSIONS TO DWELLING” against further damage, but only up to the sublimit of 5% of the combined single limit of insurance for “COVERAGE A: DWELLING” and “COVERAGE B: EXTENSIONS TO DWELLING,” and

d. The reasonable and necessary cost to replace, rebuild, stabilize or otherwise restore the land that is covered under “OTHER COVERAGES,” item 4, but only up to the sublimit of $10,000. 3. The cost to repair or replace personal property, or any other cost not set forth in 2a. through 2d. above, will not be applied to meet the deductible. 4. The deductible will be applied one time for each seismic event.

Important! There is no deductible for Coverage D: LOSS OF USE. Please note that even if the insured does not have a real property loss in excess of the policy deductible, the insured can still claim the Loss of Use coverage at a later date if forced to move out of the dwelling while covered earthquake-related repairs are being made to the property. For another example of how to calculate a deductible, see the Appendix. LOSS SETTLEMENT The BASIC EARTHQUAKE POLICY – HOMEOWNERS is a replacement cost policy both for real property and for most personal property. The real property Loss Settlement condition of the policy (Condition 5) specifies that, once losses on building property exceed the deductible, settlement …will not exceed the smallest of the following: (i) The replacement cost at the time of loss; (ii) If the damaged property has been actually repaired or replaced, the amount actually and

necessarily spent to repair or replace the damaged property; or (iii) The applicable limit of insurance or any applicable sublimit(s). Personal property is also

settled at replacement cost, except for certain limited categories of personal property that are settled at actual cash value. These categories are described in Condition 6 of the policy:

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We will settle losses to covered property described under Coverage C: PERSONAL PROPERTY . . . at replacement cost, except that we will settle losses to property in items (i), (ii), and (iii) of this paragraph, below, at actual cash value only. (i) Property which by its inherent nature cannot be replaced; (ii) Property not maintained in good or workable condition; or (iii) Property that is outdated or obsolete, or property not useful for its intended purpose. Unlike many Participating Insurers’ underlying policies, actual repair or replacement is not required to collect the replacement cost with regard to Coverage A Dwelling, Coverage B Extensions to Dwelling or Coverage C Personal Property (except for certain limited categories of personal property which are payable at actual cash value only). However, if the property has already been repaired or replaced at the time payment is made, that amount payable is limited to the amount spent. The exception to this rule is losses covered under “Other Coverages for Building Code Upgrades.” This cost is paid only if the property is actually repaired and the cost is incurred. The CEA permits the pre-payment of code upgrades if it is clear, in the claim representative’s professional judgment, that property is going to be repaired, the code upgrade cost is known (or it is known that code upgrade costs will exceed the Building Code Upgrades coverage limit), and making this payment would complete the claim process. TYPES OF PROPERTY INSURED Business and commercial buildings are never insured by the CEA policy. Under COVERAGE A: DWELLING, the policy covers the residence premises, which can be a one, two, three, or four unit dwelling at the address shown in the declarations. “Dwelling” is specifically defined in the DEFINITIONS found in the policy. It provides: “Dwelling,” means the residential structure or mobile home at the location described in the DECLARATIONS. Dwelling does not include land, whether or not beneath the residential structure or mobile home, even if required for support. Dwelling does not include any structure other that the residential structure or mobile home unless the structure (1) shares a common wall or a continuous roof line with the residential structure or mobile home or (2) is attached to the residential structure or mobile home by a foundation that is continuous with or contiguous to the foundation of the residential structure. Under COVERAGE B: EXTENSIONS TO DWELLING, you will find a list of the non-dwelling other structures covered by the policy. Besides the residence premises, some of the items covered under the Coverages A and B combined single limit are certain types of the following categories of property: • On-premises equipment and utility service structures that affect the habitability of dwelling. • Walkways, driveways, decks, and patios are covered to the extent necessary to restore

regular pedestrian ingress to and egress from the dwelling. • Bulkheads, piers, and retaining walls that are integral to the stability of the dwelling are

covered.

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The “OTHER COVERAGES” section of the policy contains the following additional property building property coverages: • Emergency repairs up to a 5% sublimit of the Coverages A and B combined single limit. • Debris removal up to 5% of the Coverages A and B combined single limit as additional

insurance. • Building code upgrade coverage in the amount of $10,000,$20,000,or $30,000 (depending

on the coverage option selected by the policyholder) as additional insurance. • Land stabilization, necessary to support the dwelling is covered up to $10,000 as a sublimit

of Coverage A. CHIMNEYS – Coverage A: $5,000 Sublimit of Insurance Chimneys are covered up to a $5,000 sublimit regardless of the number of chimneys covered. For purposes of applying the sublimit: “Chimney” means the flue or vent and the building code required structure that surrounds the flue or vent, including exterior chimney facings, from the firebox to the outside of that structure. Chimney does not include a hearth, a mantel, or the firebox where combustion takes place. The hearth, mantel and firebox are not subject to this $5,000 sublimit and damage to them is covered under the dwelling limit. Also, please note that payment for the replacement of masonry chimneys is made at the cost of a non-masonry chimney. The non-masonry provision is found in the homeowner policy condition 5(g), which reads: To repair or replace a chimney, we will not pay more than the least of the following amounts: (i) The sublimit of $5,000 that applies to chimneys; (ii) The cost of replacement of a masonry chimney or chimneys with a non-masonry,

earthquake-resistant chimney or chimneys; or (iii) The necessary amount actually spent to repair the damaged chimney or chimneys. There are four things to remember when working with chimneys. 1. Follow the chimney definition and don’t include the hearth, mantel, and firebox in the estimate

of chimney damage. 2. The CEA policy has a $5,000 chimney sublimit, no matter how many chimneys there are

on the property. This is not $5,000 per chimney, but $5,000 for all chimneys. 3. The settlement provisions provide for the least of three different options, one being chimneys

are replaced with non-masonry, earthquake resistant chimney. EQUIPMENT AND UTILITY STRUCTURES - Coverage B: The policy covers equipment and utility service structures for electric, telephone, natural or bottled gas, heating, oil, water, septic, and sanitary sewage systems. To be covered, these items must be owned by the insured, must be on the residence premises, and must affect the habitability of the dwelling.

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Exterior water supply systems, including irrigation systems, sprinkler systems, and water reclamation systems are excluded. In order to determine whether any such item is covered, the claim representative must determine the answer to the following three questions: 1. Does the insured own the item? 2. Is the item that was damaged one of the types of items listed in the policy? 3. Is the item physically located on the insured’s premises? 4. Does the item affect the habitability of the dwelling? There is coverage under a CEA homeowners policy only when the answer to all three question is “yes.” WALKWAYS, DRIVEWAYS, DECKS, PATIOS - Coverage B: The policy reads in part as follows: … we cover… 2. That portion of any walkway, driveway, deck, or patio that is necessary for regular pedestrian ingress to or egress from the dwelling and for the regular ingress to and egress from the dwelling by any non-ambulatory insured. The scope of this coverage is to establish safe pedestrian passage to and from the dwelling for the insureds. The scope is best appreciated by breaking down the coverage language as follows: • That portion – This language obviously states that only the relevant portion of the property is

covered. Use the local city or county building codes, where the codes speak to this issue, to determine what “that portion” necessary for safe ingress and egress is.

• Any should be interpreted to mean all such items that are used for regular pedestrian ingress or egress.

• Pedestrian - Means that ingress and egress necessary for vehicles is not covered. (An exception could be made for a non-ambulatory insured.)

• To or from the dwelling - This means that the policy covers regular pedestrian ingress and egress from the home to a public sidewalk or to the private or public street next to the home.

Questions about what portion of the walkway, driveway or patio should be repaired or replaced must be addressed on an individual basis according to the facts of the loss and the coverage available. The claim file should have a detailed drawing of what ingress and egress was allowed, and the file should contain documentation as to how and why the dimensions and amounts paid were arrived at. This coverage is for replacement cost with materials of like kind and quality and for the same use. (See the definition of “replacement cost” in the policy.) BULKHEADS, PIERS AND RETAINING WALLS - Coverage B: The policy covers those bulkheads, piers, and retaining walls on the residence premises that are integral to the stability of the dwelling. Except as provided for in “OTHER COVERAGES,” item 4, the cost of repairing, replacing or stabilizing the land under or around these devices is not covered.

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The policy applies only to property located on the residence premises and in which the named insured holds an insurable interest. Therefore, to the extent that bulkheads, piers, and retaining walls are not entirely located on the residence premises, the insurable interest must be fully investigated and coverage based on the extent of the policyholder’s insurable interest. PROPERTY NOT COVERED: Coverage A: and Coverage B: The CEA BASIC EARTHQUAKE POLICY – HOMEOWNERS does not cover certain items of real property. For example, the following are not covered: • Detached garages, outbuildings, pools, spas, fences, and other structures not set forth in

Coverage B: EXTENSIONS TO DWELLING. • Exterior water supply systems including, but not limited to, irrigation systems, sprinkler

systems, and water reclamation systems. • Underground structures or equipment located outside the foundation wall of the structure

(except equipment and utility services which affect habitability of the dwelling). • Land, other than that portion of land stabilization expenses covered under OTHER

COVERAGES, item 4. These are only a few examples. It is important to read the policy for a complete list of property that is not covered. EXTERIOR AND UNDERGROUND SYSTEMS Except as provided under Coverage B - EXTENSIONS TO DWELLING, the policy does not cover exterior water supply systems including, but not limited to irrigation systems, sprinkler systems, and water reclamation systems; underground structures or equipment located outside the perimeter of the dwelling foundation, including but not limited to underground pipes, cables, flues, drains, electrical supply systems and electrical lighting systems. (This is found in the policy, under Property Not Covered, Coverage A and Coverage B, Item 10. ANTENNAS AND SATELLITE DISHES The policy does not cover antennas, satellite dishes and any towers, brackets, or attachments that support or secure them. DECORATIVE FEATURES The policy does not cover: Any decorative or artistic features of the property, including but not limited to works of art; items such as murals; stained or leaded glass; mirrors; chandeliers; mosaics; statuary or sculpture; carvings, inlays, and reliefs; and fountains, aquariums, and their systems. If at the time of loss a decorative or artistic feature is serving a utilitarian purpose, the cost to repair or replace the decorative or artistic feature is not covered to the extent the cost of repair or replacement exceeds the cost of replacing it with a non-decorative, non-artistic functional replacement.

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In applying this policy provision, the CEA recommends the following approach. If an item on the above list is damaged by the earthquake, it is not covered and if an item is not listed, it probably is covered. If a claim representative is unsure if an item rises to the level of being a decorative or artistic feature of the property, they should e-mail a picture to his or her company CEA Liaison, who can consult with the CEA if necessary. The following lists the common meaning of the words used in this section of the policy. For purposes of illustration, these definitions were taken from a standard dictionary. • Murals – a painting that is applied to a wall, ceiling, or floor surface • Stained glass – glass that has been colored in some way • Leaded glass – pieces of glass held together by lead, can be clear, stained, or etched glass • Mirrors – a polished or smooth surface (as of glass) that forms images by reflection • Chandeliers –light fixture, hangs from the ceiling, branched, often ornate • Mosaics – design made of small pieces of colored stone or glass • Statuary – statues collectively • Statue – a sculpture representing a human or animal • Sculpture – a three-dimensional work of art • Carvings – an object created by carving (as wood or ivory or stone) • Inlays – decorate the surface by inserting wood, stone, or metal • Reliefs and bas reliefs – Decorative features in which figures or designs are raised above (or

indented into) the surrounding flat surface • Fountains - a structure from which an artificially produced jet of water arises • Aquariums - tank with water for keeping fish and underwater animals, or a tank for reptiles If at the time of loss a decorative or artistic feature is serving a utilitarian purpose, (e.g., a chandelier, etc.) the item can be considered in the repair estimate at the cost of repair or replacement with a non-decorative, non-artistic functional replacement consistent with the quality of materials generally found in the home. For example, in the case of the chandelier, the adjuster should allow for a replacement light fixture of equivalent quality of other light fixtures in the home, but should not pay for the replacement of the damaged chandelier. AWNINGS AND PATIO COVERS The policy does not cover awnings and patio coverings, or their support structures. All structures comprising the patio covering, including posts supporting the covering, are excluded. Awnings and patio coverings are not covered even if permanently attached to the dwelling. A patio slab is not part of a covered loss, except for any portion of it that is necessary for ingress or egress as described in the policy. LANDSCAPING Damage to Landscaping, trees, shrubs, lawns, or plants, even if damaged by necessary repairs to covered property, are not covered. If it is necessary to remove a landscape element in order to access the structure for repairs, an allowance for removal may be considered, but policy coverage does not allow for replacement of the landscaping element.

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SWIMMING POOLS AND HOT TUBS The policy does not cover swimming pools, spas, or hot tubs, whether they are personal property or part of the dwelling. Tile or other material linking or attaching the pool, spa, or hot tub to a deck or to the dwelling is not covered. The policy reads as follows: Property Not Covered—Coverage A and Coverage B---We do not cover: Swimming pools, spas, and hot tubs, whether part of the dwelling or not, including the tile or other material linking or attaching the pool, spa or hot tub to a deck or to the dwelling. GARAGES AND OUTBUILDINGS Detached garages and outbuildings are not covered. However, the definition of “dwelling” includes structures that share a common wall or continuous roof line with the residential structure or mobilehome or are attached by a foundation that is continuous or contiguous to the foundation of the dwelling. If a garage or outbuilding meets this definition then it would be covered under the structure policy limit. PLASTER The policy does not cover plaster, to the extent that the cost to repair or replace it exceeds the value of its replacement with Sheetrock or drywall. The claim representative should consider whether minor repairs with plaster may be less costly and more beneficial to the insured than repair or replacement with Sheetrock or drywall.

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DWELLING GLASS Conditions: 5. Loss Settlement: Coverages A and B. f. We will replace covered glass with safety glazing material when required by ordinance or law. This applies when you are paying for broken building window glass, and building codes require that it be replaced with safety glass. This increased cost falls under the policy building code upgrade coverage. The companion homeowner’s policy may have earthquake coverage for glass used in the dwelling. If there is double coverage, see the provisions in the policy regarding Other Insurance. PERSONAL PROPERTY After the dwelling deductible is met by damage to covered real property, personal property is covered without further deductible, subject to the total limit of insurance set forth in the Declarations page for Coverage C. The policy provides a minimum limit of $5,000 for personal property coverage, and additional coverage up to $100,000 can be purchased. See the Declarations page for the policyholder’s limits. Personal Property Not Covered or Subject to a Sublimit Certain types of personal property are not covered. Other categories of personal property are covered, but only up to a sublimit. Read the policy for a complete list of not covered and sublimited personal property. Here are some examples: • The policy does not cover: artwork, including but not limited to paintings, drawings, framing,

sculpture, photographs, handmade tapestries and rugs, pottery, and ceramics. For purposes of this coverage, clay and stoneware dishes are not pottery and are covered.

• Motor vehicles, watercraft, and trailers are not covered. • Business property: Coverage C has a sublimit of $1,000 on business property. There is a

separate sublimit of $3,000 on computers and other electronic data processing equipment, whether or not it is business property. Therefore, a computer used for business is not limited by the $1,000 business property sublimit.

• Personal Property owned by others: Property owned by roomers, boarders, or renters not related to an insured is not covered. For property owned by all other persons other than an insured, there is a sublimit of $2,500 on covered personal property, regardless of the Coverage C limit of insurance.

LOSS OF USE Coverage D: Loss of Use coverage can be purchased up to a maximum of $100,000. If a covered loss makes the dwelling unfit to live in, and the insured vacates the dwelling, the necessary increase in living expenses actually incurred is covered. The claim file should contain documentation to support all loss of use expenses that were paid. If any part of the dwelling was rented to others or held for rental, and a covered loss makes it unfit to live in, the fair rental value (less any expenses that do not continue) is covered.

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If a civil authority prohibits the insured from occupying the dwelling because of direct damage to neighboring premises caused by an earthquake we cover the resulting Additional Living Expense or Loss of Rent, subject to the limit of insurance. Neighboring premises includes roads and bridges. Even if an insured has no damage to their home, if they are kept away by civil authorities, adjusters should quickly evaluate if they qualify for this coverage. This coverage is not subject to any deductible. There is coverage for policyholders whose dwellings are temporarily unfit to live in while they repair damage to the dwelling caused by a covered earthquake, even if their property losses are under the deductible. There is no maximum period of time after the occurrence of an earthquake for covered Loss of Use expenses to be incurred. Loss of Use coverage applies even if the insured is not required to vacate the insured premises until months after the earthquake (such as, for example, when repairs to the property cannot be started until a substantial period of time after the earthquake due to a shortage of contractors available to perform the work). EMERGENCY REPAIRS The cost of necessary and reasonable emergency measures taken to protect against further earthquake damage is covered up to a sublimit of 5% of the limit of insurance for the type of property being protected. However, the first $1,500 of emergency repairs do not have a deductible. This means the claim representative should pay for covered emergency repairs up to $1,500 without applying a deductible. In addition, the representative must keep track of all covered emergency repairs because they are subject to the policy sublimit of 5% of coverage A&B CSL. DEBRIS REMOVAL The policy reads in part: We will pay the reasonable expense you incur in removing from the residence premises the debris of covered property that is damaged by an earthquake . . . . This coverage provides up to 5% of the combined single limit of insurance for “COVERAGE A: DWELLING” and “COVERAGE B: EXTENSIONS TO DWELLING” as additional insurance. No coverage is provided until and unless losses covered under Coverages A or B have exceeded the policy deductible. This is similar to most HO fire policies. In cases where you document EXTRA debris removal expense, you can pay up to an additional 5% of Coverage A. BUILDING CODE UPGRADES Building code upgrade coverage in the amount of $10,000 is included in the policy. the policyholder can also select $20,000 or a $30,000 limit. Some things to remember about this coverage are: • The covered property must actually be repaired before payment may be made for Building

Code Upgrade coverage. • This coverage is additional insurance to the Coverages A and B combined single limit. • This coverage is to bring the covered property up to local residential building code standards

that were in effect on the date of the earthquake that caused the loss.

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• The coverage pays only for the Building Code Upgrade costs necessary to secure a reconstruction permit for repair of the covered property.

• Building code upgrade is NOT one of the four items that are included in the HO deductible calculation.

Note: The base-limits CEA homeowner policy includes $10,000 of Building Code Upgrade coverage as additional insurance. This applies to all dwellings, including mobilehomes. For dwellings other than mobilehomes, the policyholder can increase this limit by endorsement from a $10,000 limit to a $20,000 or $30,000 limit of additional insurance. LAND STABILIZATION COSTS The policy covers up to $10,000 for the cost to replace, rebuild, stabilize, or otherwise restore land owned by the insured necessary to support the dwelling, if the need for stabilization is caused directly by a covered earthquake and is necessary for the habitability of the dwelling. This coverage is provided as a $10,000 sublimit of the Coverages A and B combined single limit. Other than this, there is no coverage for land. Note: Land is excluded in the definition of “Dwelling.” The cost of engineering work done to determine the need for land stabilization is included in this $10,000 limit. Minor movement of land (not land stabilization) to accommodate a foundation repair covered under the policy is properly placed under Coverage A, and is not subject to the land stabilization sublimit of $10,000. LOSSES EXCLUDED The CEA policy covers only one peril, earthquake. The LOSSES EXCLUDED section of the policy provides as follows: We do not insure for any loss that is not directly caused by an earthquake that commences during the policy period as part of a seismic event that commences during the policy period. Without limiting the above, even if a loss directly or indirectly is caused by, is contributed to by, results from, or is aggravated by an earthquake, we do not insure for any loss that is caused directly or indirectly by, or that in any way results from, is contributed to by, or is aggravated by, any of the following: The policy then lists a number of specifically-excluded perils. The most significant of these are discussed below, but claim representatives must read the policy and familiarize themselves with the complete list. Fire and Explosion The policy does not cover losses resulting from fire or explosion. This includes fires resulting from such things as broken gas lines, exposed wiring, or other factors directly resulting from an earthquake. Any losses resulting from fire must be adjusted under the policyholder’s fire insurance policy, not under the CEA policy. In situations where part of the home is damaged by a covered earthquake and part of the home is damaged by a fire, the claim representative working on each claim will need to properly allocate the damage to either the fire or earthquake policy. NOTE: The CEA must be immediately notified, by e-mail to the Earthquake Response Manager, about any CEA claim opened up on a fire-damaged home where the CEA claim has a claim reserve of greater than zero (or whichever other minimum reserve amount that Participating

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Insurer uses to open up a CEA claim). The CEA intends to inspect these claims to make sure the damages are appropriately allocated. Asbestos and Other Pollutants (Loss Excluded) The policy contains a detailed pollution and pollutants exclusion that applies to groundwater, land, and personal property. Because this exclusion applies to personal property, the policy will not cover asbestos removal, including the cost of testing, when the expense is necessary to repair or replace damaged items under Coverage C. Damage to any personal property, including furniture, furnishings, and clothing that are contaminated by asbestos is not covered. The policy would, however, cover asbestos removal (including the cost of testing) or other earthquake-caused pollution damage to the dwelling when the expense is necessary to repair or replace damaged items or real property covered under Coverages A or B. Where the claim representative suspects that asbestos may be present, an expert should be consulted. Non-Earthquake Earth Movement and Land Sliding (Loss Excluded) The policy does not cover any loss caused directly or indirectly by non-earthquake earth movement: Earth movement, settling of land, land sliding, subsidence, mudflows, or earth sinking, rising or shifting . . . . There is an exception to this exclusion, however—the policy does cover the loss if such earth movement, settling of land, land sliding, subsidence, mudflow, or earth sinking, rising, or shifting satisfies both of the following requirements: a. Is induced by, and would not have occurred in the absence of, an earthquake that commences during the policy period as part of a seismic event that commences during the policy period; and b. Causes loss that manifests within one year after the earthquake that caused the loss. For example, if an earthquake causes a landslide to occur six months after the earthquake, the damage caused to the dwelling may be covered. However, if the landslide occurs or the loss manifests anytime after the first anniversary of the earthquake, the damage is not covered under the CEA policy. Theft or Vandalism (Loss Excluded) Theft, vandalism, or other human conduct causing loss following an earthquake is excluded. The policy provides that it does not cover any loss that is caused directly or indirectly by . . . Theft, vandalism or other human conduct causing loss following an earthquake.

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BASIC CEA COMMON INTEREST DEVELOPMENT EARTHQUAKE POLICY In California, a “common interest development” can be a community apartment project, a condominium project, a planned development, or a stock cooperative, all as further defined in California Civil Code

section 1351. Since the term “common interest development” is most typically applied to condominiums, for ease of reference the term “condominium” will be used throughout the remainder of this manual. Following is a brief summary of the coverages, exclusions, and limitations provided by the condominium policy. This policy has many of the same provisions found in the BASIC EARTHQUAKE POLICY – HOMEOWNERS. The purpose of the following is to point out some of the unique features of the condominium policy. Note: Read the specific policy in force at the time of the claim to determine the appropriate coverages, limits, and exclusions. This summary is not a substitute for reading the policy. You will also need to review the association master policy and the association governing documents in order to adjust a condominium loss. POLICY DEFINITIONS The vast majority of the key definitions found in the BASIC EARTHQUAKE POLICY – HOMEOWNERS are also found in the BASIC EARTHQUAKE POLICY – COMMON INTEREST DEVELOPMENT. There are, however, some additional definitions that are unique to this policy. Read the definitions for the following terms, none of which is contained in the other policies: “association governing documents,” “association master policy,” “association of owners,” “common interest development,” and “dwelling unit.” ADJUSTING CONDOMINIUM CLAIMS The greater the number of units in a complex, the greater the need for coordination. Participating Insurers should identify the number of policies they have issued within a given condominium complex. To the extent possible, claims assignments should be given to the same claim representative and supervised by the same individual. OTHER EARTHQUAKE COVERAGE If a loss to property that would otherwise be covered under Coverage A: BUILDING PROPERTY is covered under an association master policy, refer to the “other insurance” clause in the CEA policy:

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Other Insurance. a. If you have other insurance, not including the association master policy, that covers

earthquake loss to the dwelling unit or other property covered under this policy, we will pay our share of the covered loss or damage. Our share is the proportion that the applicable limit of insurance under this policy bears to the combined limits of insurance of all policies that cover the same property.

b. If there is other insurance that covers the same loss or damage, other than as described in

8.a above, we will pay only for the amount of covered loss or damage in excess of the amount due from that other insurance, but we will not pay more than the applicable limit of insurance.

DUTIES AFTER A LOSS While the insured’s duties after a loss are basically the same as the BASIC EARTHQUAKE POLICY - HOMEOWNERS, the following is unique to the condominium policy: If requested, provide the participating insurer with copies of all association governing documents. OVERVIEW OF DECLARATIONS PAGE In contrast to the BASIC EARTHQUAKE POLICY – HOMEOWNERS, the BASIC EARTHQUAKE POLICY - COMMON INTEREST DEVELOPMENT provides for three coverage groups that can be purchased together in any combination or separately. They are: Coverage A: BUILDING PROPERTY Coverage C: PERSONAL PROPERTY together with Coverage D: LOSS OF USE Coverage E: LOSS ASSESSMENT Optional Coverage under C Coverage A: BUILDING PROPERTY can be purchased alone or in combination with other coverages. If Coverage A is selected, the limit is always $100,000. Building code upgrade coverage of $10,000 additional insurance comes with Coverage A. This is the maximum coverage for building upgrades for common interest developments. Coverage C: PERSONAL PROPERTY is sold together with Coverage D: LOSS OF USE. The base-limits policy carries $5,000 in Coverage C and $1,500 in Coverage D. The insured may select higher limits ranging between $5,000 and $200,000 for Coverage C and between $1,500 and $100,000 for Coverage D. Coverage C and Coverage D can be purchased in combination with other coverages, or as the only coverages under the policy. Coverage E: LOSS ASSESSMENT can be purchased alone or in combination with other coverages. Depending on the value of the condominium, the limit will be either $25,000, $50,000 or $75,000, or $100,000 Optional Coverage under C- Breakables can now be purchased as a separate, optional coverage.

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The fact that these coverages can be purchased separately and with different coverage limits of insurance, each coverage with its own deductible requirement, requires the claim representative to be vigilant in confirming coverage, limits, and deductible amounts. Always check the declarations page for the coverage, limits, and deductible. LOSSES EXCLUDED Losses excluded are identical to the BASIC EARTHQUAKE POLICY - HOMEOWNERS policy. DEDUCTIBLES One difference between the condominium policy and the homeowners policy is how deductibles are handled. Unlike the homeowners policy, in the condominium policy each coverage has its own separate deductible, and only loss to property covered under that coverage counts against the deductible. In the condominium policy, there is: • A separate deductible for Coverage A: BUILDING PROPERTY. The deductible will range

between 5% to 25%. Only losses subject to coverage under Coverage A can be used to meet the Coverage A deductible.

• A separate deductible for Coverage C: PERSONAL PROPERTY. The deductible will range between 5% to 25%. Only losses subject to coverage under Coverage C can be used to meet the Coverage C deductible.

• No deductible for Coverage D: LOSS OF USE. • A separate deductible for Coverage E: LOSS ASSESSMENT. The deductible is 5%-25% of

the Coverage E limit (i.e., $3,750 for $25,000 limit policies, $7,500 for $50,000 limit, and $11,250 for the $75,000 limit policies). Only losses subject to coverage under Coverage E can be used to meet the Coverage E deductible. Since Coverages A, C, and E can be purchased independently and each has its own separate deductible, it is best to refer to the Declarations page to determine the correct deductible to apply.

BUILDING PROPERTY - Coverage A Coverage A is optional in the BASIC EARTHQUAKE POLICY – COMMON INTEREST DEVELOPMENT, so it is important to carefully review the Declarations page to determine whether the policyholder purchased Coverage A. A single-family residence usually has one owner and stands separate from other structures. In contrast, a condominium project is a collection of separate dwelling units together with property owned jointly by many owners. Property owned jointly may include the structure in which the individual units are located, common walkways, pools, and other common property. Often, the association of owners has obtained a policy of insurance, referred to as an “association master policy” in the CEA policy, which may insure against the perils of fire, earthquake, or both. The first step to be taken in order to determine whether the property is covered under Coverage A: BUILDING PROPERTY is to review: • The association governing documents, to determine whether the insured has the obligation

to repair or maintain the property, and • The association master policy to determine whether the property is covered for the risk of

earthquake under the association master policy.

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There are two basic categories of property covered under Coverage A: BUILDING PROPERTY. The first category is covered regardless of what the policyholder’s individual maintenance obligations are under the association governing documents. That category consists of the following property: We cover: 1. The following property: a. Built-in appliances, fixtures, alterations, and improvements that are part of the structure in

which the dwelling unit is located and are contained within the dwelling unit; b. Wall-to-wall interior carpeting attached to the dwelling unit; c. Items of real property, other than chimneys, that pertain exclusively to the dwelling unit; d. Chimneys that are attached to or part of the dwelling unit, up to a sublimit of $5,000,

regardless of the number of chimneys covered. In addition to the above items, the policy covers the following second category of property, which is only covered if the insured has an obligation to maintain the property under the association governing documents. Therefore, the claim representative will need to review those governing documents to determine whether any of the following property is covered: 2. The following property, but only to the extent that you are obligated to repair or maintain the property under the terms of the association governing documents: a. Plumbing pipes and utility service structures and equipment that are enclosed within the

walls, ceiling, or floor of the dwelling unit, extending to the exterior surface of the perimeter walls of the dwelling unit;

b. Equipment and utility service structures for electric, telephone, natural or bottled gas, heating,

oil, water, septic, and sanitary sewage systems that (1) are located outside of the perimeter walls of the dwelling unit but within the common interest development and (2) directly affect the habitability of the dwelling unit

. EMERGENCY REPAIRS – Coverage A Emergency repairs to protect Coverage A: BUILDING PROPERTY will only be paid if damage exceeds the Coverage A deductible. The emergency repairs coverage provides coverage up to a sublimit of 5% of the policy limit for Coverage A: BUILDING PROPERTY. DEBRIS REMOVAL – Coverage A The policy provides for debris removal of building property as follows: Debris Removal. We will pay the reasonable expense you incur in removing from the common interest development the debris of property covered under “COVERAGE A: BUILDING PROPERTY” that is damaged by an earthquake that commences during the policy period as part of a seismic event that commences during the policy period. This coverage provides up to 5% of the limit of insurance for “COVERAGE A: BUILDING PROPERTY” as additional insurance.

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Debris removal is part of Coverage A and will only be paid if all Coverage A loss exceeds the deductible. LOSS SETTLEMENT – Coverage A Loss settlement under Coverage A: BUILDING PROPERTY is basically the same as loss settlement under Coverages A and B of the BASIC EARTHQUAKE POLICY - HOMEOWNERS. However, considering the nature of common ownership versus individual ownership of property found in common interest developments, it is particularly important to remember to determine whether the insured has an insurable interest and a responsibility to insure the property. Also, determine whether the CEA policyholder’s loss may be covered or collectible under an association master policy in which case you should refer to the “Other Insurance” provision of the policy. PERSONAL PROPERTY– Coverage C The adjusting is the same under the homeowners, the renters, and condominium policy, except for the application of the deductible. Coverage C is an optional coverage in the BASIC EARTHQUAKE POLICY – COMMON INTEREST DEVELOPMENT, so it is important to carefully review the Declarations page to determine whether the policyholder has purchased Coverage C, and if so, in what coverage amount. The deductible under Coverage C of the BASIC EARTHQUAKE POLICY – COMMON INTEREST DEVELOPMENT ranges from 5% to 25%. Under the BASIC EARTHQUAKE POLICY – COMMON INTEREST DEVELOPMENT, a claim can be paid as soon as the loss to personal property exceeds the $750 Coverage C: PERSONAL PROPERTY deductible. This is different from the structure of the BASIC EARTHQUAKE POLICY – HOMEOWNERS, where regardless of the amount of loss to personal property, there is no payment for any loss to personal property until after the loss to dwelling and extensions to dwelling exceeds the amount of the dwelling deductible. EMERGENCY REPAIRS – Coverage C The cost of emergency measures undertaken to protect damaged personal property from further damage is part of the Coverage C limit and will only be paid if damage to personal property exceeds the Coverage C deductible. The coverage reads, in part, as follows: This Emergency Repairs coverage provides coverage up to a sublimit of the lesser of (i) 5% of the policy limit of insurance for “COVERAGE C: PERSONAL PROPERTY” or (ii) $1,000. The applicable total limit of insurance for the “COVERAGE C: PERSONAL PROPERTY” will be reduced by any amount we pay for this coverage. DEBRIS REMOVAL – Coverage C Coverage C of the policy provides for removal of the debris of damaged personal property as follows: Debris Removal. We will pay the reasonable expense you incur in removing from the common interest development the debris of property covered under “COVERAGE C: PERSONAL PROPERTY” that is damaged by an earthquake that commences during the policy period as

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part of a seismic event that commences during the policy period. This coverage provides, as additional insurance, up to the lesser of (i) 5% of the limit of insurance for “COVERAGE C: PERSONAL PROPERTY” or (ii) $1,000. If the Coverage C limit has been exhausted, there is still additional coverage for debris removal (up to the lesser of 5% of the Coverage C limit or $1,000). LOSS OF USE – Coverage D Coverage D: Loss of Use is an optional coverage in the BASIC EARTHQUAKE POLICY – COMMON INTEREST DEVELOPMENT, so it is important to carefully review the Declarations page to determine whether the policyholder has purchased Coverage D, and if so, in what coverage amount. If the policyholder purchased Coverage D, the calculation for Loss of Use or Loss of Rents is functionally the same as under the homeowners policy. In order to collect Loss of Use or Loss of Rents, under the BASIC EARTHQUAKE POLICY - HOMEOWNERS, the dwelling must be unfit to live in. Under the condominium policy, even if the dwelling unit is undamaged or not unfit to live in at the time of the earthquake, but the insured is forced to vacate because of repairs to other units, Loss of Use or Loss of Rents may be paid. Check the specific policy provision for the exact terms and conditions for Loss of Use coverage. LOSS ASSESSMENT- Coverage E A loss assessment is a demand by an association of owners, telling the dwelling unit owner that he or she has to pay for damage to common property. That loss assessment is covered, but only to the extent that the assessment relates to the repair or replacement of damaged association property that is the kind of property that is covered under Coverage E. For example, swimming pools are listed as “Losses Not Covered” under Coverage E, so if the association assesses a CEA policyholder for a share of the damaged pool, the CEA policy cannot pay for any part of loss assessment attributable to the repair of the damaged pool. Coverage E: LOSS ASSESSMENT is an optional coverage in the BASIC EARTHQUAKE POLICY – COMMON INTEREST DEVELOPMENT, so it is important to carefully review the Declarations page to determine whether the policyholder has purchased Coverage E, and if so, in what coverage amount. The maximum limit available is $100,000. If the policyholder purchased Coverage E, the policy covers the insured’s share of an assessment charged by the association against all property owners in the common interest development, if all of the following three requirements are satisfied: a. Requirement One: You have a legal obligation to pay the amounts assessed against you by

he association of owners, and the assessment is properly and legally made as a result of a loss that is directly caused by an earthquake that commences during the policy period as part of a seismic event that commences during the policy period;

b. Requirement Two: The assessment is not made as a result of a loss specified in “Losses Not

Covered—Coverage E”; and c. Requirement Three: The assessment is made as a result of a loss that is to property owned

by one or any combination of the following three categories: (i) all members of the association of owners collectively, (ii) the association of owners, or (iii) you.

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An assessment against the insured must be fully investigated, since there may be portions that are not covered. The claim representative must obtain sufficient documentation and records to understand the basis for the assessment. For example, suppose there is no association master policy that covers earthquake damage, and suppose each owner is assessed $10,000 to fix the roof of the complex. Assuming the deductible has been met, this could be a covered loss. However, assume the loss assessment for $10,000 was to repair landscaping. This would not be covered. To determine the covered portion of the claim, the claim representative should reduce the loss assessment sought by the association of owners by that portion of the loss assessment attributable to any of the 17 categories of property not covered as set forth in Coverage E: LOSS ASSESSMENT or to causes excluded in any of the policy exclusions. Also, there is a sublimit of $10,000 for that portion of any assessment relating to building code upgrades. Unlike the case with Coverage A losses for building code upgrades, this is not additional insurance, but rather, is a sublimit of the Coverage E limit of insurance. Check the declarations page for the applicable deductible for Coverage E: Loss Assessment. REDUCTION OF VALUE - Coverage E In rare situations, the association of owners may elect not to repair or replace damaged property, or it may be permanently prevented from repairing or replacing the property. The resulting reduction in the fair market value of the insured’s ownership interest is covered if both of the following requirements are satisfied. i. As a result of the unrepaired damage, the dwelling unit either is unfit to live in or cannot

legally be occupied; and ii. The reduction in the value of your ownership interest in the dwelling unit is not the result of

a loss to property specified in “Losses Not Covered—Coverage E.” The method of calculation of the proper amount a claim presented under this unique form of coverage is specified in detail in the policy language. It is essential that the policy language be carefully reviewed if such a claim is presented. ORDINANCE AND LAW – Coverage A and Coverage E The policy provides that losses relating to the following are not covered: 7. Required compliance with any ordinance, law, or residential building code that regulates the

use, construction, repair, or demolition of a building or other structure, except as specifically provided under this policy, under the following provisions:

a. “Additional Coverages—Coverage A,” Item 3, “Building Code Upgrades,” subject to the

applicable $10,000 sublimit, and

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b. “Losses Covered—Coverage E,” Item 1, “Assessment By Association of Owners,” subject to the applicable $10,000 sublimit. INGRESS AND EGRESS The condominium policy specifies, under Losses Not Covered, Coverage A, Building Property and Coverage E, Loss Assessment, that losses to walkways, driveways, decks, and patios are not covered, except for those walkways, driveways, decks, and patios necessary to provide ingress to and egress from the insured’s dwelling unit. The ingress and egress exception to Losses Not Covered under Coverages A and E both apply only to ingress to and egress “from the dwelling unit”. Dwelling unit is defined as “your individual unit.” Thus, payments under these exceptions are limited to damage to ingress to and egress from the insured’s dwelling unit. In cases of loss to ingress and egress that might potentially be covered under the CEA policy, claim representatives should pay particular attention to the possibility that such losses are covered under an association master policy or other insurance, and apply the “Other Insurance” clause of the CEA policy.

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BASIC CEA RENTERS EARTHQUAKE POLICY The BASIC EARTHQUAKE POLICY – RENTERS does not provide coverage for loss to real property, it provides only Coverage C: PERSONAL PROPERTY and Coverage D: LOSS OF USE. The scope of these two coverages is basically the same under the

BASIC EARTHQUAKE POLICY – RENTERS as it is in the BASIC EARTHQUAKE POLICY – HOMEOWNERS. However, the calculation of the deductible for Coverage C: PERSONAL PROPERTY is significantly different from the method of calculating the deductible found in the BASIC EARTHQUAKE POLICY – HOMEOWNERS, and instead is calculated in the same manner as the BASIC EARTHQUAKE POLICY – COMMON INTEREST DEVELOPMENT. PERSONAL PROPERTY DEDUCTIBLE The deductible under the BASIC EARTHQUAKE POLICY – RENTERS ranges between 5% and 25%, with a coverage limit of up to $200,000. Under the BASIC EARTHQUAKE POLICY – RENTERS, a claim can be paid as soon as the loss to personal property exceeds the $750 Coverage C: PERSONAL PROPERTY deductible. This is different from what is under the BASIC EARTHQUAKE POLICY – HOMEOWNERS, where regardless of the amount of loss to personal property, there is no payment for any loss to personal property until after the loss to dwelling and extensions to dwelling exceeds the amount of the dwelling deductible. Optional coverage- Breakables, like dishes and ceramics, can now be purchased. LOSS OF USE As with the other CEA policies, there is no deductible for Coverage D: LOSS OF USE. The adjustment of a Loss of Use claim is the same as it is under the homeowners policy. Even if the insured did not receive payment under the other coverages in the policy, the policyholder may be able to collect Loss of Use at a later date when repairs are made. The policy reads in part: If the part of the rental unit that you occupy becomes unfit to live in and you are forced to vacate the rental unit as a result of either (1) damage to the rental unit caused by an earthquake that commences during the policy period as part of a seismic event that commences during the policy period or (2) the process of repairing damage to the rental unit caused by an earthquake that commences during the policy period as part of a seismic event that commences during the policy period, then we cover the necessary increase in living expenses you actually incur to maintain your normal standard of living. We will pay Additional Living Expenses for the shortest time reasonably needed (a) to repair or replace the parts of the rental unit you occupy that are unfit to live in, or (b) for you to permanently relocate elsewhere if the owner of the rental unit does not elect to repair or replace the rental unit. If the insured sublets a portion of the rental unit to a subtenant and actually looses rental income due to earthquake damage, the insured may also collect under Coverage D for that loss of rent.

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CEA CLAIMS PROCEDURES These investigation procedures are designed to provide basic claim handling information. They are intended to augment what an experienced property claim representative already knows about adjusting property claims, and to highlight certain unique aspects of CEA policies. They have been developed to promote consistency among claim representatives and fairness to policyholders in the

adjusting of CEA claims. They will not cover all situations. COMPANION POLICY If at the time of loss no companion policy is in effect, the CEA policy is void and no payment can be made. At the outset of the investigation, confirm that the underlying companion policy is in force. WHEN TO CONSULT WITH THE CEA As claims agents for the California Earthquake Authority, Participating Insurers are responsible for investigating and adjusting claims made under CEA policies in a fair, prompt, and consistent manner. Section 3.2 of Article III of the Insurer Participation Agreement reads in part: “The Participating Insurer may perform Authority services on behalf of the Authority in any reasonable manner that is in compliance with the statutory, regulatory, and case law regarding claims handling practices; provided, however, where the Authority has promulgated specific procedures to govern its operations, the Participating Insurer shall conform its practices to those procedures.” Participating Insurers are reminded to follow all CEA procedures on claims matters and that some matters must be referred to the CEA. Matters that must be referred to the CEA include the following: • Any legal action filed on a CEA claim, notice, or knowledge of any lawsuit against a

Participating Insurer on a CEA claim, and any legal action where the name California Earthquake Authority or CEA appears: Participating Insurers must immediately notify the CEA’s Legal Department if they obtain formal or informal knowledge of the initiation of any such legal actions. Participating Insurers must immediately provide copies of all legal papers and pleadings received by the Participating Insurer to the CEA’s Legal Department Fax: (916) 327- 8270), and follow up with a telephone call to (916) 325-3800 to make sure that the papers were received. Participating Insurers are not authorized to accept service of legal process on the CEA’s behalf, and if a Participating Insurer does happen to come into possession of any such legal papers, the papers must immediately be provided to the CEA’s Legal Department.

• Department of Insurance complaints or requests for assistance: If a Participating Insurer

receives notice of any policyholder or consumer complaint, or policyholder or consumer request for assistance made to the California Department of Insurance (CDI) concerning the Participating Insurer’s handling of or involvement in any CE A related matter, the Participating Insurer must immediately send or fax a copy of the Department of Insurance complaint to the CEA’s Consumer Services Unit Fax: (916) 327-8270, and follow up with a

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telephone call to (916) 325-3800 to make sure that the document was received. The Participating Insurer may provide the appropriate response to the CDI without the CEA’s prior approval of the response, but the Participating Insurer must send the CEA’s Consumer Services Unit a copy of the response that was sent to the policyholder and the CDI. Until the issue is resolved, the Participating Insurer must mail or fax to the CEA’s Consumer Services Unit a copy of all future correspondence with the CDI on the issue.

• Taking claims to appraisal or Department of Insurance mediation: Participating Insurers

must consult with the CEA and obtain the CEA’s prior approval before demanding appraisal or mediation (including mediation under the CDI’S earthquake claim mediation program), and must provide the CEA with the details on the claim made, settlement demands, offers made, and the reasoning for the position taken by the Participating Insurer.

• Examination under oath (EUO): Participating Insurers must notify and consult with the

CEA, and obtain the CEA’s prior approval, before giving notice to an insured that the Participating Insurer wishes to take his or her EUO. The Participating Insurer must provide the CEA with the details on the claim, settlement demands, and the reasons why the Participating Insurer believes an EUO would be appropriate. In the event an examination under oath is set, it must be handled in accordance with California Insurance Code section 2071.1.

• Claims where the damages are not covered by the earthquake policy in force: When an

insured makes a claim and a Participating Insurer makes no payment because the loss is not covered by the CEA policy in force, the Participating Insurer must inform the policyholder in writing that the claim is being denied and the letter must quote the policy provisions on which the decision is based. The CEA has not provided a sample letter for this situation, but much of the wording found in the under-deductible sample letter (Attachment 6) will be useful. Participating Insurers must send a copy by e-mail, of the denial letter to the CEA’s ERM for review and approval as to form before sending the letter to the insured.

FAIR CLAIMS SETTLEMENT PRACTICES All claim representatives handling claims in California must abide by the California Fair Claims Settlement Practices Regulations and other applicable codes or regulations. Claim representatives are expected to be familiar with the California Insurance Code section 790.03(h), setting forth certain specified unfair claims-handling practices. Insurers and their representatives must not knowingly engage in any of the practices listed in that statute. CLAIM FILE DOCUMENTATION Participating Insurers are expected to handle claims on behalf of the CEA in a manner consistent with this manual, their company claim guidelines, and the California Fair Claims Settlement Practices Regulations. Specific requirements (for example, the number of photographs required) will not be dictated by the CEA beyond the statement that all claims files must be clearly documented, with sufficient detail in the file, that a person reading the file is able to understand how and why all decisions were made on the claim. The documentation to support claims decisions is to be kept in the Participating Insurer claim file. Files are subject to review and audit by the CEA.

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KEEP THE POLICYHOLDER INFORMED Good claim-handling practices, as well as applicable regulations, require that policyholders be kept informed during the claim process. Keep the insured up-to-date about the claim and the progress of the investigation as decisions and information become available, and in every case no less than every 30 days. Estimates and expert reports should be shared with the insured as soon as possible. Keep the insured informed when key decisions will be made on their claim. When a report from an expert is relied on to form an opinion regarding damage, provide a copy of that report to the insured. Give the insured a copy of the claim representative’s scope and estimate as soon as possible. The CEA values the privacy of its insureds; therefore the CEA insists that no one discuss a claim with the media. Furthermore, California law, including California Insurance Code sections 791 through 791.21, protects the confidentiality of private policyholder-related information. Refer all media inquiries you receive to your company media spokesperson, your team leader, or to the CEA at (916) 325-3800. Claim representatives must be trained on the current law regarding the obligation of the insurer to fully investigate earthquake damage that is discovered or reported after the earthquake damage claim is initially submitted to or closed by the Participating Insurer. The Participating Insurer must investigate reports of hidden or later-discovered damages before invoking any policy provisions regarding the time limit for submitting claims. Even if a new claim is received more than one year after the date of loss, the Participating Insurer should open a new claim and investigate the facts of the claim before it invokes any policy provisions. All such investigations should be made subject to a written reservation of rights. All claims should be concluded with a final closing letter even if payment is being made. This letter should: (1) explain in writing any previous decision not explained in writing, and (2) quote the “Legal Action” condition of the policy, and advise the insured of the tolling of that provision from the date that the claim was reported to the date of the final letter. TIMELY ADJUSTING - SBA and FEMA Requirements In light of the policy deductible, policyholders generally will not receive payment for the total amount of the damage, and will be required to bear some portion of the financial costs of the earthquake themselves. As a result they may be looking to the Small Business Administration (SBA) for low-interest loans or to the Federal Emergency Management Agency (FEMA) for grants. In order to receive SBA and FEMA assistance, the insured will need documentation from the claim representative. Usually these agencies require a statement of loss or a denial letter. The SBA and FEMA have loan-submission deadlines, so the insureds will need this documentation as quickly as possible. It is important that the handling of the claim and final paperwork be timely. More information about FEMA and the SBA can be found at their Web sites at: http://www.fema.gov and http://www.sba.gov. DESTRUCTION OR TESTS In some situations, the insured may be solely responsible for the cost of performing tests. The policy provides as follows:

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At our option, we may select and retain adjusters, consultants, contractors, engineers, or other experts to inspect your property or to perform tests, including destructive tests, to determine the extent or cause of loss with respect to any claim you make under this policy. We will bear the cost of performing any tests (including the cost of repair of damage necessitated by any destructive tests) that we elect to perform to determine the extent or cause of loss. If, however, it is the opinion of the CEA that your property (or some particular part of your property) has not sustained covered earthquake damage over the deductible amount of this policy, and despite our opinion you request additional testing of your property or that part of your property, then if additional testing is performed, you are solely responsible for the costs of performing the additional testing and of repairing the damage to your property that was caused by any additional destructive testing, unless the additional testing establishes the existence of covered earthquake damage that, either alone or combined with other covered earthquake damage, exceeds the deductible amount of this policy. When necessary, complete a “testing agreement.” USE OF ENGINEERS OR EXPERTS Where the causation is obvious and damage is non-structural, a claim representative can assess the damage. However, earthquake damage can manifest itself in a variety of forms, from minor cracking of interior Sheetrock to major failure of the foundation system. An engineer should be used when the damage appears to be structural in nature. The services of an expert will assist in the analysis of the cause and extent of loss and the proper way to repair the damage. It is important that the claim representative understand the distinctions between the various expert fields and how they can be best used during the claim investigation. One source of earthquake engineering information is the CUREE General Guidelines for the Assessment and Repair of Earthquake Damage in Residential Woodframe Buildings. (www.curee.org) COSTS TO REBUILD OR REPAIR – Prices of Building Materials The CEA is committed to providing fair and reasonable local cost reimbursements for covered earthquake damage. Claim representatives may use automated damage estimating programs or qualified contractors to estimate the dollar value of damage. The CEA does not provide cost of labor and or cost of materials information after an earthquake. Determining appropriate labor and materials costs is part of the Participating Insurers’ loss adjustment duties. Participating Insurers should make sure their estimating programs have been updated with appropriate local post-disaster labor and material costs. California law regulates price increases for goods and services after a state of emergency has been declared. Section 396 of the California Penal Code is intended to prevent post-disaster “price gouging,” and that statute provides that persons selling specified goods and services at a price more than 10% above the price charged prior to an emergency are guilty of a misdemeanor and are subject to criminal prosecution. OVERHEAD AND PROFIT It is appropriate to allow for overhead and profit (O&P) in cases where the repair involves multiple trades requiring the use of a general contractor to control the job. It is not appropriate to allow for O&P when you are dealing with individual trades and individual tradesmen are doing

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the work. On a one-trade repair, do not allow for O&P even if a general contractor is doing the work. If it is appropriate to allow for O&P on an estimate, add the overhead percentage and the profit percent together and then apply the total percentage to the estimate. Do not apply the percentages individually since this approach results in a higher cumulative O&P amount. The CEA allows O&P amounts that follow the customary practice of contractors in a given area. The reasons for any exceptions to these O&P guidelines should be documented in the claim file. CLAIM PAYMENT ABILITY & SURCHARGE If there is a very large earthquake or a series of earthquakes, such that the CEA’s claims paying ability might be exceeded, there is a provision in the CEA policy that provides for the payment of claims on a pro-rata bases. If this were ever to be needed, the CEA would declare a “claim payment ratio”. This would mean that the adjuster would determine the total amount payable on a claim and then pay the insured a percentage of that total amount based on the CEA’s declared claim payment ratio. If a ratio other than 100% is to be used, it will be communicated to the Participating Insurers as soon as possible and will apply to all loss settlements from the date of notification onward. DOUBLE COVERAGE To help resolve issues of overlapping insurance or coexistent insurance coverage, the claim representative should follow the Other Insurance provisions in the policy involved. Further help can be found in the Guiding Principles for Overlapping Insurance Coverage published in 1963 by a consortium of underwriting organizations. This document should be available from your claim manager. FRAUDULENT CLAIMS Often discrepancies in claims handling can be resolved by open communication with the insured. It is important that claim representatives keep an open mind and treat the policyholder with respect at all times. Refer suspected fraudulent claims to the Participating Insurer’s Special Investigation Unit (SIU). Request a Proof of Loss as stated in the policy conditions. It is expected that claim representatives be trained to recognize insurance fraud. The claim file should have evidence of teamwork between SIU and the claims handler in resolving the issues in question. Unless the true amount of covered loss and damage has been determined before the referral to SIU, determination of the actual covered loss and damage, if any, should be continued by the claim representative during the SIU investigation. A general reservation of rights letter should be sent to the insured indicating that investigation is not a commitment as to payment. EMERGENCY REPAIRS Emergency repairs coverage is available to protect a dwelling and extensions to a dwelling to the extent these items are covered. Emergency repairs are different for CEA policies and the different CEA forms: For homeowner policies, the first $1,500 of emergency repair is paid without a deductible. Other emergency repairs are subject to a policy sublimit of 5% of Coverage A&B CSL. For condos, emergency repairs are covered up to a $1,500 sublimit of

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Coverage A. For Renters are covered for the lesser of 5% or $1,000 sublimit of Coverage C and subject to the policy deductible. SCOPE OF LOSS AND ESTIMATES In most cases, the claim representative should complete a sufficiently thorough examination of the home to enable him or her to list all recent earthquake damage, complete a diagram of areas to be repaired, and obtain needed measurements. The claim representative should then complete an itemized scope of loss. Claim representatives should create or obtain an accurate estimate of the cost to repair all covered earthquake damage. Participating Insurers may use any software generally accepted by the insurance industry in the preparation of building and structure repair estimates. The file must contain the documentation necessary to support the estimate. The measurement of areas, room sizes and other dimensions on which quantities of material and labor are based must be shown in the estimate. A diagram should be prepared and attached to the estimate. Document the damages with photographs as appropriate. Claim representatives may need to reevaluate an estimate if notified that the actual costs of repairs differ from the costs that were listed on the original estimate. Any additional earthquake damage found after repairs have begun should also be evaluated for coverage. Engineers or experts should be used when appropriate. The insured should be given a copy of the scope and estimate as soon as possible. SUBROGATION While there is less likelihood that there is third-party liability for the damages suffered by an insured from an earthquake than from most other perils, the claim representative should still be aware of subrogation potential. For example, defects in construction can cause additional damage during an earthquake, or the earthquake damage may be increased by recent work in the surrounding area by a public entity or contractor. It is the claim representative’s responsibility to thoroughly investigate any subrogation potential. The Participating Insurer is responsible for the subrogation process. If the claim representative discovers that the loss may have occurred as a result of negligence of a third party, proper documentation must be gathered so that a successful subrogation claim can be pursued. Proper investigation of a claim with subrogation potential should include at least the following: a. Take a recorded statement of persons likely to have information about the contributing cause

of damage if possible; b. Obtain and preserve any evidence; c. Notify the insured of the intention to pursue subrogation rights and of the “Subrogation”

provision of the CEA policy requiring an assignment of rights and cooperation in the pursuit of subrogation;

d. Take photographs of the damage and other items material to the case; and e. Notify the responsible party and their insurance carrier as soon as it appears that a

subrogation claim may be presented.

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SALVAGE As in any other claim, consideration should be given as to whether any damaged items have salvage value. The CEA’s position is that the policyholder should be made whole, including the deductible, before any salvage is taken. If there are salvageable items that need to be dealt with, follow your company procedures for dealing with salvage in the claim handling process. PROOF OF LOSS The CEA does not require a Proof of Loss on every claim. However, the CEA has a right to one where necessary. The policy provides that, upon the Participating Insurer’s request, a Proof of Loss must be provided within 60 days. In cases where the insured and the insurer do not agree on the amount of loss, it is sometimes valuable to get the insured’s input as to the loss by requesting the insured to file a Proof of Loss. This decision should be made on a case-by-case basis. LOSS SETTLEMENT DISPUTES Generally, loss settlement disputes involve questions concerning scope of damage, the proper repair method, and the actual cost of the repairs. Keep an open mind and solicit input from the insured’s contractor or representative to resolve discrepancies in scope, repair method, and pricing. Personal meetings can be helpful. Disputes can often be efficiently resolved though the California Earthquake Claims Mediation Program with the California Department of Insurance (CDI) at (800) 927-4357. The CEA supports using the CDI mediation program to resolve issues of scope of loss, mandated building code upgrades, pre-existing damage, additional living expense, asbestos abatement, earthquake vs. aftershocks, hidden damages, and personal property valuation issues. (CDI form 526, EQMED 12/99). Another dispute resolution option is the appraisal provision in the policy. If CDI mediation does not resolve the dispute, the appraisal process is still available. COVERAGE DISPUTES Unlike loss settlement disputes, coverage disputes concerning the interpretations of policy coverage or policy language are reviewed and decided by the CEA. Disputes CANNOT be handled through the CDI mediation program or resolved in appraisal. When investigating a claim where coverage is an issue, consider a reservation-of-rights letter. DENIAL OF DAMAGES There are three main types of denial letters that may need to be sent to a policyholder. 1. Claims under the deductible: Where an insured makes a claim and a Participating Insurer makes no payment because the damage is below the deductible, the Participating Insurer must inform the policyholder in writing that the claim is being denied. Section 2695.7(b) (1) of title 10 of the California Code of Regulations requires that “when an Insurer denies or rejects a first party claim, in whole or in part, it shall do so in writing…” Attachment 6 is a sample under deductible denial letter. The CEA does not need to approve these letters before they are sent.

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2. Claims where the damages are not covered by the earthquake policy in force. Where an insured makes a claim and a Participating Insurer makes no payment because the damage is not covered by the policy in force, the Participating Insurer must inform the policyholder in writing that the claim is being denied and the letter must quote the policy provisions on which the decision is based. The CEA has not provided a sample letter for this situation, but much of the wording found in Attachment 6 will be useful. Participating Insurers must send a copy by e mail, of the denial letter to the CEA’s ERM for review and approval before mailing it to the insured. 3. Claims with a combination of both of the above situations. Where an insured makes a claim and a portion of it is subject to denial but other parts will be paid, the Participating Insurers must inform the policyholder in writing about the specifics of what is being paid, and what is not being paid and why. The CEA does not need to approve these letters before they are sent. With regard to homeowner claims, a denial letter must: • Deny payment for damage for Coverage A and Coverage B if it is under the deductible. • Deny any claim made under Coverage C, under a Basic Homeowner policy on the ground

that damage to property covered under Coverage A and Coverage B is insufficient to meet the policy deductible, or under an HO Choice Policy, on the ground that the damage to property covered under Coverage C is insufficient to meet the policy deductible.

Denial letters under all policies should: Inform the insured of his or her right to obtain further inspections and to obtain new estimates, if necessary. • Explain to the insured that Loss of Use coverage has no deductible and the insured may

apply for Loss of Use payments later if a covered loss makes the dwelling unfit to live in and it needs to be vacated during repairs. This is true even if the Coverage A and B damages are under the deductible.

• Invite the insured to submit any documents showing that the loss exceeds the deductible. • Advise the insured of the one-year requirement to bring legal action and quote the language

from the policy, and explain that the time limit has been tolled during the handling of the claim.

• Include the required wording on how to contact the California Department of Insurance. • Always include any expert’s reports that you used to make your decision with the denial

letter. • All denial letters should be completed as soon as practical since policyholders may need

these letters to apply for FEMA or SBA assistance. USE OF CEA NAME It is important to properly use the name “California Earthquake Authority” or the acronym “CEA” in claims correspondence when adjusting a claim for the CEA. (Questions about the approval process to use the CEA mark (logo) are found in CEA Circular #OPS-00-06.) Whenever the words “California Earthquake Authority” are used they may be in title case (first letter of each word capitalized) or in all capital letters. It is not appropriate to use these words in all lower case. The acronym “CEA” is always used in upper case with no periods.

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Letterhead: You should use your company letterhead or name and you should include the words “A Participating Insurer of the California Earthquake Authority.” The salutation: It is best to personalize claims correspondence whenever possible. It is generally not appropriate to use the words “California Earthquake Authority” or “CEA” in the salutation. If you do not know the name of the policyholder, however, you may use “Dear CEA Policyholder.” The body of a letter: It is acceptable to use the name “California Earthquake Authority” or the abbreviation “CEA” when referring to the CEA as an entity or to CEA policy language. For example, “Please refer to your BASIC EARTHQUAKE POLICY – HOMEOWNERS, issued by the California Earthquake Authority, where it reads in part …” Or, “The XXX insurance company, a Participating Insurer of the California Earthquake Authority (CEA), wishes to inform you …” Signature block: You may use your normal signature block, and while not required, you may add “A Participating Insurer of the California Earthquake Authority.” For example: Sincerely, John Q. Adams Senior Claim Representative XXX Insurance Company, A Participating Insurer of the California Earthquake Authority The return address in a letter: You may use “A Participating Insurer of the California Earthquake Authority” as part of your return address shown in a letter. Claims settlement checks: If you have a field on your check to name the company on whose behalf the payment is being issued, you may use “California Earthquake Authority.” CEA return address: It is not appropriate to use the CEA home office address or phone number in any correspondence. Do not use the CEA name or address as the return address on an outgoing or return envelope. In other words, the return address should never be shown as: “California Earthquake Authority, [Participating Insurer’s Address].” JOINT PAYEE It is important to protect both the interest of the policyholder and any mortgagee or lender that may have a legal right of recovery to an earthquake claim payment. In some cases, it is not appropriate to name the mortgagee on a CEA earthquake policy claim payment, because the mortgagee may not have the legal right to share control of CEA insurance policy proceeds. Therefore, it is important that the relevant loan documents be examined to determine whether the lender has any right to recovery of earthquake insurance proceeds. It is the claim representative’s responsibility to determine whether a mortgagee is to be named on a claim payment check. This is accomplished by reviewing the applicable mortgage documents to determine if the mortgagee required earthquake insurance as an express condition for making the loan or if the loan documents contain wording requiring that the

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mortgagee be named on proceeds from an earthquake claim. In these cases the claim representative must name the mortgagee as an additional payee on the claims indemnity payment. Under longstanding informal guidelines, when the total indemnity payment will be $10,000 or less, the payment may be made to the policyholder(s) only. The lender is not entitled to any control over payments for ALE. In summary, it falls to the claim representative to determine whether a mortgagee needs to be named on a claim payment check. The claim file must be documented to support the decision made by the claim representative. CEA Claims Bulletin 98-4, “Conditions under which a mortgagee can be named as a joint payee on a CEA claims check or draft” lays out the CEA’s position on this subject and includes some letters a claim representative can choose to use when dealing with a non-responsive policyholder. ADJUSTER BEST PRACTICES Regardless of the damage, the adjuster must never:

Take a quick look around and ask the insured to fill out a property loss form at his or her convenience;

Leave the insured with blank forms, except for supplemental items learned of after the initial scope was completed;

Take a partial scope and attempt to do the rest later; Rely on the expertise of the insured’s public adjuster; or Rely on a contractor to establish the scope.

The adjuster must walk through the entire scene of the loss with the insured and obtain an agreed scope of loss. He or she must advise the insured that the adjuster will be retaining experts in the valuation and repair of the type of property that is involved. These experts will bid on the repair and replacement from the agreed scope. The adjuster must present the insured with a copy of the agreed scope, and inform him that he may, if he wishes, obtain similar opinions based on the same agreed scope.

To substantiate the agreed scope of the loss, the adjuster must photograph the scene—both the damaged and undamaged portions of the property—that is the subject of the loss. The adjuster must take a complete photographic and written inventory of the loss scene, taking photographs of everything damaged, any possible source of ignition of a fire, or any other peril that may have caused the damage and those things not damaged. If the scene is extensive, the adjuster should consider hiring a professional to do a video inventory of the loss location. It should be taken silently. A narration can be added later, after everything has been seen. If there is an extensive contents loss, the adjuster must retain the services of a salvor to inventory and price each item of inventory, whether damaged or not.

Contact must be made with the official investigating officers, either police or fire arson investigators, where a fire was involved. Building departments are an additional visitation where conformance with building codes and upgrades must be investigated.

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The adjuster should obtain from the insured any photographs, videotapes, or motion pictures the insured or its employees may have made of the loss. He or she must determine the actual cash value of all of the property insured. If a replacement cost value endorsement applies, the adjuster also must determine the full cost to repair or replace the items with like kind and quality. If necessary to establish values, the adjuster should retain the services of a real estate or commercial equipment and stock appraiser.

If additional living expenses are involved, adjuster must obtain the amounts of the insureds’ normal expenses for: mortgage payments, electricity, gas, water, trash pick up, gardening, laundry, food, eating out, entertainment, travel, dry cleaning, property taxes, and any other continuing usual household expenses.

A scope of work is developed (what the insurer will pay) detailing repairs for damage caused by the earthquake in accordance with the terms of the policy. If the actual cost of repair differs from the costs listed on the original estimate the adjuster will re-evaluate the estimate. If agreement is reached, a supplemental payment may be issued by the insurance company to cover these increases.

Do We Need A Moral Code?

Possessing a moral code is not all that is needed to set an insurance professional apart from a layman. However, maintaining a Code of Ethics can inspire us to do better — especially if the breach of the code means we will lose our membership or be scrutinized by our peers.

Having high ethical standards, or more simply being honest, can be more important than being right because honesty reflects character while being right reflects a level of ability. Unfortunately, the insurance industry, for the most part, still rewards ability. There are, for example, plenty of "million dollar" production winners and "sales achievement awards"; but few, if any, "Ethics & Due Care" certificates. Being ethical is indeed professional but the gesture goes beyond the mere compliance with law. It means being completely honest concerning ALL FACTS. It means more than merely NOT telling lies because an incomplete answer can be more deceptive than a lie. It means more than being silent when something needs to be said, because saying nothing can be the same as a lie. For example, is it the duty of an adjuster to warn a first party insured of mold contamination and possibility of health risks discovered in a building under claim. While the legal issue gained steam in a famous Melinda v. Fire Insurance Exchange Case ($32 million – later appealed and settled for an undisclosed amount) most adjusters are coming to the realization that the duty of good faith and fair dealing obligate warnings be given to the insured. And, the adjuster should also include covered mold remediation in the scope of damages, including Additional Living Expenses necessary. But, does the obligation stop at a simple warning? When handling water damage should the insurance professional be pro-active concerning mold? What about third party claimants, e.g., other occupants near an infected unit? Responsibility is not only based on the sense of duty of one human being to another, it’s accepted claims practice, professional and ethical, to take action. And, not doing so could be a breach of the Unfair Claims Practice regulations or a possible tort/criminal liability. The story doesn’t end here either. Notification alone may not be enough because part of your training concerns the proper use of experts. An insurance pro who may occasionally see or smell mold should know that it may also exist behind walls and other inaccessible locations. The presence of mold may also be indicated by unexplained illnesses,

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i.e., when the situation warrants, you may have the obligation to seek out the liability exposures to properly evaluate the claim. Testing for mold by a professional could be required. Adjusters, agents and insurers may feel uncomfortable in disclosing potential health dangers where their client / claimant may suffer the wrath of potential new claims. However, failure to disclose such dangers to first or third parties could result in the building owner / policyholder being sued for damages in excess of the available policy limits. If that happen, who do you think the property owner might be looking to make up the difference? Policyholders might also have a bad faith claim against the insurer for failing to protect the property. In essence, as a practical matter, full disclosure may be cheaper in the long run. Could lack of a health disclosure result in criminal charges? In the Melinda Case above, child endangerment criminal charges were filed against some insurance company personnel but later dropped in a settlement. Instilling Ethics Someday, it may be real important for a court and jury to hear that you have a history of serving claimants without consideration for how much you made or how busy you were, i.e., you are a person with good ethics. Instilling ethics is a process that must start long before a person chooses insurance as a career. It is probably part of the very fiber that is rooted in lessons parents teach their children. So, preaching ethics in a forum like this course of study may not be incentive enough to sway adjusters to stay on track. It may be easier to explain that honesty and fair play could mean greater sales and lessen the possibility of lawsuits.

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SCOPE OF LOSS & ESTIMATES SAFETY FIRST CAUTION: Before an adjuster enters any structure after an earthquake, he or she must exercise proper caution. Generally, safety assessment evaluators from local building departments are dispatched to the more heavily damaged

neighborhoods to evaluate structures after a major quake. From these preliminary inspections, structures might be classified as follows: 1) Habitable, corresponding to buildings that experienced minor or negligible damage and have no signs indicating a reduction of their original seismic capacity. This means that buildings are apparently safe and no restriction on use or occupancy exists. 2) Limited use, corresponding to buildings where some local hazard exists, or some questionable damaged area would then be scheduled for a detailed evaluation. It means that parts of a structure could be occupied. The dangerous areas have to be barricaded and posted “AREA UNSAFE” and are not usable but can be entered for a brief period of time only to remove possessions or for emergency purposes but it is a risk. 3) No entry, corresponding to buildings with damage affecting to the lateral force and/or vertical load resisting systems (moderate structural damage) and are not inhabitable, although they are still able to resist loads. Entry in them must be prohibited and must be cordoned off. Further actions to improve safety in and around the building may be identified and recommended by building inspectors or engineers. 4) Danger of collapse, corresponding to heavily damaged buildings, those whose original seismic capacity has greatly decreased (heavy structural damage or near to collapse), There are extreme hazards and thus are subject to sudden collapse even in minor aftershocks. Typically, these are structures that represent a threat to life-safety ad are unsafe for occupancy or entry except by experienced building professionals. Entry in them must be prohibited and the need for emergency support as well as protection of the surrounding areas must be considered. Of course, adjusters should not enter buildings posted “No Entry” or “Danger of Collapse”. Further, the adjuster should know that a “Habitable or Limited Use” safety assessment does NOT address non-safety-related earthquake damage, i.e., even if a building is deemed safe to occupy, it may have sustained damage and a scope of loss must be determined. EARTHQUAKES ARE DIFFERENT In approaching the earthquake claim, it is important to first understand that the forces of earthquakes are different from conventional disasters. Buildings that are particularly vulnerable to damage include: • Older buildings that are not bolted to their foundation • Older buildings with unbraced cripple walls

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• Split level houses • Houses on steep hillsides • Houses with open floor plans • Buildings with large openings or large expanses of windows

Unbraced cripple walls represent a structural weakness during earthquake. Severe damage can result if failure of the cripple wall system occurs. To correct this condition, cripple walls can be reinforced, typically by installing plywood sheeting. Cripple wall evaluations and reinforcement must be performed under the direction of a structural engineer or foundation contractor and must be completed in accordance with building code regulations.

The forces in the walls at the lowest level of woodframe buildings are the greatest so earthquake damage is typically concentrated in the first-story walls. Taller, heavier and stiffer buildings, such as multi-story masonry buildings are subject to greater forces and more damage. Likewise, a framed house with a heavier tile or clay roof will experience higher inertia forces from an earthquake and, most likely, suffer more damage than a framed house with a lighter wood shingle roof. Un-reinforced masonry and plaster structures or walls are brittle and very weak in tension. Look for them to crack at much lower tensions than steel or wood. Fires ignited by damaged natural gas or electrical utilities can be a severe indirect effect of earthquakes, although quick fire department response prevented fires triggered by the 1989 Loma Prieta and 1994 Northridge earthquakes. Damage from nearby bodies of water (swimming pools, lakes or the ocean) can also cause significant damage during and after an earthquake. THE 1994 NORTHRIDGE EARTHQUAKE The Northridge, California earthquake is one of the most analyzed earthquakes in history. The lessons learned have been shocking and instrumental to the creation of new codes as well as the creation of the California Earthquake Authority. One major outcome of the earthquake, for both insurers, was the discovery that the exposure data that had served as the basis for risk calculations was of poor quality with locational information often incomplete, or miscoded. Information systems, designed to support policy administration and related activities, were ill-suited to capturing or reporting the exposure characteristics that govern catastrophe risk. While homeowners policy writers could reliably track the locations of the majority of their insureds, Northridge highlighted significant problems with insurance-to-value assumptions. Beyond the systematic under-reporting of aggregate

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exposure values, these underestimations served to significantly erode the impact of deductibles expressed as a percentage of policy limits. Northridge also overturned the prevailing assumption of homogeneity of the residential inventory in California dominated by ‘wood frame’ construction practices. In detailed claims research in 1996-1997, it was identified that a diverse range of more vulnerable appurtenant structures (Coverage B), such as swimming pools, masonry block walls, detached patios and garages, etc., represented almost twice the proportion of the property value that had been assumed and were also almost twice as vulnerable to earthquake damage as the main building. For commercial lines writers, the lessons of the Northridge Earthquake were even more acute. Exposures coded at best to ZIP Code, but often to the Zone level of resolution failed to capture the geographic specificity of the risk. More generally, data coding for multi-location schedules was often incomplete or misleading, where values for ‘secondary’ locations were simply coded on a lump sum basis and geographically associated with the ‘key’ location. Construction information was found to be missing or unreliable in many cases, often on a systematic basis across entire lines of businesses or even portfolios, a problem exacerbated due to the prevailing re-use (and often misuse) of fire underwriting building classifications for earthquake risk assessment. In some cases, whole classes of exposure were overlooked, such as earthquake sprinkler leakage coverages attached to standard fire insurance policies. What changes have been made? Where ZIP Code was once considered ‘high-resolution data,‘ and zonal aggregates were deemed acceptable, street-address location data is now the standard of resolution for property catastrophe exposed accounts. Construction data is systematically captured using earthquake-specific codes, and many writers now capture and report construction details beyond just the primary characteristics. Not only is more data being captured from insureds and their brokers at a greater degree of resolution, but more data is being shared between insurers and their reinsurers, and data quality metrics are working their way into the vernacular of risk management and risk transfer conversations.

Shakemap. The ability to provide detailed quality data is now a prerequisite to accessing the top reinsurance markets. Shakemap was developed by The US Geological Survey to facilitate the communication of earthquake information, beyond just magnitude and location. This is done by rapidly mapping out earthquake ground motion. Shakemap originated as primarily an internet based system to provide real-time displays of earthquake shaking and data is usually available within minutes of a significant earthquake. This information helps to assess the scope and impact of the even and can help improve loss estimation. Click here to learn more about Shakemap and how to use the program.

As it turned out, of $15.3 billion in Northridge claims, over 60% were from personal lines exposures, far beyond initial expectations. Following a two-year RMS research project to collect and analyze almost $3 billion of detailed homeowners claims data, including a hands-on review of claims files, it became clear that a series of issues contributed to this significant underestimation of residential losses. These included: systemic under-insurance, a greater than expected vulnerability of appurtenant structures, the impact of price opportunism in ‘demand surge,’ and the presence of a greater degree of statistical variability (uncertainty) in wood frame damage than anticipated, thus reducing the previously understood impact of deductibles in mitigating losses. While part of this discrepancy in industry (and modeler) expectations of losses in the residential sector can be explained by the location of the Northridge event vis-à-vis the

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PML scenarios – that is, in the more ‘residential’ San Fernando Valley rather than the more ‘commercial’ heart of Los Angeles – more significant was a collective failure of insurers, regulators, and modelers to appreciate the vulnerability of residential building stock to earthquake losses, and hence the concentration of risk that was developing within those companies writing homeowners business. Bottom line? The Northridge Earthquake sent shock waves through the personal lines market in California. Losses equated to 28 times the aggregate earthquake premium collected in 1993, and far exceeded the historical earthquake premiums to date. A few insurers teetered on the verge of insolvency. For the majority who remained viable despite the unprecedented scale of losses, it became clear that the status quo was no longer tenable. Many insurers moved quickly to file re-calibrated rating schemes, California being a ‘prior-approval’ regulatory environment. These rating schedules not only reflected new appreciation of what constituted an ‘adequate premium,’ but included far more specific rate territory definitions based on the new understanding of the risk landscape. Faced with the uncertainties about gaining approval for true risk-based pricing, and recognizing the near impossibility of diversifying their pre-existing books of earthquake business, many large insurers began to reevaluate their commitment to the homeowners market in California. As California law required insurers to make an offer of earthquake coverage as an endorsement to a homeowners’ policy, one straightforward way to avoid earthquake exposure was to move out of writing homeowners coverage altogether. Faced with the implications to the State’s economy, and in particular the housing market and mortgage industry, a compromise was negotiated, and in 1996 the California legislature enacted the California Earthquake Authority (CEA) as a privately funded, but publicly managed, organization set up to make standardized and limited residential earthquake insurance coverage available. Insurers could elect to participate in the CEA or offer their own policies. The standardized CEA policy, known as the mini-policy, provided a limited form of earthquake protection, covering the value of the dwelling itself but only modest coverage for contents and additional living expenses. Losses in appurtenant structures, the infamous driver of many of the Northridge claims, were excluded altogether. In addition, deductibles were raised to 15%, and the product was priced using a catastrophe model at rate levels (in areas of risk) greater than those that existed pre-Northridge. An unintended consequence of these actions has been to disincentivize the take-up of homeowners earthquake insurance. Today, only 10% of California homes have earthquake insurance. While the commercial earthquake insurance market has grown since 1994, the change in the takeup and policy features of the residential earthquake insurance market has served to reduce the P&C Industry’s overall exposure to California earthquake risk. If current homeowners earthquake takeup and coverage terms were in place in 1994, the insured personal lines losses would have been 70% lower than what was incurred in Northridge. Today, estimates are that a recurrence of the Northridge earthquake would result in approximately $9 billion in overall (commercial and personal lines) insured losses, down from the $15.3 billion paid following the event. The significant majority of these losses would now be commercial, rather than personal lines, and a larger share of the primary losses would likely be borne by the global reinsurance market. Not only would the industry suffer less loss, the losses would be more diversified across a broader range of commercial earthquake insurers and global reinsurance markets, given the improved attention to risk management within individual companies. While a $9 billion loss would still be significant by any measure, the industry is far better positioned today to absorb losses from a comparable event, and move forward with less disruption to the market.

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DOCUMENTING EARTHQUAKE DAMAGE The scope of loss for an earthquake claim must be detailed and include a listing of recent earthquake damage. Descriptions, including room dimensions; materials, like moldings, flooring, wall coverings, and fixtures; and information about special features, openings, casements, detailing, moldings, and other architectural features are essential. The inspection should also include, but not limited to attics, crawlspaces, roofs, chimneys, foundations and all structural areas. Let’s look at some areas of special concern:

Earthquake shaking can cause soils to behave like a liquid and lose their ability to support structures. Liquefaction often causes buried gas and water lines to break. The highest hazard is in low-lying areas where there are loose, sandy soils or poorly compacted artificial fill. This photo shows liquefaction-related damage in the Marina District of San Francisco following the 1989 magnitude 6.9 Loma Prieta earthquake (USGS photo).

Exterior Spaces A logical starting point is to assess the outside of the building (all easily accessible sides). It is examined visually looking for signs of: residual drift (building or parts of it out of plumb), damage to outward non structural elements (exterior walls, façade, chimneys and roof, etc). Examine visually the ground story, looking for damage to all visible structural elements, (especially columns, core elements, beams and stairways) and also checking all infill or partition walls. Secondly, perform a visual inspection of the ground and pavement around the building and nearby area looking for ground fissures, settlements, signs of liquefaction or slope movement or rock-fall hazards, in case of buildings at or close up hillside. Here are some general exterior questions of interest: • New cracks in the ground (See Concrete Surfaces and Foundations) • Signs of fresh cracking in any hardscape • Signs of fresh cracking in retaining walls • Patterns of cracking throughout hardscape or the ground surface • Sand boils or fresh deposits of sand or mud • Unusual slumping, rising or bulging of ground surface • Evidence of rock falls or slope instability • Wet areas indicating broken underground utilities

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• Fresh cracking at doors and windows • Collapse or partial collapse of building foundation • Obvious “lean” in any exterior wall • Doors or windows that do not close • Broken glass in doors or windows • Pattern of cracking that extends from the ground surface through the foundation and wall • Cracking of stucco at the mudsill • Fresh cracking or exposed perimeter foundation • Movement between slab and slab-on-grade foundation Interior Spaces If access to the interior is available and/or the building is safe enough, a quick walk-through followed by a more detailed inspection are performed. This allows a best usability classification of questionable buildings and the detection of any potentially serious damage or hazardous areas and the discovery of imminent hazards within and outside the building. Here are some general interior questions of interest: • Fresh cracking, buckling, spalling or detachment of walls at corners of windows and doors • Fresh cracking of wall or ceiling finishes • Doors or windows out of rack • Pattern of cracking from slab through the wall • Movement or sliding of walls relative to floors • Inoperable or damaged doors or windows • Collapse of ceiling finish • Water damages from recent leaks • Significant sagging of floors over crawlspaces or second floors • Pattern of fresh cracking in floor finishes • Collapse of fireplace facing or firebox • Displaced connections of appliances from rigid gas or water pipes • Damage to gas lines • Damage to toilets • Decreased water pressure due to broken or obstructed lines • Shifting of cabinets throughout the structure • Fresh cracking of ceramic tile on walls or floors Where the causation is obvious and damage is non-structural, the adjuster can assess the damage without consulting engineers or experts. However, earthquake damage can manifest itself in a variety of forms, from minor cracking of interior Sheetrock to major failure of the foundation system. An engineer or expert consultant should be used when the damage appears to be structural in nature (see next section on Determining the Need for an Engineer or Expert). Let’s look closer at some specific areas of exterior and interior loss assessment and valuation:

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Walls Minor cosmetic damage is fairly common in California. Soils in many areas of California are expansive, resulting in normal swelling and shrinking soil movement. This movement causes distortion and cracking . . . typically diagonal cracks extending from the corners of windows and doors. Depending on the season and weather, this can cause temporary binding of doors and windows. Signs of major settlement and earthquake damage occur when the cracks around windows appear to be unidirectional as shown in the illustration above. Multiple cracks in the same direction are a possible indicator of more than typical differential settlement caused by soil movement or an earthquake. Other areas of concern include the following: • Fresh cracking, buckling or detachment of exterior stucco (see Concrete Surfaces and

Foundations) • Fresh cracking of interior plaster or drywall. • Out of wrack walls (jammed doors, jammed or broken windows) • Walls out of plumb • Movement or signs of interior walls sliding relative to the floor • Corners of doors, windows and walls may show the most damage • Cracks at plate lines • Loose or exposed weep screed • Second floor rim joist area cracks A technical consultant may be required where: • Walls are visibly out of plumb or doors and windows are inoperable • Stucco cracks wider than 1/16” and longer than 3 feet between window and door openings • Loose or buckled stucco along the plate line • Spalling that exposes stucco mesh or wire • Delamination of stucco from framing • Bulges in drywall or plaster or actual detachment from framing • Multiple nail pops through drywall • Interior finish cracks wider than 1/16” away from windows or door openings • Fresh water damage due to rain or plumbing • Buildings older than 1980 may contain hazardous materials requiring special abatement

measures Example of non-structural spalling of a foundation. Evidence of wall moisture that lead to crumbling and foundation failure over time.

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In situations where the issues above are not present, chances are there is no structural damage beneath a wall surface. Here, only cosmetic repairs are required . . . typically patching and repainting. More severe damage, or where invasive inspection is requested, can result in the installation of additional wall fasteners, new sheathing, new framing, localized removal and replacement of drywall/stucco or the possibility of code required upgrades for the addition of new shear wall sheathing. Floors, Ceilings and Roofs Roofs, ceiling and floors are fairly stout. Typically, they do not sustain major earthquake damage in areas of moderate shaking. Damage that does occur is usually limited to non-structural cracks or damage from falling objects during the quake. Heavy shaking can result in more serious damage, including the possibility of the building sliding off its foundation, especially in structures built on cripple or stem walls. Distinguishing seismic damage from pre-existing conditions before a quake is part of the adjuster’s assessment. Common conditions that existed prior to an earthquake that may have gone unnoticed include squeaky floors, loose nails, cracks and nail pops or roof leaks. Telltale signs of such non-earthquake damage includes: • Old looking leaks near flashings and roof penetrations. • Leaks due to deterioration in roofing materials (roof felt) • Normal sagging of roof structures • Differential movement of roofs or floors due to movement of foundation from soil instability • Twisting framing members due to missed nails, green wood, etc • Backing out of nails or screws due to thermal conditions • Cracking and gaps in caulk due to exposure Fine cracking in ceilings is common for both drywall and plaster in California structures. Linear cracks (sometimes the entire width of a room) often develop near the centerline of the ceiling as a result of shrinkage in roof rafters. Exposed beams and wood ceilings also “age” showing shrinkage, checking, twisting and warping. This can also cause large gaps between the wood and drywall. Non-earthquake damage to floors results in out of level conditions, squeaks, loose nails and cracking of grout or other fill materials. Often times, these issues occur due to unstable soils causing movement to foundation and superstructure. These same movements can result in gaps between posts leaving beams completely unsupported. A soils specialist should be consulted where ground failure is suspected. Earthquake related issues of concern with floors, ceilings and roofs include: • Dislodged clay or concrete tiles • Sagging roof ridgelines • Roof membrane tears • Flashing dislodged • Ceiling finish damage near chimneys • Cracks or gaps in ceiling or floors at split-levels • Ceiling cracks along corner beads or from corner openings • Fresh cracking of ceiling finishes, especially at corners

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• Excessive sagging or bouncy floors • Signs of movement between floor and exterior hardscape or retaining walls • Racking of cripple walls • Signs of movement off the sill • Vertical irregularities in building transitions (e.g., split level homes) • Out of square rooms • Fallen, leaning or cracked chimneys • Fallen or shifted rooftop HVAC units As discussed earlier, roofs, ceilings and floors are flexible structures. Given enough shaking, however, they can shift and even fail (fall off a foundation). In most cases, damage is limited to finishes from falling objects or an adjacent chimney. A chimney that has shifted more than ¼” away from the house should be inspected from foundation to attic for potential damage to adjacent framing. Owners often complain of increased floor squeaks after an earthquake. It has been suggested that earthquake-induced racking of the floor diaphragm can loosen nails leading to more squeaks. Unless the shaking is severe, however, the structure will remain habitable. Attics & Crawlspaces CAUTION: There are hazards associated with entry into these areas . . . only qualified inspectors should perform them. And, being confined, an inspection may require the presence of a second individual or assistance from the owner/occupant. At the very least, let someone know you are entering these spaces and a time frame for exit.

In general, the absence of conspicuous visible external damage may mean there is little damage in either an attic or crawlspace.

Here are some questions to determine the extent of possible earthquake damage. Most of these issues require consultation of an engineer for possible repair or replacement.

• Tilting posts or cripple walls • Noticeable sag in floors • Missing or loose posts • Split sill plate • Diagonal bracing that is fractured, buckled or loose • Shifting of frame relative to the foundation • Visible cracks in stem walls greater than 1/8” • Indication of previous water intrusion or flooding • Condition of masonry below fireplace • Active plumbing leaks • Broken pipes • Crushed, separated heating/air ducts • Damaged asbestos insulation or ducts • Condition of framing, braces, connections and tie straps near chimney If the building was constructed before 1980 and repair work involves disturbance (demolition, removal, grinding, sanding, etc) of floors or ceilings, an environmental consultant should be retained to assess the possibility of asbestos in acoustic ceilings, joint compound, plaster,

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ceiling tiles, vinyl floors, roofing felt and/or roof mastic. Lead may also be present in kitchen and bath ceilings or enamel painted floors. Cracks in drywall less than 6 inches long can easily be patched and retextured. Longer cracks may involve removal of the drywall to the nearest joint, followed by new drywall, tape and texture. Plaster cracks can typically be cleaned and patched. Fireplaces & Chimneys Due to their heavy mass and stiffness, masonry fireplaces are somewhat vulnerable to earthquake damage. Unreinforced chimneys have a tendency to crack or overturn while reinforced ones fair better. Chimneys constructed along an exterior wall are prone to pulling away from the building. Many California homes built after 1980 use factory-built “modular” fireplaces employing insulated metal flues. These fireplace systems are less susceptible to damage from earthquakes. Issues for masonry chimneys can range from cracking or tilting to collapse or displacement away from the actual structure. Adjusters should examine the exterior and interior of the fireplace. On the outside, you are looking for visible signs of cracking, tilting or displacement as well as damage to flashings and nearby roof tiles or roof structure. Further, if the top stack of the chimney is prone to rocking, when gently pushed, there is a likelihood of major damage. Only trained adjusters should use this rocking technique.. Inside, one should examine the fireplace facing for signs of movement from surrounding walls. Examine the firebox for fresh cracking as well as any masonry finishes that wrap around the flue. Recent cracks are often more noticeable by the lack of creosote build-up. In the attic, you should assess the condition of any steel straps connected to framing for signs of stress or breakage. If any of the above damage is spotted a technical consultant should be contacted. Where required, professionals can perform a camera scan of the flue pipe and/or a smoke test to detect fireplace or chimney cracks. Masonry chimneys with considerable older cracks may have weakened mortar due to high lime content or weathering. When probed with a screwdriver, higher strength mortar will remain in tact. Weak mortar can crumble or chip easily with little contact. Electrical, Plumbing and Mechanical CAUTION: Before entering a damaged, vacant building, verify that the gas has been shut off. If odor of gas persists, vacate the structure and contact the gas utility company. In any post-earthquake inspection, a primary concern is that hazards do not exist from mechanical, electrical or plumbing systems. If the adjuster observes any condition that questions the integrity of gas lines, furnace or water heater flues or electrical connections, the appropriate utility company or service provider must be contacted before restoring utility service to the structure. Damage to electrical, plumbing and mechanical systems might include: • Toppled HVAC or water heater systems (possibly unrestrained) • Damage at rigid connection lines

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• Broken pipes or conduits due to significant movement • Ruptured buried utility lines • Water damage due to broken lines (check walls, floors, crawlspaces, attics) • Disconnected ducts • Broken toilets • Failed electrical connections due to shifting • Falling ceiling fixtures (lights, fans, etc) • Electrical shorts with possible fire when electricity remains on or is eventually restored • Reduced or no water pressure • Reduced or obstructed HVAC airflow While underground utilities are not easy to inspect, damage is suspect when other, visible utility lines are broken or severed. A leak detection service may be required. Non-earthquake sources of damage to these systems include: • Normal corrosion of water lines and water heaters over time. The rate of corrosion varies

depending on the condition of water and materials used. • Mineral deposits in water lines • Plugged sewer lines from tree roots or human-induced obstructions • Deterioration of washers, gaskets and hoses with time • Contaminated refrigerant lines from debris, wear and tear, corrosion, etc Where mechanical, electrical and plumbing remain functioning, common repairs should be enough to serve most homeowners. Systems that have failed, shorted or obstructed may call for more aggressive repairs or outright replacement. Reasonably Uniform Appearance of Repairs The California Fair Claim Settlement Practices Regulations, section 2695.9(a)(2), reads in part: “When a loss requires replacement of items and the replaced items do not match in quality, color or size, the insurer shall replace all items in the damaged area so as to conform to a reasonably uniform appearance.” Carpet and floor coverings: When dealing with replacement of carpet and other floor coverings, good judgment must prevail, but generally if a match cannot be found, doorways with doors that can close (swinging or pocket) can be used as the dividing line between rooms where there will be replacement of floor covering damaged by this loss and adjoining rooms where the floor covering was not damaged and need not be replaced. (This concept does not apply to closets with doors. For purposes of floor covering replacement, such closets should be considered part of the room.) Roofs: Bear in mind that the regulations do not require an exact color match, but rather that all items in the damaged area “conform to a reasonably uniform appearance.” It is expected that the claim representative use his or her good judgment to determine how much of the damaged area needs to be repaired or replaced to comply with the “reasonably uniform appearance” standard.

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It will generally not be necessary to replace the whole slope unless materials of the same size and quality cannot be found or the condition of the roof makes a repair impossible. Repairs most likely will be made with new materials of like kind and quality, which generally fade to match the existing materials. When a claim representative recommends a repair rather than a replacement, the adjuster must be able to explain the “reasonably uniform appearance” concept to the insured and advise how the claim representative determined the area to be repaired. DETERMINING THE NEED FOR ENGINEERS AND EXPERTS Adjusters shall be trained how to evaluate visible damage and indicia of hidden damage to determine when to consult with an engineer or other expert. Where the causation is obvious and damage is non-structural, an adjuster can assess the damage. However, earthquake damage can manifest itself in a variety of forms, from minor cracking of interior sheetrock to major failure of the foundation system. If a visual assessment identifies conditions that indicate the need for technical consultant assistance (see previous section), the appropriate consultant should be contacted. Structure and soil specialists include: • Licensed Civil Engineers • Licensed Structural Engineers • Licensed Architects • Civil Engineers specializing in soil or geotechnical engineering • Geotechnical Engineers • Engineering Geologists The services of an expert will assist in the analysis of the cause and extent of loss and the proper way to repair the damage. In some circumstances, invasive inspection, also known as “destructive testing” may be recommended by a technical consultant or engineer. This may involve: • Removal of drywall • Removal of carpeting and padding • Core samples from concrete slabs or foundations • Removal of wall finishes to inspect concealed framing • Excavation of soil test pits Before proceeding with invasive inspections, the benefits and costs should be understood and evaluated by all parties. CAUTION: In buildings constructed prior to 1980, where repairs involve disturbing certain finishes or building materials that may contain asbestos or lead paint, the services of an appropriate and licensed environmental consultant should be procured. The consultant may recommend testing and proper abatement when work is actually performed (there are many legal requirements here). It is important that the adjuster understand the distinctions between the various expert fields and how they can be best used during the claim investigation. One source of earthquake

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engineering information is the CUREE General Guidelines for the Assessment and Repair of Earthquake Damage in Residential Woodframe Buildings. (www.curee.org) When to Retain an Engineer or Expert In the previous section we offered some very specific tips on when to call a technical consultant. It is to the insurers best interest to determine the need for engineers or other experts as soon as possible in the claim adjustment process. Some of the conditions you should consider when retaining an engineer to inspect the property are: • Building has collapsed or partially collapsed, • Building superstructure has shifted relative to or off its foundation, • Building as a whole, any story, any walls, any cripple walls, or columns are visibly out of • plumb, • Shifting or movement of interior walls and partitions relative to the floor, • A pattern of broken windows or a pattern of sticking or inoperable hinged doors, • For hillside houses, at the downhill edge; damage to vertical supports; posts visibly out of • plumb; broken, slack, or buckled diagonal bracing; or damage to connection between • foundation and superstructure, • Visible distortion of the roofline or significant fresh damage to attic framing, • Damage to the structure in the vicinity of the chimney, • A pattern of splitting of framing members (sill plate, hold down locations, floor joists, • etc.), and • Evidence of fresh, uneven settlement of floors. • Broken water, sewer or gas pipes • Fresh cracks in foundation greater than 1/8” • Evidence of spalling in footings or stem walls (excessive moisture, salt or crumbling) • Racking of cripple walls • Delamination of stucco • Shifting of framing relative to foundation • Bulges in wall surfaces What Kind of Engineer to Select For purposes of claims adjusting, the primary technical issues for the engineer to address are: • Identification of all structurally significant earthquake damage, especially those damage

patterns that might not be obvious to owners and adjusters, • Causation (i.e. distinguishing between damage caused by the earthquake and

conditions/damage attributable to other causes), • Scope of work necessary to repair the damage caused by the earthquake in accordance with

the terms of the policy, and • Any building code upgrades that may be required as a part of the repair of the earthquake

damages. Generally, an adjuster should start with a structural specialist (a Civil Engineer specializing in structural engineering or a Structural Engineer). A structural specialist can evaluate all

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components of a building, including the foundation, for structural damage. The structural specialist should be consulted regarding the need for a soils specialist or other technical consultants. When a building inspection report relies on engineering judgment, the stamp of a responsible engineer will generally be required. Locating Qualified Engineers Ideally, carriers should maintain a list of pre-qualified engineers who can be called upon in the immediate aftermath of an earthquake. When that is not the case, one source of contact information for potentially qualified engineers is the regional Structural Engineers Association of California (see www.seaoc.org for links to regional association) or the local chapter of the American Society of Civil Engineers (see www.asce.org/inside/sec_brnch.cfm for links to local chapters). Prior to retaining an engineer, check credentials, by obtaining a copy of the engineer’s curriculum vitae (résumé) or statement of qualifications that should include information on education, work experience, technical expertise, and professional registration (or engineering license) numbers. The status of an engineer licensed in California can be verified at: http://www.dca.ca.gov/pels/l_lookup.htm Written Contract Specifying the Scope of Services Assuming that the engineer’s credentials are acceptable, the next step is executing a written agreement or contract with the engineer. California Business and Professions Code section 6749 requires, with some exceptions, that engineers provide their clients with a written contract specifying at a minimum: • A description of the services to be provided to the client by the professional engineer. • A description of any basis of compensation applicable to the contract, and the method of

payment agreed upon by the parties. • The name, address, and license or certificate number of the professional engineer, and the

name and address of the client. • A description of the procedure that the professional engineer and the client will use to

accommodate additional services. • A description of the procedure to be used by any party to terminate the contract. • Following a major earthquake, qualified engineers in an area may be overwhelmed or in

short supply. Claim representatives should ask for and agree to the delivery time for any written reports before authorizing the work.

Payment of Expert Fees Adjusters should ask for and agree to a budget before authorizing the work. Expert fees necessary to investigate a claim or determine the cause of loss are paid for by Insurers. There could be an exception when dealing with testing. The Participating Insurers receive a loss-adjusting fee on all paid claims, which when averaged out over all claims handled, is designed to reimburse them for these fees. Fees necessary to

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determine the cause of loss should not be included as part of the claim payment—they are loss adjustment expenses. Fees necessary to determine the appropriate April-2009 California Earthquake Authority – Claim Manual Page 51 repair or replacement are part of the claim payment under the policy coverage limits after the deductible and any other policy provisions are met. Other Contractors Depending on initial assessments and reports of technical consultants, a variety of additional contractors may be needed to determine all damages and associated costs to repair / replace. Following are a few possible contractors involved in assessing quake damages: • Soils specialists to evaluate ground issues • Chimney inspection of the flue • General contractor to assist in opening concealed areas for inspection and repairs and

evaluate repair costs • Carpet contractor to remove and reinstall carpet • Plumber / leak investigator • Swimming pool contractor to evaluate any cracks to pool and decking • Mechanical engineer or HVAC contractors to inspect ductwork, furnaces and a/c • Concrete coring service to remove slab samples • Utility location service to locate underground lines • Roofing contractor to assess potential roof damage • Environmental consultant to test for mold, asbestos, lead and/or removal of same CAUTION: In the aftermath of a major earthquake, contractor scams are prevalent. Be sure to verify credentials and references of all contractors and service providers. CONCRETE SURFACES AND FOUNDATIONS Old or New Concrete Cracks Adjusters need to understand the difference between pre-existing cracks in a structure’s concrete and new cracks caused by an earthquake. Probably the most reliable indicator that cracks are caused by an earthquake is the presence of corresponding earthquake damage to adjacent slabs, soil or building structure. If there is no corresponding damage, it is probable that the cracks are pre-existing due to settlement or other structural issues. Here are some other indicators of new vs. pre existing crack assessment: • Fresh cracks exhibit sharp edges free of weathering, rounding or erosion. The exception is

under crawl spaces where these cracks do not weather. • Fresh cracks will generally be a different shade than pre-existing cracks. • Older cracks may be partially filled or filled with paint, oil, grease, floor covering adhesive,

sawdust, drywall mud and other foreign matter that tends to accumulate over time. • Older cracks may reveal attempts to repair, e.g., grout, caulk, leveling material, etc. • Older cracks may be filled with weeds, debris and dirt. • Older cracks covered by tile or vinyl may have filled or partially filled with floor adhesive.

Careful removal of the floor material is helpful in assessing these cracks. • Tack or carpet strips that span older cracks tend to remain in tact. A major earthquake and

resulting slab crack could break the carpet strip.

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• Stains or efflorescence that is markedly different on two sides of a crack might indicate a pre-existing crack.

Evidence of an older concrete crack showing worn edges and debris fill.

Fresh cracks after earthquake evidence by sharp edges and out of plane offset across foundation

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Pre-existing crack as evidenced by floor mastic filling a long-term crack. Also look for debris or plaster / drywall compound filling all or portions of an older crack.

Repair or Replace Concrete? After earthquakes, adjusters will need to make decisions on whether damaged concrete needs repair or a full replacement. The nature and extent of a crack determines the need to repair or replace damaged concrete. Cracks in concrete are fairly normal in California . . . the cause is shrinkage, settling of soil or earthquake related. In general, as long as these cracks are less than 1/8” wide and the offset is less than 1/16” out-of-plane, there are no structural issues present to require replacement. Nonstructural repair (sealing) of these cracks can be justified for cosmetic reasons as well as the prevention of future moisture or pests. Following are some additional guidelines: • Since concrete receives much of its support from the soil, conditions where subsidence of

soil or liquefaction is evident, the need to stabilize soil comes first. This may require complete removal of the concrete in order to stabilize soil or the use of creative techniques where addition concrete or epoxy, under pressure, is pumped in underneath the concrete. Or, underpinning may be recommended where concrete shafts or steel pipe piles are forced deep in the ground to reach more stable soil. A soils engineer is required to make this assessment.

• Grinding or leveling are possible solutions to repair slab cracks where vertical offsets greater than 1/16” are present. Wider, cracks with more offset may require removal by sawcut or jackhammer, steel reinforcing (dowels into edges of existing concrete) to insure that new and old concrete are tied together.

• Where major subsidence has occurred in a raised foundation, a solution to level the wood floors may be made utilizing heavy duty jacks to raise the home and fill the void beneath the mudsill with a concrete-based leveling compound. This work must be performed by a specialized contractor.

• Where concrete damage results in a loss of structural support, a structural repair will be necessary. This most probably involves the proper removal and replacement of concrete.

• In some cases external remedies, such as metal plates bolted on both sides of the crack, grade beams, carbon fiber composites, or external post-tensioning might be recommended by a technical consultant.

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• Slabs or stem walls with pre-existing cracks may widen in a new earthquake. As long as the crack is less than 1/8 inch with no offset, slope or settlement, structural repair is probably not needed. Sealing these cracks is probably the only repair needed.

• Slab cracks between 1/8” and ¼” with no offset or slope can typically be repaired using epoxy injection. For better esthetics, this slab could be replaced. Stem wall cracks where a crack offset is less than 1/16” can also be repaired with epoxy.

• Horizontal stucco cracks along the slab or top of footing typically do not warrant replacement as long as any footing damage is less than 1/8 inch.

• Construction joints between the slab and footing can generally be sealed with an elastomeric joint compound, cement-based patching material or latex-based sealant.

BUILDING CODE UPGRADES

When a building has been damaged or destroyed by a covered peril, a policyholder may face an additional loss because building laws and ordinances governing the repair, reconstruction, or demolition of the insured property can significantly increase the costs. In most instances, these laws and ordinances will require that the repairs or reconstruction of a damaged structure comply with current building codes. Consider these examples:

• Lightning struck an insured’s sixty-year-old home and caused damage to part of the electrical wiring. Because the wiring was sixty years old, the entire home had to be rewired to meet current building codes

• A house built in 1985 is totally destroyed. The re-building of the house requires new school

fees of $3 per square foot . . . a fee that did not exist when the house was originally built and insured.

• A home’s living room, kitchen, master bedroom and garage are completely destroyed in a

fire. Local building codes prohibit the repair of a damaged building if it is more than 70% damaged.

Building upgrades can be required for a damaged structure because building officials have authority under [the unsafe structures section of the building code] to require alterations to existing, nonconforming uses that are dangerous to human life. This can cover a lot of territory.

What Policies Cover

Outright Exclusion: Some policies exclude coverage for the costs of complying with building code upgrades. Typical exclusion language reads as follows:

We do not insure under any coverage for any loss which would not have occurred in the absence of one or more of the following excluded events. We do not insure for such loss regardless of: (a) the cause of the excluded event; or (b) other causes of the loss; or (c) whether other causes acted concurrently or in any sequence with the excluded event to produce the loss; or (d) whether the event occurs suddenly or gradually, involves isolated or widespread damage, arises from natural or external forces, or occurs as a result of any combination of these:

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• Ordinance or Law, meaning enforcement of any ordinance or law regulating the construction, repair or demolition of a building or other structure, unless specifically provided under this policy.

Specified Sublimit: Certain private earthquake insurers set specific sublimits on building code upgrades . . . say $10,000. Additional Coverage: The CEA earthquake policy treats building code upgrades as additional insurance with specific sublimits: • The base-limits CEA homeowner policy includes $10,000 of Building Code Upgrade

coverage as additional insurance. This applies to all dwellings, including mobilehomes. For dwellings other than mobilehomes, the policyholder can increase this limit by endorsement from a $10,000 limit to a $20,000 limit of additional insurance.

No Specific Mention: A more difficult question arises in cases where the in force type of language is not present. On the one hand, insurers could reasonably argue that there is no coverage under the endorsement for the increased cost of construction due to building laws and ordinances that took effect after the date of loss. Specifically, insurers could reasonably argue that the loss did not cause the enforcement of any post-loss law or ordinance because those laws and ordinances were not in effect at the time of the loss. This argument is supported by the general insurance law principle that the amount of the loss is fixed as of the date of the loss. This interpretation also is consistent with the insurer’s intent. Indeed, most underwriters believe that the liability of the insurer cannot be increased by post-loss events. Two public policy arguments also support the position that there is no coverage for the cost of complying with post loss laws and ordinances. First, a construction that extends coverage to post-loss building laws and ordinances eliminates any underwriting certainty and allows post-loss legislation to act as an ex post facto law for the insurance company’s obligations. Second, this construction encourages an open-ended adjustment period. In other words, an insurer could literally be paying for the cost to comply with laws and ordinances enacted many months or even years after a loss. On the other hand, insureds may argue that there is coverage for the costs of complying with post-loss enacted laws and ordinances in the absence of any explicit language limiting the coverage to only those laws and ordinances in effect at the time of loss. Furthermore, insureds may argue that they reasonably expected the policy to provide code upgrade coverage for post-loss laws and ordinances. Specifically, code upgrade coverage endorsements are designed to protect insureds from exposure to a risk of loss from the operation of federal, state, and local building laws and ordinances. Where replacement cost coverage is provided, insureds may argue that it is reasonable to expect coverage under the endorsement for the increased cost of construction necessitated by both building laws in force at the time of loss and building laws that become effective after the date of loss, unless the policy explicitly stated otherwise.

PreExisting Code Violations or Post Loss

Some of the most contested issues in code upgrade coverage cases is whether there is coverage for the costs of complying with preexisting code violations and whether the insurance company is liable to pay for the cost incurred as a result of a law or ordinance that took effect after the date of loss. Of course, the answer to these questions will greatly depend on the language of the policy and the jurisdiction where the coverage dispute arises.

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If the policy specifically limits the insurer's liability to those increased costs necessitated by laws and ordinances “in force at the time of loss,” that limitation should be upheld because courts will enforce policy language that is plain and unambiguous as written. A more difficult question arises in cases where the in force type of language is not present. However, insurers could reasonably argue that there is no coverage under the endorsement for the increased cost of construction due to building laws and ordinances that took effect after the date of loss. Then, a policyholder may argue that there is coverage for the costs of complying with post-loss enacted laws and ordinances in the absence of any explicit language limiting the coverage. He may also argue that it is reasonable to expect such coverage under the replacement cost provision, absent any language to the contrary.

At least one federal district court has rejected similar policyholder arguments and held that an insurer was not liable for the cost of complying with post-loss enacted building codes. See B A Properties, Inc. v. Aetna Casualty & Surety Co., 273 F.Supp. 2d 673 (D.V.I. 2003). In BA Properties, the policy did not include any “in force at the time of the loss” language. However, the court rejected the insured’s argument because the replacement cost provision determined the value at the time of the loss and interpreting the law and ordinance provision otherwise would alter its interpretation of the clear and unambiguous replacement cost provision.

Like Kind Replacement

Consider the following policy language: “. . . the cost of repair or replacement, but not exceeding the replacement cost of that part of the building damaged, for like construction and use on the same premises.” The policy defined replacement cost as “the cost, at the time of loss, to repair or replace the damaged property with new materials of like kind and quality, without deduction for depreciation.” In a lawsuit regarding this policy, the court held that like kind and quality and like construction did not include code upgrades. In a similar California case, another court held that a replacement cost policy’s “equivalent construction” provision precluded coverage for the cost to replace a fire-damaged wooden garage floor with a cement floor as required by current building codes. The court found that the like kind and quality language of the standard fire policy was substantially similar to equivalent construction language. The court also found that its conclusion was “consistent with the purpose of insurance—to compensate for the actual loss sustained, not to place the insured in a better position than he or she was before the fire.” Thus, the court found that a garage in which a cement floor cost nearly twice as much as one with a wooden floor was not equivalent construction. Thus far, California and Washington are the only two jurisdictions that have relied on like kind and quality or equivalent construction language to preclude coverage for code upgrade costs.

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SETTLEMENT AND MEDIATION OBLIGATION TO INVESTIGATE EARTHQUAKE DAMAGE Adjusters should know that current law obligates insurers to fully investigate earthquake damage that is discovered or reported after the earthquake damage claim is initially submitted to or closed by the Participating Insurer. Insurers must investigate reports of hidden or later-discovered damages before invoking any policy provisions

regarding the time limit for submitting claims. Even if a new claim is received more than one year after the date of loss, the Insurer should open a new claim and investigate the facts of the claim before it invokes any policy provisions. All such investigations should be made subject to a written reservation of rights. All claims should be concluded with a final closing letter even if payment is being made. This letter should: (1) explain in writing any previous decision not explained in writing, and (2) quote the “Legal Action” condition of the policy, and advise the insured of the tolling of that provision from the date that the claim was reported to the date of the final letter. DESTRUCTIVE TESTS In some situations, the insured may be solely responsible for the cost of performing tests. The CEA policy and some ISO policies provide as follows: At our option, we may select and retain adjusters, consultants, contractors, engineers, or other experts to inspect your property or to perform tests, including destructive tests, to determine the extent or cause of loss with respect to any claim you make under this policy. We will bear the cost of performing any tests (including the cost of repair of damage necessitated by any destructive tests) that we elect to perform to determine the extent or cause of loss. If, however, it is the opinion that your property (or some particular part of your property) has not sustained covered earthquake damage over the deductible amount of this policy, and despite our opinion you request additional testing of your property or that part of your property, then if additional testing is performed, you are solely responsible for the costs of performing the additional testing and of repairing the damage to your property that was caused by any additional destructive testing, unless the additional testing establishes the existence of covered earthquake damage that, either alone or combined with other covered earthquake damage, exceeds the deductible amount of this policy. EARTHQUAKE VICTIM ASSISTANCE In light of the policy deductible, policyholders generally will not receive payment for the total amount of the damage, and will be required to bear some portion of the financial costs of the earthquake themselves. As a result they may be looking to the Small Business Administration (SBA) for low-interest loans or to the Federal Emergency Management Agency (FEMA) for grants. In order to receive SBA and FEMA assistance, the insured will need documentation from the claim representative. Usually these agencies require a statement of loss or a denial letter. The SBA and FEMA have loan-submission deadlines, so the insureds will need this documentation as quickly as possible. It is important that the handling of the claim and final paperwork be timely. More information about FEMA and the SBA can be found at their Web sites at: http://www.fema.gov and http://www.sba.gov.

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LOSS SETTLEMENT MEDIATION Generally, loss settlement disputes involve questions concerning scope of damage, the proper repair method, and the actual cost of the repairs. Keep an open mind and solicit input from the insured’s contractor or representative to resolve discrepancies in scope, repair method, and pricing. Personal meetings can be helpful. California Earthquake Claims Mediation Program Disputes can often be efficiently resolved though the California Earthquake Claims Mediation Program with the California Department of Insurance (CDI) at (800) 927-4357. The CEA supports using the CDI mediation program to resolve issues of scope of loss, mandated building code upgrades, pre-existing damage, additional living expense, asbestos abatement, earthquake vs. aftershocks, hidden damages, and personal property valuation issues. (CDI form 526, EQMED 12/99) Another dispute resolution option is the appraisal provision in the policy. If CDI mediation does not resolve the dispute, the appraisal process is still available. Unlike loss settlement disputes, coverage disputes concerning the interpretations of policy coverage or policy language cannot be handled through the CDI mediation program or resolved in appraisal. Under CIC 10089.82, an insured may not be required to use the department' s mediation process. However, an insurer may not be required to use the department's mediation process. Neither the insurer nor the insured is required to accept an agreement proposed during the mediation. If the parties agree to a settlement agreement, the insured will have three business days to rescind the agreement. If the insured rescinds the agreement, it may not be admitted in evidence or disclosed unless the insured and all other parties to the agreement expressly agree to its disclosure. If the agreement is not rescinded by the insured, it is binding on the insured and the insurer, and acts as a release of all specific claims for damages known at the time of the mediation presented and agreed upon in the mediation conference. If counsel for the insured is present at the mediation conference and a settlement is agreed upon that is signed by the insured's counsel, the agreement is immediately binding on the insured and may not be rescinded. The costs of mediation (CIC 10089.79) shall be reasonable, and shall be borne by the insurer. The commissioner may set a fee not to exceed one thousand five hundred dollars ($1,500) for each homeowners' or earthquake coverage dispute mediated pursuant to this chapter, and seven hundred dollars ($700) for each automobile coverage dispute mediated pursuant to this chapter.

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CALIFORNIA FAIR CLAIMS SETTLEMENT PRACTICES Adjusters evaluating earthquake claims in California must ALSO be certified in Fair Claims Settlement Practices. This portion of this course is designed to satisfy the Fair Claims requirement.

FAIR CLAIMS TIME LINE RULES Insurers are routinely examined by the California Department of Insurance to test compliance with their claims practices and procedures, including conformance with the Fair Claims Settlement Practices Act. A large part of claims compliance is meeting mandated timelines. Following is a chart to help claims professionals understand the timelines under the California Fair Claims Settlement Law.

TIME LIMIT ACTION REQUIRED CODE Within 15 calendar days or sooner after receiving a notice of claim or legal action

Acknowledge receipt of the claim (unless paid) and begin any necessary investigations. Provide reasonable assistance and forms. Specify information claimant must provide for proof of claim.

2695.5

Within 15 calendar days or sooner of any client communication where a response is required

Reply to claimant (unless the claim is a notice of legal action).

2695.5

Within 21 calendar days or sooner of receipt of inquiry regarding a claim from the Dept of Insurance

Furnish DOI with a written response 2695.5

Every 30 days after a 30-day extension

Notify claimant of insurer’s inability (if any) to make a determination regarding acceptance or settlement.

2695.7

Within 30 days or sooner after settlement and provision of release

Insurer must tender settlement payment after affirmation of coverage

2695.7

Within 40 calendar days or sooner after receipt of a proof of claim

Accept or reject the claim, in whole or in part and affirm or deny liability unless fraud is involved.

2695.5

At least 60 days before expiration of the statute of limitations applicable to the claim

Insurer must notify the claimant of the expiration of the statute of limitations in writing.

2695.7

Annually, before Sept 1 Certify under penalty of perjury that all adjusters have read and understand fair claims regs, keep a copy in the adjuster claims manual and have clear instructions on procedures for compliance.

2695.6

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Note: To meet the DOI required Annual Fair Claims Certification you must read and understand the rules below, keep a copy of these rules, with claims procedures from your carrier, in your adjuster manual. Part of the certification process involves answering specific questions (using the exam that came with this course) correctly.

CALIFORNIA FAIR CLAIMS SETTLEMENT

CALIFORNIA CODE OF REGULATIONS, TITLE 10. CHAPTER 5 FAIR CLAIMS SETTLEMENT PRACTICES REGULATIONS (RH05044124 / RH05044134) Table of Contents Section 2695.1. Preamble Section 2695.2. Definitions Section 2695.3. File and Record Documentation Section 2695.4. Representation of Policy Provisions and Benefits Section 2695.5. Duties upon Receipt of Communications Section 2695.6. Training and Certification Section 2695.7. Standards for Prompt, Fair and Equitable Settlements Section 2695.8. Additional Standards Applicable to Automobile Insurance Section 2695.85. Auto Body Repair Consumer Bill of Rights Section 2695.9. Additional Standards Applicable to First Party Residential and Commercial Property Insurance Policies Section 2695.10. Additional Standards Applicable to Surety Insurance Section 2695.11. Additional Standards Applicable to Life and Disability Insurance Section 2695.12. Penalties Section 2695.13. Severability Section 2695.14. Compliance Date Section 2695.1. Preamble (a) Section 790.03(h) of the California Insurance Code enumerates sixteen claims settlement practices that, when either knowingly committed on a single occasion, or performed with such frequency as to indicate a general business practice, are considered to be unfair claims settlement practices and are, thus, prohibited by this section of the California Insurance Code. The Insurance Commissioner has promulgated these regulations in order to accomplish the following objectives: (1) To delineate certain minimum standards for the settlement of claims which, when violated knowingly on a single occasion or performed with such frequency as to indicate a general business practice shall constitute an unfair claims settlement practice within the meaning of Insurance Code Section 790.03(h); (2) To promote the good faith, prompt, efficient and equitable settlement of claims on a cost effective basis; (3) To discourage and monitor the presentation to insurers of false or fraudulent claims; and,

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(4) To encourage the prompt and thorough investigation of suspected fraudulent claims and ensure the prompt and comprehensive reporting of suspected fraudulent claims as required by Insurance Code Section 1872.4.

(b) These regulations are not meant to provide the exclusive definition of all unfair claims settlement practices. Other methods, act(s), or practices not specifically delineated in this set of regulations may also be unfair claims settlement practices and subject to California Insurance Code Section 790.03(h) and/or California Insurance Code Section 790.06. These regulations are applicable to the handling or settlement of all claims subject to Article 6.5 of Division 1, Part 2, Chapter 1 of the California Insurance Code, commencing with Section 790, except as specifically provided below:

(1) Workers’ compensation insurance; (2) Liability insurance for the professional malpractice of health care providers as defined in California Code of Civil Procedure Section 364(f)(1); (3) Self insured or self funded plans which are bona fide Employee Retirement Income Security Act ("ERISA") plans which are not also multiple employer welfare arrangements, to the extent that these ERISA plans are not covered by insurance; (4) Any other self funded or self insured plan, to the extent it is not covered by insurance, which is lawfully conducting business in this state.

(c) In recognition of both the unique relationship which exists under a surety bond between the surety, the obligee or beneficiary, and the principal, and the fact that the processing of surety claims is subject to the Unfair Practices Act, beginning with California Insurance Code Section 790, only sections 2695.1 through 2695.6, inclusive, section 2695.10, and sections 2695.12, 2695.13 and 2695.14, inclusive, shall apply to the handling or settlement of claims brought under surety bonds. (d) These regulations apply to home protection contracts and home protection companies defined in California Insurance Code Section 12740. (e) All licensees, as defined in these regulations, shall have thorough knowledge of the regulations contained in this subchapter. (f) Policy provisions relating to the investigation, processing and settlement of claims shall be consistent with or more favorable to the insured than the provisions of these regulations. (g) The California Insurance Code provides the commissioner with access to all records of an insurer and the power to examine the affairs of every person engaged in the business of insurance to determine if such person is engaged in any unfair or deceptive act or practice. California Insurance Code Section 790.03(h) requires all persons engaged in the business of insurance to effectuate prompt, fair and equitable settlements of claims and to otherwise process claims in a fair and reasonable manner. The Department considers the use of reliable information to be an essential element of the fair and equitable settlement of claims. The fact that information, data or statistical methods used or relied upon by a licensee to process or establish the value of insurance claims is obtained through a third party source shall not absolve the licensee of its legal responsibility

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to comply with these regulations or to effectuate prompt, fair and equitable settlements of claims. Failure of a licensee to provide the commissioner with requested information sufficient to examine the licensee’s claims handling practices may justify a finding that the licensee was in non-compliance with these regulations or other applicable insurance code provisions. Any and all information received pursuant to the Department’s request shall be given confidential treatment, as provided in California Insurance Code section 735.5 and California Government Code Section 11180 et seq. When processing or establishing the value of a claim, a licensee shall not be responsible for the accuracy of information provided by a governmental entity, unless the licensee has discovered or been notified of the inaccuracy and has continued to use the information. NOTE: Authority cited: Sections 790.034, 790.10, 1871.1, 12340 - 12417, inclusive, 12921 and 12926 of the California Insurance Code and Sections 11342.2 and 11152 of the California Government Code. Reference: Sections 790.03, 790.04, 735.5 and 12740 of the California Insurance Code, and Section 11180 et seq. of the California Government Code.

Section 2695.2. Definitions As used in these regulations: (a) "Beneficiary" means:

(1) for the purpose of life and disability claims, the party or parties entitled to receive the proceeds or benefits occurring under the policy in lieu of the insurer or, (2) for the purpose of surety claims, a person who is within the class of persons intended to benefit from the bond;

(b) "Calendar days" means each and every day including Saturdays, Sundays, Federal and California State Holidays, but if the last day for performance of any act required by these regulations falls on a Saturday, Sunday, Federal or State Holiday, then the period of time to perform the act is extended to and including the next calendar day which is not a Saturday, Sunday, or Federal or State holiday; (c) "Claimant" means a first or third party claimant as defined in these regulations, any person who asserts a right of recovery under a surety bond, an attorney, any person authorized by operation of law to represent the claimant, or any of the following persons properly designated by the claimant in the manner specified in subsection 2695.5(c): an insurance adjuster, a public adjuster, or any member of the claimant's family. (d) "Claims agent" means any person employed or authorized by an insurer, to conduct an investigation of a claim on behalf of an insurer or a person who is licensed by the Commissioner to conduct investigations of claims on behalf of an insurer. The term "claims agent", however, shall not include the following:

1) an attorney retained by an insurer to defend a claim brought against an insured; or, 2) persons hired by an insurer solely to provide valuation as to the subject matter of a claim.

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(e) "Extraordinary circumstances" means circumstances outside of the control of the licensee which severely and materially affect the licensee's ability to conduct normal business operations; (f) "First party claimant" means any person asserting a right under an insurance policy as a named insured, other insured or beneficiary under the terms of that insurance policy, and including any person seeking recovery of uninsured motorist benefits; (g) "Gross settlement amount" means the amount tendered plus the amount deducted as provided in the policy in the settlement of an automobile total loss claim; (h) "Insurance agent" means:

(1) the term "insurance agent" as used in section 31 of the California Insurance Code; or, (2) the term "life agent" as used in section 32 of the California Insurance Code; or, (3) any person who has authority or responsibility to notify an insurer of a claim upon receipt of a notice of claim by a claimant; or, (4) an underwritten title company.

(i) "Insurer" means a person licensed to issue or that issues an insurance policy or surety bond in this state, or that otherwise transacts the business of insurance in the state, including reciprocal and interinsurance exchanges, fraternal benefit societies, stock and mutual insurance companies, risk retention groups, California county mutual fire insurance companies, grants and annuities societies, entities holding certificates of exemption, non-profit hospital service plans, multiple employer welfare arrangements holding certificates of compliance pursuant to Article 4.7 of the California Insurance Code, and motor clubs, to the extent that they transact the business of insurance in the State. The term "insurer" for purposes of these regulations includes non-admitted insurers, the California FAIR Plan, the California Earthquake Authority, those persons licensed to issue or that issue an insurance policy pursuant to an assignment by the California Automobile Assigned Risk Plan, home protection companies as defined under California Insurance Code Section 12740, and any other entity subject to California Insurance Code Section 790.03(h). The term "insurer" shall not include insurance agents and brokers, surplus line brokers and special lines surplus line brokers. (j) "Insurance policy" or "policy" means the written instrument in which any certificate of group insurance, contract of insurance, or non-profit hospital service plan is set forth. For the purposes of these regulations the terms insurance policy or policy do not include "surety bond" or "bond". For the purposes of these regulations the term insurance policy or policy includes a home protection contract or any written instrument in which any certificate of insurance or contract of insurance is set forth that is issued pursuant to the California Automobile Assigned Risk Plan, the California Earthquake Authority, or the California FAIR Plan; (k) "Investigation" means all activities of an insurer or its claims agent related to the determination of coverage, liabilities, or nature and extent of loss or damage for which benefits

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are afforded by an insurance policy, obligations or duties under a bond, and other obligations or duties arising from an insurance policy or bond. (l) "Knowingly committed" means performed with actual, implied or constructive knowledge, including, but not limited to, that which is implied by operation of law. (m) "Licensee" means any person that holds a license or Certificate of Authority from the Insurance Commissioner, or any other entity for whom the Insurance Commissioner's consent is required before transacting business in the State of California or with California residents. The term "licensee" for purpose of these regulations does not include an underwritten title company if the underwriting agreement between the underwritten title company and the title insurer affirmatively states that the underwritten title company is not authorized to handle policy claims on behalf of the title insurer. (n) "Notice of claim" means any written or oral notification to an insurer or its agent that reasonably apprises the insurer that the claimant wishes to make a claim against a policy or bond issued by the insurer and that a condition giving rise to the insurer's obligations under that policy or bond may have arisen. For purposes of these regulations the term "notice of claim" shall not include any written or oral communication provided by an insured or principal solely for informational or incident reporting purposes. (o) "Notice of legal action" means notice of an action commenced against the insurer with respect to a claim, or notice of action against the insured received by the insurer, or notice of action against the principal under a bond, and includes any arbitration proceeding; (p) "Obligee" means the person named as obligee in a bond; (q) "Person" means any individual, association, organization, partnership, business, trust, corporation or other entity; (r) "Principal" means the person whose debt or other obligation is secured or guaranteed by a bond and who has the primary duty to pay the debt or discharge the obligation; (s) "Proof of claim" means any evidence or documentation in the possession of the insurer, whether as a result of its having been submitted by the claimant or obtained by the insurer in the course of its investigation, that provides any evidence of the claim and that reasonably supports the magnitude or the amount of the claimed loss. (t) "Remedial measures" means those actions taken by an insurer to correct or cure any error or omission in the handling of claims on the part of its insurance agent as defined in subsection 2695.2(h), including, but not limited to:

(1) written notice to the insurance agent that he/she is in violation of the regulations contained in this subchapter; (2) transmission of a copy of the regulations contained in this subchapter and instructions for their implementation; (3) reporting the error or omission in the handling of claims by the insurance agent to the Department of Insurance;

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(u) "Replacement crash part" means a replacement for any of the nonmechanical sheet metal or plastic parts which generally constitute the exterior of a motor vehicle, including inner and outer panels; (v) "Single act" for the purpose of determining any penalty pursuant to California Insurance Code Section 790.035 is any commission or omission which in and of itself constitutes a violation of California Insurance Code Section 790.03 or this subchapter; (w) "Surety bond" or "bond" means the written instrument in which a contract of surety insurance, as defined in California Insurance Code Section 105, is set forth; (x) "Third party claimant" means any person asserting a claim against any person or the interests insured under an insurance policy; (y) "Willful" or "Willfully" when applied to the intent with which an act is done or omitted means simply a purpose or willingness to commit the act, or make the omission referred to in the California Insurance Code or this subchapter. It does not require any intent to violate law, or to injure another, or to acquire any advantage; NOTE: Authority cited: Sections 132(d), 790.10, 12340 - 12417, inclusive, 12921 and 12926 of the California Insurance Code, Section 995.130 of the Code of Civil Procedure and Sections 11342.2 and 11152 of the California Government Code. Reference: Sections 31, 32, 101, 106, 675.5(b), (c) and (d), 676.6, 790.03(h) and 10082 of the California Insurance Code. Section 2695.3. File and Record Documentation (a) Every licensee's claim files shall be subject to examination by the Commissioner or by his or her duly appointed designees. These files shall contain all documents, notes and work papers (including copies of all correspondence) which reasonably pertain to each claim in such detail that pertinent events and the dates of the events can be reconstructed and the licensee's actions pertaining to the claim can be determined; (b) To assist in such examination all insurers shall:

(1) maintain claim data that are accessible, legible and retrievable for examination so that an insurer shall be able to provide the claim number, line of coverage, date of loss and date of payment of the claim, date of acceptance, denial or date closed without payment. This data must be available for all open and closed files for the current year and the four preceding years; (2) record in the file the date the licensee received, date(s) the licensee processed and date the licensee transmitted or mailed every material and relevant document in the file; and (3) maintain hard copy files or maintain claim files that are accessible, legible and capable of duplication to hard copy; files shall be maintained for the current year and the preceding four years.

(c) The requirements of this section shall be satisfied where the licensee provides documentation evidencing inability to obtain data, nonexistence of data, or difficulty in obtaining clear documentary support for actions due to catastrophic losses, or other unusual

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circumstances providing the licensee establishes to the satisfaction of the Commissioner that the circumstances alleged by the licensee do exist and have materially affected the licensee's ability to comply with this regulation. Any licensee that alleges an inability to comply with this section shall establish and submit to the Commissioner a plan for file and record documentation to be used by such licensee while the circumstances alleged to preclude compliance with this subsection continue to exist. NOTE: Authority cited: Sections 790.04, 790.10, 12340 - 12417, inclusive, 12921 and 12926 of the California Insurance Code and Sections 11342.2 and 11152 of the California Government Code. Reference: Section 790.03(h) of the California Insurance Code. Section 2695.4. Representation of Policy Provisions and Benefits (a) Every insurer shall disclose to a first party claimant or beneficiary, all benefits, coverage, time limits or other provisions of any insurance policy issued by that insurer that may apply to the claim presented by the claimant. When additional benefits might reasonably be payable under an insured's policy upon receipt of additional proofs of claim, the insurer shall immediately communicate this fact to the insured and cooperate with and assist the insured in determining the extent of the insurer's additional liability. (b) No insurer shall misrepresent or conceal benefits, coverages, time limits or other provisions of the bond which may apply to the claim presented under a surety bond. (c) No insurer shall deny a claim on the basis of the claimant's failure to exhibit property, unless there is documentation in the file (1) of reasonable demand by the insurer, and unfounded refusal by the claimant, to exhibit property, or (2) of the breach of any policy provision providing for the exhibition of property. (d) Except where a time limit is specified in the policy, no insurer shall require a first party claimant under a policy to give notification of a claim or proof of claim within a specified time. (e) No insurer shall:

(1) request that a claimant sign a release that extends beyond the subject matter which gave rise to the claim payment unless, prior to execution of the release, the legal effect of the release is disclosed and fully explained by the insurer to the claimant in writing. For purposes of this subsection, an insurer shall not be required to provide the above explanation or disclosure to a claimant who is represented by an attorney at the time the release is presented for signature; (2) be precluded from including in any release a provision requiring the claimant to waive the provisions of California Civil Code Section 1542, provided that, prior to execution of the release, the legal effect of the release is disclosed and fully explained by the insurer to the claimant in writing. For purposes of this subsection, an insurer shall not be required to provide the above explanation or disclosure to a claimant who is represented by an attorney at the time the release is presented for signature.

(f) No insurer shall issue checks or drafts in partial settlement of a loss or claim that contain or are accompanied by language releasing the insurer, the insured, or the principal on a surety bond from total liability unless the policy or bond limit has been paid, or there has been a

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compromise settlement agreed to by the claimant and the insurer as to coverage and amount payable under the insurance policy or bond. (g) No insurer shall require a first party claimant or beneficiary to submit duplicative proofs of claim where coverage may exist under more than one policy issued by that insurer. NOTE: Authority cited: Sections 790.10, 12340 - 12417, inclusive, 12921 and 12926 of the California Insurance Code and Sections 11342.2 and 11152 of the California Government Code. Reference: Section 790.03(h)(1), (3) and (4) of the California Insurance Code. Section 2695.5. Duties upon Receipt of Communications (a) Upon receiving any written or oral inquiry from the Department of Insurance concerning a claim, every licensee shall immediately, but in no event more than twenty one (21) calendar days of receipt of that inquiry, furnish the Department of Insurance with a complete written response based on the facts as then known by the licensee. A complete written response addresses all issues raised by the Department of Insurance in its inquiry and includes copies of any documentation and claim files requested. This section is not intended to permit delay in responding to inquiries by Department personnel conducting a scheduled examination on the insurer's premises. (b) Upon receiving any communication from a claimant, regarding a claim, that reasonably suggests that a response is expected, every licensee shall immediately, but in no event more than fifteen (15) calendar days after receipt of that communication, furnish the claimant with a complete response based on the facts as then known by the licensee. This subsection shall not apply to require communication with a claimant subsequent to receipt by the licensee of a notice of legal action by that claimant. (c) The designation specified in subsection 2695.2(c) shall be in writing, signed and dated by the claimant, and shall indicate that the designated person is authorized to handle the claim. All designations shall be transmitted to the insurer and shall be valid from the date of execution until the claim is settled or the designation is revoked. A designation may be revoked by a writing transmitted to the insurer, signed and dated by the claimant, indicating that the designation is to be revoked and the effective date of the revocation. (d) Upon receiving notice of claim, every licensee or claims agent shall immediately transmit notice of claim to the insurer. (e) Upon receiving notice of claim, every insurer shall immediately, but in no event more than fifteen (15) calendar days later, do the following unless the notice of claim received is a notice of legal action:

(1) acknowledge receipt of such notice to the claimant unless payment is made within that period of time. If the acknowledgment is not in writing, a notation of acknowledgment shall be made in the insurer's claim file and dated. Failure of an insurance agent or claims agent to promptly transmit notice of claim to the insurer shall be imputed to the insurer except where the subject policy was issued pursuant to the California Automobile Assigned Risk Program.

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(2) provide to the claimant necessary forms, instructions, and reasonable assistance, including but not limited to, specifying the information the claimant must provide for proof of claim; (3) begin any necessary investigation of the claim.

(f) An insurer may not require that the notice of claim under a policy be provided in writing unless such requirement is specified in the insurance policy or an endorsement thereto. NOTE: Authority cited: Sections 790.04, 790.10, 12340 - 12417, inclusive, 12921, 12926 of the California Insurance Code and Sections 11342.2 and 11152 of the California Government Code. Reference: Sections 790.03(h)(2) and (3) of the California Insurance Code. Section 2695.6 Training and Certification (a) Every insurer shall adopt and communicate to all its claims agents written standards for the prompt investigation and processing of claims, and shall do so within ninety (90) days after the effective date of these regulations or any revisions thereto. (b) All licensees shall provide thorough and adequate training regarding these regulations to all their claims agents. Licensees shall certify that their claims agents have been trained regarding these regulations and any revisions thereto. However, licensees need not provide such training or certification to duly licensed attorneys. A licensee shall demonstrate compliance with this subsection [Fair Claims Settlement Practices] by the following methods:

(1) where the licensee is an individual, the licensee shall annually certify in writing under penalty of perjury that he or she has read and understands these regulations and any and all amendments thereto; (2) where the licensee is an entity, the annual written certification shall be executed, under penalty of perjury, by a principal of the entity as follows:

(A) that the licensee's claims adjusting manual contains a copy of these regulations and all amendments thereto; and, (B) that clear written instructions regarding the procedures to be followed to effect proper compliance with this subchapter were provided to all its claims agents; (3) where the licensee retains insurance adjusters as defined in California Insurance Code Section 14021, the licensee must provide training to the insurance adjusters regarding these regulations and annually certify, in a declaration executed under penalty of perjury, that such training is provided. Alternately, the insurance adjuster may annually certify in writing, under penalty of perjury, that he or she has read and understands these regulations and all amendments thereto or has successfully completed a training seminar which explains these regulations; (4) a copy of the certification required by subsections 2695.6(b) (1), (2) or (3) shall be maintained at all times at the principal place of business of the licensee, to be provided to the Commissioner only upon request.

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(5) the annual certification required by this subsection shall be completed on or before September 1 of each calendar year. NOTE: Authority cited: Sections 790.10, 12340 - 12417, inclusive, 12921 and 12926 of the California Insurance Code and Sections 11342.2 and 11152 of the California Government Code. Reference: Section 790.03(h)(3) of the California Insurance Code. Section 2695.7. Standards for Prompt, Fair and Equitable Settlements (a) No insurer shall discriminate in its claims settlement practices based upon the claimant's age, race, gender, income, religion, language, sexual orientation, ancestry, national origin, or physical disability, or upon the territory of the property or person insured. (b) Upon receiving proof of claim, every insurer, except as specified in subsection 2695.7(b)(4) below, shall immediately, but in no event more than forty (40) calendar days later, accept or deny the claim, in whole or in part. The amounts accepted or denied shall be clearly documented in the claim file unless the claim has been denied in its entirety.

(1) Where an insurer denies or rejects a first party claim, in whole or in part, it shall do so in writing and shall provide to the claimant a statement listing all bases for such rejection or denial and the factual and legal bases for each reason given for such rejection or denial which is then within the insurer's knowledge. Where an insurer's denial of a first party claim, in whole or in part, is based on a specific statute, applicable law or policy provision, condition or exclusion, the written denial shall include reference thereto and provide an explanation of the application of the statute, applicable law or provision, condition or exclusion to the claim. Every insurer that denies or rejects a third party claim, in whole or in part, or disputes liability or damages shall do so in writing. (2) Subject to the provisions of subsection 2695.7(k), nothing contained in subsection 2695.7(b)(1) shall require an insurer to disclose any information that could reasonably be expected to alert a claimant to the fact that the subject claim is being investigated as a suspected fraudulent claim. (3) Written notification pursuant to this subsection shall include a statement that, if the claimant believes all or part of the claim has been wrongfully denied or rejected, he or she may have the matter reviewed by the California Department of Insurance, and shall include the address and telephone number of the unit of the Department which reviews claims practices. (4) The time frame in subsection 2695.7(b) shall not apply to claims arising from policies of disability insurance subject to Section 10123.13 of the California Insurance Code, disability income insurance subject to Section 10111.2 of the California Insurance Code or mortgage guaranty insurance subject to Section 12640.09(a) of the California Insurance Code, and shall not apply to automobile repair bills arising from policies of automobile collision and comprehensive insurance subject to Section 560 of the California Insurance Code. All other provisions of subsections 2695.7(b)(1), (2), and (3) are applicable.

(c)(1) If more time is required than is allotted in subsection 2695.7(b) to determine whether a claim should be accepted and/or denied in whole or in part, every insurer shall provide the claimant, within the time frame specified in subsection 2695.7(b), with written notice of the need

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for additional time. This written notice shall specify any additional information the insurer requires in order to make a determination and state any continuing reasons for the insurer's inability to make a determination. Thereafter, the written notice shall be provided every thirty (30) calendar days until a determination is made or notice of legal action is served. If the determination cannot be made until some future event occurs, then the insurer shall comply with this continuing notice requirement by advising the claimant of the situation and providing an estimate as to when the determination can be made. Subject to the provisions of subsection 2695.7(k), nothing contained in subsection 2695.7(c)(1) shall require an insurer to disclose any information that could reasonably be expected to alert a claimant to the fact that the claim is being investigated as a possible suspected fraudulent claim. (d) Every insurer shall conduct and diligently pursue a thorough, fair and objective investigation and shall not persist in seeking information not reasonably required for or material to the resolution of a claim dispute. (e) No insurer shall delay or deny settlement of a first party claim on the basis that responsibility for payment should be assumed by others, except as may otherwise be provided by policy provisions, statutes or regulations, including those pertaining to coordination of benefits. (f) Except where a claim has been settled by payment, every insurer shall provide written notice of any statute of limitation or other time period requirement upon which the insurer may rely to deny a claim. Such notice shall be given to the claimant not less than sixty (60) days prior to the expiration date; except, if notice of claim is first received by the insurer within that sixty days, then notice of the expiration date must be given to the claimant immediately. With respect to a first party claimant in a matter involving an uninsured motorist, this notice shall be given at least thirty (30) days prior to the expiration date; except, if notice of claim is first received by the insurer within that thirty days, then notice of the expiration date must be given to the claimant immediately. This subsection shall not apply to a claimant represented by counsel on the claim matter. (g) No insurer shall attempt to settle a claim by making a settlement offer that is unreasonably low. The Commissioner shall consider any admissible evidence offered regarding the following factors in determining whether or not a settlement offer is unreasonably low:

(1) the extent to which the insurer considered evidence submitted by the claimant to support the value of the claim; (2) the extent to which the insurer considered legal authority or evidence made known to it or reasonably available; (3) the extent to which the insurer considered the advice of its claims adjuster as to the amount of damages; (4) the extent to which the insurer considered the advice of its counsel that there was a substantial likelihood of recovery in excess of policy limits; (5) the procedures used by the insurer in determining the dollar amount of property damage; (6) the extent to which the insurer considered the probable liability of the insured and the likely jury verdict or other final determination of the matter;

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(7) any other credible evidence presented to the Commissioner that demonstrates that (i) any amount offered by the insurer in settlement of a first-party claim to an insured not represented by counsel, or (ii) the final amount offered in settlement of a first-party claim to an insured who is represented by counsel or (iii) the final amount offered in settlement of a third party claim by the insurer is below the amount that a reasonable person with knowledge of the facts and circumstances would have offered in settlement of the claim.

(h) Upon acceptance of the claim in whole or in part and, when necessary, upon receipt of a properly executed release, every insurer, except as specified in subsection 2695.7(h)(1) and (2) below, shall immediately, but in no event more than thirty (30) calendar days later, tender payment or otherwise take action to perform its claim obligation. The amount of the claim to be tendered is the amount that has been accepted by the insurer as specified in subsection 2695.7(b). In claims where multiple coverage is involved, and where the payee is known, amounts that have been accepted by the insurer shall be paid immediately, but in no event more than thirty (30) calendar days, if payment would terminate the insurer's known liability under that individual coverage, unless impairment of the insured's interests would result. The time frames specified in this subsection shall not apply where the policy provides for a waiting period after acceptance of claim and before payment of benefits.

(1) The time frame specified in subsection 2695.7(h) shall not apply to claims arising from policies of disability insurance subject to Section 10123.13 of the California Insurance Code, disability income insurance subject to Section 10111.2 of the California Insurance Code, or of mortgage guaranty insurance subject to Section 12640.09(a) of the California Insurance Code, and shall not apply to automobile repair bills subject to Section 560 of the California Insurance Code. All other provisions of Section 2695.7(h) are applicable. (2) Any insurer issuing a title insurance policy shall either tender payment pursuant to subsection 2695.7(h) or take action to resolve the problem which gave rise to the claim immediately upon, but in no event more than thirty (30) calendar days after, acceptance of the claim.

(i) No insurer shall inform a claimant that his or her rights may be impaired if a form or release is not completed within a specified time period unless the information is given for the purpose of notifying the claimant of any applicable statute of limitations or policy provision or the time limitation within which claims are required to be brought against state or local entities. (j) No insurer shall request or require an insured to submit to a polygraph examination unless authorized under the applicable insurance contract and state law. (k) Subject to the provisions of subsection 2695.7(c), where there is a reasonable basis, supported by specific information available for review by the California Department of Insurance, for the belief that the claimant has submitted or caused to be submitted to an insurer a suspected false or fraudulent claim as specified in California Penal Code Section 550 or California Insurance Code Section 1871.4(a), the number of calendar days specified in subsection 2695.7(b) shall be:

(1) increased to eighty (80) calendar days; or, (2) suspended until otherwise ordered by the Commissioner, provided the insurer has complied with California Insurance Code Section 1872.4 and the insurer can demonstrate to

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the Commissioner that it has made a diligent attempt to determine whether the subject claim is false or fraudulent within the eighty day period specified by subsection 2695.7(k)(1).

(l) No insurer shall deny a claim based upon information obtained in a telephone conversation or personal interview with any source unless the telephone conversation or personal interview is documented in the claim file pursuant to the provisions of Section 2695.3. (m) No insurer shall make a payment to a provider, pursuant to a policy provision to pay medical benefits, and thereafter seek recovery or set-off from the insured on the basis that the amount was excessive and/or the services were unnecessary, except in the event of a proven false or fraudulent claim, subject to the provisions of Section 10123.145 of the California Insurance Code. (n) Every insurer requesting a medical examination for the purpose of determining liability under a policy provision shall do so only when the insurer has a good faith belief that such an examination is reasonably necessary. (o) No insurer shall require that a claimant withdraw, rescind or refrain from submitting any complaint to the California Department of Insurance regarding the handling of a claim or any other matter complained of as a condition precedent to the settlement of any claim. (p) Every insurer shall provide written notification to a first party claimant as to whether the insurer intends to pursue subrogation of the claim. Where an insurer elects not to pursue subrogation, or discontinues pursuit of subrogation, it shall include in its notification a statement that any recovery to be pursued is the responsibility of the first party claimant. This subsection does not require notification if the deductible is waived, the coverage under which the claim is paid requires no deductible to be paid, the loss sustained does not exceed the applicable deductible, or there is no legal basis for subrogation. (q) Every insurer that makes a subrogation demand shall include in every demand the first party claimant's deductible. Every insurer shall share subrogation recoveries on a proportionate basis with the first party claimant, unless the first party claimant has otherwise recovered the whole deductible amount. No insurer shall deduct legal or other expenses from the recovery of the deductible unless the insurer has retained an outside attorney or collection agency to collect that recovery. The deduction may only be for a pro rata share of the allocated loss adjustment expense. This subsection shall not apply when multiple policies have been issued to the insured(s) covering the same loss and the language of these contracts prescribe alternative subrogation rights. Further, this subsection shall not apply to disability and health insurance as defined in California Insurance Code Section 106. NOTE: Authority cited: Sections 553, 554, 790.03(h)(5), 790.03(h)(12), 790.10, 1861.03(a), 10350.10, 10111.2, 11580.2(k), 12340 - 12417, inclusive, 12921 and 12926 of the California Insurance Code and Sections 11342.2 and 11152 of the California Government Code; Egan v. Mutual of Omaha Insurance Company (1979) 24 Cal.3d 809 [169 Cal.Rptr. 691]; KPFF, Inc. v. California Union Insurance Company (1997) 56 Cal.App.4th 963 [66 Cal.Rptr.2d 36] (certified for partial publication); Betts v. Allstate Ins. Co. (1984) 154 Cal.App.3d 688 [201 Cal.Rptr. 528]. Reference: Section 790.03(h) (2), (3), (4), (5) (13) and (15), and 1872.4 of the California Insurance Code, Section 6149.5 of the California Business and Professions Code and California; and Penal Code Section 550.

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Section 2695.8. Additional Standards Applicable to Automobile Insurance (a) This section enumerates standards which apply to adjustment and settlement of automobile insurance claims. (1) the words "automobile" and "vehicle" are used synonymously. (b) In evaluating automobile total loss claims the following standards shall apply:

(1) The insurer may elect a cash settlement that shall be based upon the actual cost of a “comparable automobile” less any deductible provided in the policy. This cash settlement amount shall include all applicable taxes and one-time fees incident to transfer of evidence of ownership of a comparable automobile. This amount shall also include the license fee and other annual fees to be computed based upon the remaining term of the loss vehicle’s current registration. This procedure shall apply whether or not a replacement automobile is purchased.

(A) If the insured chooses to retain the loss vehicle or if the third party claimant retains the loss vehicle, the cash settlement amount shall include the sales tax associated with the cost of a comparable automobile, discounted by the amount of sales tax attributed to the salvage value of the loss vehicle. The cash settlement amount shall also include all fees incident to transfer of the claimant’s vehicle to salvage status. The salvage value may be deducted from the settlement amount and shall be determined by the amount for which a salvage pool or a licensed salvage dealer, wholesale motor vehicle auction or dismantler will purchase the salvage. If requested by the claimant, the insurer shall provide the name, address and telephone number of the salvage dealer, salvage pool, motor vehicle auction or dismantler who will purchase the salvage. The insurer shall disclose in writing to the claimant that notice of the salvage retention by the claimant must be provided to the Department of Motor Vehicles and that this notice may affect the loss vehicle’s future resale and/or insured value. The disclosure must also inform the claimant of his or her right to seek a refund of the unused license fees from the Department of Motor Vehicles.

(2) A “comparable automobile” is one of like kind and quality, made by the same manufacturer, of the same or newer model year, of the same model type, of a similar body type, with options and mileage similar to the insured vehicle. Newer model year automobiles may not be used as comparable automobiles unless there are not sufficient comparable automobiles of the same model year to make a determination as set forth in Section 2695.8(b)(3), below. In determining the cost of a comparable automobile, the insurer may use either the asking price or actual sale price of that automobile. Any differences between the comparable automobile and the insured vehicle shall be permitted only if the insurer fairly adjusts for such differences. Any adjustments from the cost of a comparable automobile must be discernible, measurable, itemized, and specified as well as appropriate in dollar amount and so documented in the claim file. Deductions taken from the cost of a comparable automobile that cannot be supported shall not be used. The actual cost of a comparable automobile shall not include any deduction for the condition of a loss vehicle unless the documented condition of the loss vehicle is below average for that particular year, make and model of vehicle. This subsection shall not preclude deduction for prior and/or unrelated damage to the loss vehicle. A comparable automobile must have been available

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for retail purchase by the general public in the local market area within ninety (90) calendar days of the final settlement offer. The comparable automobiles used to calculate the cost shall be identified by the vehicle identification number (VIN), the stock or order number of the vehicle from a licensed dealer, or the license plate number of that comparable vehicle if this information is available. The identification shall also include the telephone number (including area code) or street address of the seller of the comparable automobile. (3) Notwithstanding subsection (2), above, upon approval by the Department of Insurance, an insurer may use private sales data from the Department of Motor Vehicles, or other approved sources, which does not contain the seller’s telephone number or street address. Approval by the Department of Insurance shall be contingent on the Department’s determination that reasonable steps have been taken to limit the use of private sales data that may be inaccurately reported to the Department of Motor Vehicles or other approved sources. (4) The insurer shall take reasonable steps to verify that the determination of the cost of a comparable vehicle is accurate and representative of the market value of a comparable automobile in the local market area. Upon its request, the department shall have access to all records, data, computer programs, or any other information used by the insurer or any other source to determine market value. The cost of a comparable automobile shall be determined as follows and, once determined, shall be fully itemized and explained in writing for the claimant at the time the settlement offer is made:

(A) when comparable automobiles are available or were available in the local market area in the last 90 days, the average cost of two or more such comparable automobiles; or, (B) when comparable automobiles are not available or were not available in the local market area in the last 90 days, the average of two or more quotations from two or more licensed dealers in the local market area; or, (C) the cost of a comparable automobile as determined by a computerized automobile valuation service that produces statistically valid fair market values within the local market area; or (D) if it is not possible to determine the cost of a comparable automobile by using one of the methods described in subsections (b)(3)(A), (b)(3)(B) and (b)(3)(C) of this section, the cost of a comparable automobile shall otherwise be supported by documentation and fully explained to the claimant. Any adjustments to the cost of a comparable automobile shall be discernible, measurable, itemized, and specified as well as appropriate in dollar amount and so documented in the claims file. Deductions taken from the cost of a comparable automobile that cannot be supported shall not be used.

(5) In first party automobile total loss claims, the insurer may elect to offer a replacement automobile which is a specified comparable automobile available to the insured with all applicable taxes, license fees and other fees incident to transfer of evidence of ownership of the automobile paid by the insurer at no cost other than any deductible provided in the policy. The offer and any rejection thereof must be documented in the insurer's claim file. A replacement automobile must be in as good or better overall condition than the insured vehicle and available for inspection within a reasonable distance of the insured's residence.

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(6) Subsection 2695.8(b) applies to the evaluation of third party automobile total loss claims, but does not change existing law with respect to the obligations of an insurer in settling such claims with a third party.

(c) In first party automobile total loss claims, every insurer shall provide notice to the insured at the time the settlement payment is sent or final settlement offer is made that if notified by the insured within thirty-five (35) calendar days after the insured receives the claim payment or final settlement offer that he or she cannot purchase a comparable automobile for the gross settlement amount, the insurer will reopen its claim file. If subsequently notified by the insured the insurer shall reopen its claim file and utilize the following procedures:

(1) The insurer shall locate a comparable automobile for the gross settlement amount determined by the company at the time of settlement and shall provide the insured with the information required in (c)(4), below, or offer a replacement vehicle in accordance with section 2695.8(b)(4). Any such vehicle must be available in the local market area; or, (2) The insurer shall either pay the insured the difference between the amount of the gross settlement and the cost of the comparable automobile which the insured has located, or negotiate and purchase this vehicle for the insured; or, (3) The insurer shall invoke the appraisal provision of the insurance policy. (4) No insurer is required to take action under this subsection if its documentation to the insured at the time of final settlement offer included written notification of the identity of a specified comparable automobile which was available for purchase at the time of final settlement offer for the gross settlement amount determined by the insurer. The documentation shall include the telephone number (including area code) or street address of the seller of the comparable automobile and:

(A) the vehicle identification number (VIN) or, (B) the stock or order number of the vehicle from a licensed dealer, or (C) the license plate number of such comparable vehicle.

(d) No insurer shall, where liability and damages are reasonably clear, recommend that the third party claimant make a claim under his or her own policy to avoid paying the claim under the policy issued by that insurer. (e) No insurer shall:

(1) require that an automobile be repaired at a specific repair shop; or, (2) suggest or recommend that an automobile be repaired at a specific repair shop, unless all of the requirements set forth in California Insurance Code Section 758.5 have been met [prominently disclose such requirement at time the insurance is applied for]. (3) require a claimant to travel an unreasonable distance either to inspect a replacement automobile, to conduct an inspection of the vehicle, to obtain a repair estimate or to have the automobile repaired at a specific repair shop.

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(f) If partial losses are settled on the basis of a written estimate prepared by or for the insurer, the insurer shall supply the claimant with a copy of the estimate upon which the settlement is based. The estimate prepared by or for the insurer shall be of an amount which will allow for repairs to be made in a workmanlike manner. If the claimant subsequently contends, based upon a written estimate which he or she obtains, that necessary repairs will exceed the written estimate prepared by or for the insurer, the insurer shall:

(1) pay the difference between the written estimate and a higher estimate obtained by the claimant; or, (2) if requested by the claimant, promptly provide the claimant with the name of at least one repair shop that will make the repairs for the amount of the insurer’s written estimate. The insurer shall cause the damaged vehicle to be restored to its condition prior to the loss at no additional cost to the claimant other than as stated in the policy or as otherwise allowed by law. The insurer shall maintain documentation of all such communications; or, (3) reasonably adjust any written estimates prepared by the repair shop of the claimant's choice and provide a copy of the adjusted estimate to the claimant.

(g) No insurer shall require the use of non-original equipment manufacture replacement crash parts in the repair of an automobile unless:

(1) the parts are at least equal to the original equipment manufacturer parts in terms of kind, quality, safety, fit, and performance; (2) insurers specifying the use of non-original equipment manufacturer replacement crash parts shall pay the cost of any modifications to the parts which may become necessary to effect the repair; and, (3) insurers specifying the use of non-original equipment manufacture replacement crash parts warrant that such parts are of like kind, quality, safety, fit, and performance as original equipment manufacturer replacement crash parts; and, (4) all original and non-original manufacture replacement crash parts, manufactured after the effective date of this subchapter, when supplied by repair shops shall carry sufficient permanent, non-removable identification so as to identify the manufacturer. Such identification shall be accessible to the greatest extent possible after installation; and, (5) the use of non-original equipment manufacturer replacement crash parts is disclosed in accordance with section 9875 of the California Business and Professions Code.

(h) No insurer shall require an insured or claimant to supply parts for replacement. (i) When the amount claimed is adjusted because of betterment or depreciation, all justification shall be contained in the claim file. Any adjustments shall be discernable, measurable, itemized, and specified as to dollar amount, and shall accurately reflect the value of the betterment or depreciation. This subsection shall not preclude deduction for prior and/or unrelated damage to the loss vehicle. The basis for any adjustment shall be fully explained to the claimant in writing and shall:

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(1) reflect a measurable difference in market value attributable to the condition and age of the vehicle, and (2) apply only to parts normally subject to repair and replacement during the useful life of the vehicle such as, but not limited to, tires, batteries, et cetera.

(j) In a first party partial loss claim, the expense of labor necessary to repair or replace the damage is not subject to depreciation or betterment unless the insurance contract contains a clear and unambiguous provision permitting the depreciation of the expense of labor. (k) After a covered loss under a policy of automobile collision coverage or automobile physical damage coverage as defined in California Insurance Code Section 660, where towing and storage are reasonably necessary to protect the vehicle from further loss, the insurer shall pay reasonable towing and storage charges incurred by the claimant. The insurer shall provide reasonable notice to the claimant before terminating payment for storage charges so that the claimant has time to remove the vehicle from storage. This subsection shall also apply to a third party claim filed under automobile liability coverage as defined in California Insurance Code section 660, however, payment to a third party claimant may be prorated based upon the comparative fault of the parties. NOTE: Authority cited: Sections 790.10, 12921 and 12926 of the California Insurance Code, Section 3333 of the California Civil Code and Sections 11342.2 and 11152 of the California Government Code. Reference: Sections 758.5, 790.03(c) and 790.03(h)(3) of the California Insurance Code and Section 9875 of the California Business and Professions Code. Section 2695.85. Auto Body Repair Consumer Bill of Rights (a) Every insurer that issues automobile liability or collision insurance policies shall provide the named insured(s) with an Auto Body Repair Consumer Bill of Rights either at the time of application for an automobile insurance policy, at the time a policy is issued, or following an accident or loss that is reported to the insurer. If the insurer provides the insured with an electronic copy of a policy, the bill of rights may also be transmitted electronically. If the insurer provides the bill of rights following an accident or loss, the insurer shall also provide the bill of rights to the particular insured filing the insurance claim. If the insurer provides the bill of rights at the time of application or policy issuance, all named insureds that have not previously received the bill of rights shall be provided with a copy upon renewal of the policy. (b) The requirements set forth in subsection 2695.85(a), above, shall apply to all automobile liability and collision insurance policies issued in California including commercial automobile, private passenger automobile, and motorcycle insurance policies. (c) The Auto Body Repair Consumer Bill of Rights shall be a separate standardized document and plainly printed in no less than ten-point type. An insurer may distribute the form using its own letterhead, but the language of the Auto Body Repair Consumer Bill of Rights shall be developed by the California Department of Insurance and shall read as follows:

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AUTO BODY REPAIR CONSUMER BILL OF RIGHTS

A CONSUMER IS ENTITLED TO:

1. SELECT THE AUTO BODY REPAIR SHOP TO REPAIR AUTO BODY DAMAGE COVERED BY THE INSURANCE COMPANY. AN INSURANCE COMPANY SHALL NOT REQUIRE THE REPAIRS TO BE DONE AT A SPECIFIC AUTO BODY REPAIR SHOP. 2. AN ITEMIZED WRITTEN ESTIMATE FOR AUTO BODY REPAIRS AND, UPON COMPLETION OF REPAIRS, A DETAILED INVOICE. THE ESTIMATE AND THE INVOICE MUST INCLUDE AN ITEMIZED LIST OF PARTS AND LABOR ALONG WITH THE TOTAL PRICE FOR THE WORK PERFORMED. THE ESTIMATE AND INVOICE MUST ALSO IDENTIFY ALL PARTS AS NEW, USED, AFTERMARKET, RECONDITIONED, OR REBUILT. 3. BE INFORMED ABOUT COVERAGE FOR TOWING AND STORAGE SERVICES. 4. BE INFORMED ABOUT THE EXTENT OF COVERAGE, IF ANY, FOR A REPLACEMENT RENTAL VEHICLE WHILE A DAMAGED VEHICLE IS BEING REPAIRED. 5. BE INFORMED OF WHERE TO REPORT SUSPECTED FRAUD OR OTHER COMPLAINTS AND CONCERNS ABOUT AUTO BODY REPAIRS. COMPLAINTS WITHIN THE JURISDICTION OF THE BUREAU OF AUTOMOTIVE REPAIR Complaints concerning the repair of a vehicle by an auto body repair shop should be directed to: Toll Free (800) 952-5210 California Department of Consumer Affairs Bureau of Automotive Repair 10240 Systems Parkway Sacramento, CA 95827 The Bureau of Automotive Repair can also accept complaints over its web site at: www.autorepair.ca.gov COMPLAINTS WITHIN THE JURISDICTION OF THE CALIFORNIA INSURANCE COMMISSIONER. Any concerns regarding how an auto insurance claim is being handled should be submitted to the California Department of Insurance at: (800) 927-HELP or (213) 897-8921 California Department of Insurance Consumer Services Division 300 South Spring Street Los Angeles, CA 90013 The California Department of Insurance can also accept complaints over its web site at: www.insurance.ca.gov NOTE: Authority cited: Sections 790.10, 1874.85, 1874.87 of the California Insurance Code. Reference: Sections 790.03(c), 790.03(h)(3), and 1874.87 of the California Insurance Code;

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Sections 9884.8, 9884.9 of the California Business and Professions Code; and California Code of Regulations, Title 10, Chapter 5, Subchapter 7.5, Section 2695.8(j). Section 2695.9. Additional Standards Applicable to First Party Residential and Commercial Property Insurance Policies (a) When a residential or commercial property insurance policy provides for the adjustment and settlement of first party losses based on replacement cost, the following standards apply:

(1) When a loss requires repair or replacement of an item or part [replacement cost], any consequential physical damage incurred in making the repair or replacement not otherwise excluded by the policy shall be included in the loss. The insured shall not have to pay for depreciation nor any other cost except for the applicable deductible. (2) When a loss requires replacement of items and the replaced items do not match in quality, color or size, the insurer shall replace all items in the damaged area so as to conform to a reasonably uniform appearance.

(b) No insurer shall require that the insured have the property repaired by a specific individual or entity. (c) No insurer shall suggest or recommend that the insured have the property repaired by a specific individual or entity unless:

(1) the referral is expressly requested by the claimant; or (2) the claimant has been informed in writing of the right to select a repair individual or entity and, if the claimant accepts the suggestion or recommendation, the insurer shall cause the damaged property to be restored to no less than its condition prior to the loss and repaired in a manner which meets accepted trade standards for good and workmanlike construction at no additional cost to the claimant other than as stated in the policy or as otherwise allowed by these regulations.

(d) If losses are settled on the basis of a written scope and/or estimate prepared by or for the insurer, the insurer shall supply the claimant with a copy of each document upon which the settlement is based. The estimate prepared by or for the insurer shall be in accordance with applicable policy provisions, of an amount which will restore the damaged property to no less than its condition prior to the loss and which will allow for repairs to be made in a manner which meets accepted trade standards for good and workmanlike construction. The insurer shall take reasonable steps to verify that the repair or rebuilding costs utilized by the insurer or its claims agents are accurate and representative of costs in the local market area. If the claimant subsequently contends, based upon a written estimate which he or she obtains, that necessary repairs will exceed the written estimate prepared by or for the insurer, the insurer shall:

(1) pay the difference between its written estimate and a higher estimate obtained by the claimant; or, (2) if requested by the claimant, promptly provide the claimant with the name of at least one repair individual or entity that will make the repairs for the amount of the written estimate. The insurer shall cause the damaged property to be restored to no less than its condition prior to the loss and which will allow for repairs in a manner which meets accepted trade

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standards for good and workmanlike construction at no additional cost to the claimant other than as stated in the policy or as otherwise allowed by these regulations; or, (3) reasonably adjust any written estimates prepared by the repair individual or entity of the insured's choice and provide a copy of the adjusted estimate to the claimant.

(e) Once the appraisal provision under an insurance policy is invoked, the appraisal process shall not include any legal proceeding or procedure not specified under California Insurance Code Section 2071. Nothing herein is intended to preclude separate legal proceedings on issues unrelated to the appraisal process. (f) When the amount claimed is adjusted because of betterment, depreciation, or salvage, all justification for the adjustment shall be contained in the claim file. Any adjustments shall be discernable, measurable, itemized, and specified as to dollar amount, and shall accurately reflect the value of the betterment, depreciation, or salvage. Any adjustment for betterment or depreciation shall reflect a measurable difference in market value attributable to the condition and age of the property and apply only to property normally subject to repair and replacement during the useful life of the property. The basis for any adjustment shall be fully explained to the claimant in writing.

(1) Under a policy, subject to California Insurance Code Section 2071, where the insurer is required to pay the expense of repairing, rebuilding or replacing the property destroyed or damaged with other of like kind and quality, the measure of recovery is determined by the actual cash value of the damaged or destroyed property, as set forth in California Insurance Code Section 2051. Except for the intrinsic labor costs that are included in the cost of manufactured materials or goods, the expense of labor necessary to repair, rebuild or replace covered property is not a component of physical depreciation and shall not be subject to depreciation or betterment. NOTE: Authority cited: Sections 790.10, 2051, 2051.5, 2071, 12921 and 12926 of the California Insurance Code, Section 7109 of the California Business and Professions Code and Sections 11342.2 and 11152 of the California Government Code; Reference: Sections 790.03(h)(3), (5) and (7) of the California Insurance Code.

Section 2695.10 Additional Standards Applicable to Surety Insurance (a) No insurer shall base or vary its claims settlement practices, or its standard of scrutiny and review, upon the claimant's, age, race, gender, income, religion, language, sexual orientation, ancestry, national origin, or physical disability, or upon the territory of the property or person insured. (b) As soon as possible, but in no event later than forty (40) calendar days after receipt by the insurer of proof of claim, and provided the claim is not in litigation or arbitration, the insurer shall accept or deny the claim, in whole or in part, and affirm or deny liability. Every insurer that denies or rejects a claim in whole or in part, or disputes liability or damages, shall provide to the claimant a written statement listing all bases for such rejection or denial, and the factual and legal bases for each reason given for each rejection or denial, which are within the insurer’s knowledge. If an insurer’s denial of a claim in whole or in part is based on a specific statute or specific bond provisions, the denial shall include reference thereto and provide an explanation of the application of the statute or bond provision to the claim. Written notification pursuant to this subsection shall also include a notification that the claimant may have the matter reviewed

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by the California Department of Insurance and shall provide the address and telephone number of the unit of the Department which reviews complaints regarding claims practices.

(1) A principal's absence, non-cooperation, or failure to meet the bonded obligation shall not excuse unreasonable delay by the insurer in determining whether a claim should be accepted or denied. (2) While an insurer may consider all information provided by a principal, absent reasonable factual and/or legal bases for denying a claim, no insurer shall deny a claim based solely upon a principal's protest of a claim or denial of liability for a claim.

(c) In the event an insurer requires more time than is allotted in subsection 2695.10(b) to determine whether a claim should be accepted and/or denied, in whole or in part, the insurer shall provide the claimant with written notice of the need for such additional time [extension] within the time specified in subsection 2695.10(b). Such written notice shall specify the reasons for the need for such additional time, including specification of any additional information the insurer requires in order to make such determination. The insurer shall provide the claimant with written notice as to the continuing reasons for the insurer's inability to make such a determination. Except in cases where extraordinary circumstances are present which materially affect the insurer's ability to comply, such written notice shall be provided within 30 calendar days of the date of the initial notification, and every 30 calendar days thereafter until such determination is made or notice of legal action is received. If the determination cannot be made until some event, process, or third party determination is made, then the insurer shall comply with this requirement by advising the claimant of the situation and provide an estimate as to when the determination can be made. (d) No insurer shall fail to pursue diligently an investigation of a claim, or persist in seeking information not reasonably required for or material to resolution of a claim dispute. (e) No insurer shall deny a claim upon information obtained in a telephone conversation or personal interview with any source unless the telephone conversation or personal interview is documented in the claim file pursuant to the provisions of section 2695.3. (f) Where the claim is to be settled by payment, and where neither the claim nor the amount is in dispute, such payment shall be tendered (1) within 15 calendar days following affirmation of liability where the insurer does not require the claimant to execute a release, or (2) within 15 calendar days following the insurer's receipt of a release properly executed by the claimant, where such release is required by the insurer. Such release shall be provided to the claimant within ten (10) calendar days following affirmation of liability. Where multiple claimants are involved, payment shall be made pursuant to this subsection, provided such payment shall not increase the insurer's liability, or impair the rights of other claimants under the bond. (g) Except where a claim has been settled by payment, every insurer shall provide written notice of any statute of limitations or other time period requirement upon which the insurer may rely to deny a claim. Such notice shall be given to the claimant no less than sixty (60) days prior to the expiration date. If notice of claim is first received by the insurer within sixty (60) days of the expiration date and such date is known to the insurer, then notice of the expiration date must be given to the claimant immediately. This subsection shall not apply to a claimant represented by counsel on the claim matter or to a claim already time barred when first received by the insurer.

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(h) No insurer shall attempt to settle a claim by making a settlement offer that is unreasonably low. The Commissioner shall consider any admissible evidence offered regarding the following factors in determining whether or not a settlement offer is unreasonably low:

(1) the extent to which the insurer considered evidence submitted by the claimant to support the value of the claim; (2) the extent to which the insurer considered legal authority or evidence made known to it or reasonably available; (3) the procedures used by the insurer in determining the dollar amount of damages; (4) any other credible evidence presented to the Commissioner that demonstrates that the final amount offered by the insurer in settlement of a claim is below the amount that a reasonable person with knowledge of the facts and circumstances would have offered in settlement of the claim.

NOTE: Authority cited: Sections 790.10, 12921, 12921.1 and 12926 of the California Insurance Code. Reference: Sections 790.03(h)(3), (4) and (15), 12921.3 of the California Insurance Code, and California Civil Code Section 2807. Section 2695.11. Additional Standards Applicable to Life and Disability Insurance Claims (a) No insurer shall seek reimbursement of an overpayment or withhold any portion of any benefit payable as a result of a claim on the basis that the sum withheld or reimbursement sought is an adjustment or correction for an overpayment made under the same policy unless:

(1) the insurer's files contain clear, documented evidence of an overpayment and written authorization from the insured or assignee, if applicable, permitting such the reimbursement or withholding procedure, or (2) the insurer's files contain clear, documented evidence pursuant to section 2695.3 of all of the following:

(A) The overpayment was erroneous under the provisions of the policy. (B) The error which resulted in the payment is not a mistake of the law. (C) The insurer notifies the insured within six (6) months of the date of the error, except that in instances of error prompted by representations or nondisclosure of claimants or third parties, the insurer notifies the insured within fifteen (15) calendar days after the date of discovery of such error. For the purpose of this subsection, the date of the error shall be the day on which the draft for benefits is issued. (D) Such notice states clearly the cause of the error and states the amount of the overpayment. (E) The procedure set forth above in (a)(2)(A) through (D) above may not be used if the overpayment is the subject of a reasonable dispute as to facts.

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(b) With each claim payment, the insurer shall provide to the claimant and assignee, if any, an explanation of benefits which shall include, if applicable, the name of the provider or services covered, dates of service, and a clear explanation of the computation of benefits. (c) An insurer may not impose a penalty upon any insured for noncompliance with insurer requirements for precertification of benefits unless such penalties are specifically and clearly set forth in writing in the policy or certificate of insurance. (d) An insurer that contests a claim under California Insurance Code Section 10123.13 shall subsequently affirm or deny the claim within thirty (30) calendar days from the original notification. In the event an insurer requires additional time to affirm or deny the claim, it shall notify the claimant and assignee in writing. This written notice shall specify any additional information the insurer requires in order to make a determination and shall state any continuing reasons for the insurer’s inability to make a determination. This notice shall be given within thirty (30) calendar days of the notice (required under Insurance Code Section 10123.13) that the claim is being contested and every thirty (30) calendar days thereafter until a determination is made or legal action is served. If the determination cannot be made until some future event occurs, the insurer shall comply with this continuing notice requirement by advising the claimant and assignee of the situation and providing an estimate as to when the determination can be made. (e) When a policy requires preauthorization of non-emergency medical services, the preauthorization must be given immediately but in no event more than five (5) calendar days after the request for preauthorization. The preauthorization shall be communicated or confirmed in writing to the insured and the medical service provider, and shall explain the scope of the preauthorization and whether the preauthorization is or is not a guarantee of acceptance of the claim. In the event the preauthorization is denied, the reason(s) for the denial shall be communicated in writing to the insured and the medical service provider. (f) No preauthorization shall be required by an insurer for emergency medical services. (g) An insurer shall reimburse the insured or medical service provider for reasonable expenses incurred in copying medical records requested by the insurer. NOTE: Authority cited: Sections 790.10, 12921 and 12926 of the California Insurance Code and Sections 11342.2 and 11152 of the California Government Code. Reference: Section 790.03(h)(1), (2), (3), (5) and (13) and Section 10123.13 of the California Insurance Code. Section 2695.12. Penalties (a) In determining whether to assess penalties and, if so, the appropriate amount to be assessed, the Commissioner shall consider admissible evidence on the following:

(1) the existence of extraordinary circumstances; (2) whether the licensee has a good faith and reasonable basis to believe that the claim or claims are fraudulent or otherwise in violation of applicable law and the licensee has complied with the provisions of Section 1872.4 of the California Insurance Code;

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(3) the complexity of the claims involved; (4) gross exaggeration of the value of the property or severity of the injury, or amount of damages incurred; (5) substantial mischaracterization of the circumstances surrounding the loss or the alleged default of the principal; (6) secreting of property which has been claimed as lost or destroyed. (7) the relative number of claims where the noncomplying act(s) are found to exist, the total number of claims handled by the licensee and the total number of claims reviewed by the Department during the relevant time period; (8) whether the licensee has taken remedial measures with respect to the noncomplying act(s); (9) the existence or nonexistence of previous violations by the licensee; (10) the degree of harm occasioned by the noncompliance; (11) whether, under the totality of circumstances, the licensee made a good faith attempt to comply with the provisions of this subchapter; (12) the frequency of occurrence and/or severity of the detriment to the public caused by the violation of a particular subsection of this subchapter; (13) whether the licensee's management was aware of facts that apprised or should have apprised the licensee of the act(s) and the licensee failed to take any remedial measures; and (14) the licensee’s reasonable mistakes or opinions as to valuation of property, losses or damages.

(b) This section shall not bar, obstruct or restrict any right to administrative due process an insurer may be afforded under California Insurance Code Sections 790.05, 790.06, and 790.07. NOTE: Authority cited: Sections 790.035, 790.07, 790.08, 790.09, 790.10, 1872.4, 12340 - 12417, inclusive, 12921, 1065, 704, 780-784, 1011, 11690, 12926 and 12928.6 of the California Insurance Code and Sections 11342.2 and 11152 of the California Government Code. Reference: Section 790.03(h), 790.035 (a), 790.04, 790.05, 790.06, 790.08, 790.10 of the California Insurance Code. Section 2695.13. Severability If any provision or clause of this rule or the application thereof to any person or situation is held invalid, such invalidity shall not affect any other provision or application of this rule which can be given effect without the invalid provision or application, and to this end the provisions of this rule are declared to be severable.

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NOTE: Authority cited: Sections 790.10, 12340 - 12417, inclusive, 12921 and 12926 of the California Insurance Code and Sections 11342.2 and 11152 of the California Government Code. Reference: Section 790.03(h) of the California Insurance Code. 2695.14 Compliance Date (a) Any amendments to these regulations shall be complied with within ninety (90) calendar days after they are filed with the Secretary of State. (b) Prior to the compliance date of these regulations, licensees shall, pursuant to Section 2695.6, adopt and communicate to their claims agents standards for the prompt investigation and processing of claims, and provide training and instruction on these regulations. (c) These regulations shall apply to any claims handling that takes place on or after the compliance date set forth under subsection 2695.14(a). NOTE: Authority Cited: Sections 790.10, 12921 and 12926 of the California Insurance Code and Section 11343.4 of the California Government Code. Reference: Section 790.03(h) of the California Insurance Code.

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APPENDIX SAMPLE CEA DEDUCTIBLE CALCULATION SAMPLE CEA COVERAGE REVIEW FORM SAMPLE CEA TESTING AUTHOIRTY AGREEMENT SAMPLE CEA ADVANCED PAYMENT AGREEMENT SAMPLE WORDING FOR CEA UNDER DEDUCTIBLE DENIAL LETTER SPECIMEN CEA HOMEOWNERS EARTHQUAKE POLICY

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SAMPLE CEA POLICY DEDUCTIBLE CALCULATION SPREADSHEET BASIC HOMEOWNERS EARTHQUAKE POLICY

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CEA DEDUCTIBLE SPREADSHEET EXPLANATIONS

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SAMPLE CEA COVERAGE REVIEW FORM

Description of loss: The Insured’s home was damaged by an earthquake on 9/03/2006. The house is of two-story woodframe construction with a perimeter concrete foundation. There is also a guesthouse (one story) of similar construction that includes a bedroom, bath, kitchen, and a two-car garage. The two structures are built end-to-end, north to south, with a breezeway connecting the north-end of the house and the south end of the guesthouse. The breezeway shares a roofline with the guesthouse. The roof is connected to the north-end wall of the house. A wall on the west side of the breezeway connects to both the house and guesthouse, enclosing the west side of the breezeway. The breezeway is of woodframe construction on its own perimeter foundation. The foundation abuts the foundations of the house on the south side and the guesthouse on the north. Coverage question: Is the guesthouse a dwelling as defined by the policy and if so can it be considered under COVERAGE A: ‘DWELLING’? The guesthouse is a residential structure of not more than four units and is at the location described in the DECLARATIONS. The DECLARATIONS page makes no mention of, or distinction between, the two structures. Our research: Webster’s defines “contiguous” as “1. in physical contact; touching along all or most of one side. 2. near, next, adjacent”. By this definition the breezeway’s foundation is contiguous with both of the other structures’ foundations. However, the breezeway must be considered part of the guesthouse in any case because of the roofline they share. It would appear that the guesthouse meets the definition of a dwelling on all criteria except the roofline. The definition only requires one criterion to be met. Our recommendation: As such, the guesthouse would appear to fall under “COVERAGE A: ‘DWELLING’ since it requires that the building be defined as a dwelling and be identified on the DECLARATIONS page. The page gives only the address, and doesn’t identify or exclude any specific structures. Based upon the above points it is our recommendation that coverage be extended to the guesthouse. For your reference we have attached diagrams and photos as well as a copy of the Earthquake Declarations Page. Please contact Team Leader John Q. Manager at (800) 555-1234 if you have any questions.

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SAMPLE CEA TESTING AUTHORITY AGREEMENT Claim Number: ___________________ Date of Loss: ________________ Name: __________________________ Date of Agreement:_____________ (Policyholder) Address: _________________________ City: ____________________________ State:_____ Zip: ___________ I [we], _________[Name(s) of policyholder(s)]________, acknowledge and agree to the following: 1. _______[Name of Participating Insurer]_____ (“the Insurer”), a Participating Insurer of the California Earthquake Authority (“the CEA”), and I [we] disagree (i) as to whether my [our] home has sustained covered earthquake damage over the deductible amount of my [our] insurance policy issued by the CEA, and (ii) as to the need for further testing to determine the extent or cause of damage to my [our] home. The Insurer contends that additional testing will not establish the existence of covered earthquake damage over the amount of the deductible, and I [we] believe that additional testing will establish that my [our] home sustained covered earthquake damage over the amount of the deductible. 2. The Insurer has advised me [us] that, pursuant to the terms of my [our] insurance policy, the Insurer will not authorize any additional testing as part of the claims adjusting process unless I [we] agree that, in the event additional testing is performed and that testing fails to establish the existence of covered earthquake damage over the amount of the deductible of the insurance policy issued by the CEA, I [we] will pay for the cost of conducting that testing, including the cost of repairing any damage to my [our] property caused by any destructive testing that is conducted. 3. I [we] therefore request the Insurer to authorize the following testing: _________________________________________________________________________________________________________________ [DESCRIPTION OF TESTING REQUESTED BY POLICYHOLDER] ____________________________________________________________________________ ________________________________________________________________________________________________________________________________________________________ I [we] agree that, in the event the testing described above fails to establish the existence of earthquake damage that is covered under my [our] CEA policy and that it is over the deductible amount of that policy, I [we] will pay for all costs associated with conducting that testing, including, but not limited to, the cost of repairing any damage to my [our] property caused by any destructive testing. I [we] understand that, in the event the testing described above establishes that my [our] property has sustained covered earthquake damage over the amount of the deductible of the CEA policy, I [we] will not be required to pay for any of the costs of that testing. Policyholder(s):_______________________ Date: ______________ (Signature of policyholder) Claim Representative__________________ Date: _______________ CEA Participating Insurer: _________________________________________

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SAMPLE CEA ADVANCED PAYMENT AGREEMENT [Name] [Address] [City, State] Re: Claim No.: Policy No.: Policyholder(s): Address of Insured Property: Date of Damage: Dear _______, There is a question as to whether there is coverage under the policy for the damages, which have occurred. We are investigating the claim. We are under no legal obligation to make any payments until the coverage investigation is complete. However, to prevent any undue hardship which this loss may cause, we advance the sum of $____________ under the following terms and conditions: 1) This advance shall not be considered as any admission that payment is due under any portion of the policy; 2) If we determine that payment is not required under the terms and conditions of the policy, you will repay the advance; 3) In making this advance, we reserve all rights and do not waive any terms, conditions or requirements under the policy, nor any rights we have; and 4) Other than as agreed in this letter, you reserve your rights as well. You will cooperate in the coverage investigation, and comply with the policy conditions regarding the presentation of any claim. We may need a Proof of Loss or an examination under oath. If we determine that your claim is payable, we will apply the advance against any benefit due under the policy. If you have any questions, please let us know. Sincerely, XXXXXXXXXXX I have read this letter, and agree to its terms: ___________________________________ [Insured]

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SAMPLE WORDING FOR CEA UNDER DEDUCTIBLE DENIAL LETTER Dear XXXXXX, Thank you for your courtesy and cooperation during the investigation of your claim [or other opening greeting]. As we discussed, your California Earthquake Authority policy provides coverage for earthquake damage, subject to a deductible of $________. Our investigation and estimate of damage has determined that the cost to repair any covered damage to your [dwelling, extensions to dwelling– as appropriate] is less than your deductible. For this reason, we will be unable to make any payment under the terms and conditions of your policy, and your claim is therefore denied. [Optional when there is a personal property loss also: Please note that no payment can be made for loss to any personal property until the deductible for the dwelling or extensions to dwelling is met.] The attached estimate represents our evaluation of your covered damages. If you believe we have missed any damage, let us know. Also, you may wish to obtain your own estimate of the cost of repairs. If you obtain your own repair estimate (or if you have already obtained one), and the amount is above your policy deductible, please contact us immediately and send us a detailed estimate. While the covered damage to your property did not exceed the deductible, expenses incurred for Loss of Use while the home is uninhabitable could be considered for payment under Coverage D – Loss of Use. This coverage is subject to the applicable limit of insurance. Please let us know if your home becomes uninhabitable during the repair process and you incur Loss of Use expenses. California law requires us to notify you of a time limit that applies to your claim. The time limit pertains to Condition 10, which is found on page ___ of your policy. This condition is required by law and is contained in all residential property insurance policies issued in the State of California. The condition states the following: CONDITIONS 10. Legal Action. No action can be brought under this policy by any person unless the policy provisions have been fully complied with and the action is started within one year after the date of inception of the loss. This condition limits your time to commence legal action for recovery of damages sustained in your loss. Please note that we do not mean to suggest that you file a legal action. We only seek to advise you of the time limitation set forth within this condition of your policy. California case law provides that the one-year time period for commencing legal action is tolled from the date you notified us of the claim until the date of this letter. Tolled means that this time period does not count towards the calculation of the one-year time period to begin legal action. We are also required to let you know that, if you believe that this claim has been wrongfully denied or rejected or that there is a dispute as to damages, you have the right to have the matter reviewed by the California Department of Insurance at 300 South Spring Street, 11th Floor, Los Angeles, CA 90013 (213) 897-8921, (800) 927-4357. Please contact me if you have any questions regarding your damages, your coverage, or the contents of this letter. I can be reached at 1.800.xxx.xxxx. Sincerely, John/Jane Q. Adjuster Senior Claim Representative XXX Insurance Company A Participating Insurer of the California Earthquake Authority cc: Agent

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SAMPLE CEA PROPERTY LOSS NOTICE REPORT OF NEW EARTHQUAKE CLAIM

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SPECIMEN CEA HOMEOWNERS EARTHQUAKE POLICY – 2016

To view 2016 CEA Specimen Policies go to www.earthquakeauthority.com

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INDEX Adjuster best practices 51 Advanced pay agreement sample 108 Appendix 103 Asbestos or lead paint 65 Attic or crawlspace inspections 62 Awnings and patio covers 28 Building upgrades required 71 Buildings vulnerable to EQ damage 54 Bulkheads, piers, retaining walls 25 California Earthquake Authority 8 California earthquake certification 5 Calif EQ Claims Mediation Prog 75 Calif Fair Claims Settlement Law 76 CEA 8 CEA Claims procedures 42 CEA consulting 42 CEA coverage comparison 10 CEA deductible, calculation 21 CEA event code 17 CEA name, use of 50 CEA policies, do not cover 9 CEA policies, types 9 CEA policy deductible 21 CEA, chimney sublimit 24 Certificates, maintaining 7 Chimney sublimit 24 Claim file documentation 43 Claim file review 14 Claim payment ability 46 Claim payment ratio 46 Claim reserve 14 Claims settlement practices 97 Common Interest Earthquake Policy 32 Companion policy 11 Compliance, fair claims settlement 85 Concrete and foundations 68 Concrete, old or new 68 Concrete, repair or replace 70 Condominium claims 33 Contractor credentials and references 58 Costs to rebuild 45 Coverage disputes 48 Coverage review form sample 106 Credentials and references, contractors 58 Decorative or artistic glass 29 Deductible 21 Deductible calculation sample 104

Deductible, calculation 21 Denial letter sample 109 Denial letters 49 Denial of damages 48 Destructive tests 74 Disaster response 15 Documenting earthquake damage 57 Double coverage 46 Driveways, walkways 25 Dwelling coverage limit 19 Earthquake Coverage 8 Earthquake policy specimen 110 Earthquake training, scope 5 Earthquake vulnerable buildings 54 Earthquakes, how different 54 Electrical plumbing, mechanical 63 Emergency repair costs 30 Engineers, determining need for 65 Engineers, locating 67 Engineers, selecting 66 Exterior masonry 26 Exterior spaces 58 Fair claims settlement, compliance 85 Fair claims time line, reply to claim 76 Fair claims timeline rules 76 Fair claims training 85 Fair claims, duties 84 Fair claims, files and records 82 Fair claims, first party residential 96 Fair claims, penalties 100 Fair claims, policy provisions 83 Fair claims, prompt and fair 86 Fair claims, severability 101 Floors, ceilings, roofs 61 Flue pipe scan 63 Fraudulent claims 46 Garages and outbuildings 28 Glass 29 Homeowner, loss of use 29 Homeowners Earthquake Policy 19 Homeowners, covered losses 19 Homeowners, deductible 2 Homeowners, loss settlement 22 Homeowners, not covered 20 Interior spaces 59 ISO vs. CEA 8 Joint payee 50 Land stabilization costs 31 Lead paint 65 Like kind replacement 73 Loss assessment 38

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Loss settlement mediation 75 Northridge earthquake 55 Old or new concrete 68 Older, pre-existing concrete crack 68 Ordinance and law 39 Overhead and profit 45 Overlapping coverage 14 Participating insurer 11 Plaster 28 Policy interpretations 12 Policyholders 44 Pre-existing code violations 72 Pre-existing concrete crack 68 Proof of loss 48 Property loss claim sample 110 Reasonably uniform appearance 96 Reduction of value 39 Reevaluate an estimate 47 Reinspections 13 Renters Earthquake Policy 41 Repairs, suggesting or recommending 96 Reply to claim 76 Salvage 48 Scope of loss 6 Scope of Loss & Estimates 54 Settlement and mediation 74 Settlement offer 87 Shakemap 56 Slab or stem wall cracks 71 Smoke test 63 Subrogation 47 Suggesting, recommending individual 96 Swimming pools 28 Technical consult, walls 60 Testing authority agreement sample 106 Theft 32 Timely adjusting 44 Unbraced cripple walls 55 Underground systems 26 Unidirectional cracks 60 Victim assistance 74 Vulnerable buildings 54 Walkways, driveways, decks, patios 25 Walls, technical consultant 60