THE SENATETHIRTY-THIRD LEGISLATURE, 2025S.B. NO.STATE OF HAWAIIJAN 1 7 2025A BILL FOR AN ACT123456789101213141516RELATING TO THE STABILIZATION OF PROPERTY INSURANCE.BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:PART ISECTION 1. The legislature finds that before the wildfire event in Lahaina, Maui, on August 8, 2023, the availability of condominium building master property insurance policy options within the condominium insurance marketplace was already shrinking. Due in part to the shrinking condominium insurance marketplace, condominium building master insurance policies have increased exponentially, with insurers increasing deductible amounts from what used to be between $10,0 to $25,0 per unit, per occurrence, to as much as $250,0. These increased deductibles are also due to consistent and high-cost losses.The legislature also finds that while the State has avoided a direct, major impact from a major hurricane since Hurricane Iniki devastated Kauai and damaged homes along Oahu's leeward coast more than thirty years ago, mortgage lenders continue to require Hawaii homeowners to carry hurricane insurance that canSB LRB 25-0143-3.docx Page 2S.B. NO. W1234567891012131415161718192021cost two to three times the annual premiums of a conventional homeowner policy.The legislature further finds that Hawaii Business Magazine recently reported that generally, a condominium building or complex carries a master hurricane policy that covers one hundred per cent of the cost to replace the property—millions of dollars in many cases. Unfortunately, because insurance premiums for those policies have recently risen so high, the president of Insurance Associates estimates that three hundred seventy-five to three hundred ninety buildings, including new high-rise towers in Kakaako, Oahu, have opted to renew their hurricane insurance policies having less than one hundred per cent hurricane coverage. This practice of reducing coverage is creating complications and adverse conseguences for every person and entity associated with condominiums in Hawaii, from lenders and insurance agents to buyers and sellers of condominiums.Furthermore, some condominium associations for older buildings are forced to obtain property insurance through the secondary insurance market if they are dropped by the standard insurers for, among other things, having too many claims. The president of Insurance Associates reported that more than seven SB LRB 25-0143-3.docx ■■iliuni Page 3S.B. NO.1234567891012131415161718192021hundred condominium buildings on Oahu alone were built before 1990. These secondary market insurers are not bound by the State's laws or administrative rules governing rates, so their prices may be more expensive than those of standard insurance carriers.To illustrate the difference in insurance premium costs, the president of Insurance Associates cites the example of one high-rise condominium in Waikiki in which the condominium association had been paying an annual insurance premium of $235,0 for property and hurricane insurance and had already been dropped by two of the standard insurance companies when the third company declined to renew their insurance policy. The stated reason for the nonrenewal and rejection was that the building's aging plumbing had not been replaced. As a result, the condominium association was forced to purchase insurance on the secondary market, which cost approximately $1,200,0.The legislature finds that the consequences of under-insured condominium buildings, including condominium buildings that lack full hurricane coverage, also impact individual owners. Today, there are only three insurers writing hurricane coverage for condominium buildings, one of which is SB LRB 25-0143-3.docx Page 4S.B. NO.10qt|1234567891012131415161718192021only willing to underwrite $10,0,0 to $25,0,0 in hurricane coverage while underwriting all other coverage up to the building's value. If a condominium building's insurance coverage, including hurricane coverage, is below its full value, the mortgages on individual units within that building would not meet the underwriting criteria to qualify for purchase through the federal government's secondary mortgage market, meaning that these mortgages cannot be sold by financial institutions to mortgage investor entities such as Fannie Mae and Freddie Mac. Coverage to address this lack of hurricane insurance coverage options is available from the excess and surplus lines market, which comprises insurers who are not licensed in the State; however, some condominium buildings are unwilling to purchase this coverage because of its high price. The legislature understands that although this Act authorizes the Hawaii hurricane relief fund to expand coverage to condominium buildings, premium rates may be high due to the rise in the global reinsurance market for hurricane insurance caused by the frequency and severity of worldwide disasters.In addition, Hawaii Business Magazine has reported that the 2021 collapse of the Surfside condominium building in Miami is SB LRB 25-0143-3.docx Page 5S.B. NO.1234567891012131415161718192021also having a ripple effect on condominium lending. In 2023, Fannie Mae and Freddie Mac made permanent the rules for condominium lending that were created in the wake of that disaster and ceased buying loans for buildings or projects that have put off major repairs--such as replacing old water pipes. These new lending rules also prohibit the sale of a loan on a condominium building to Fannie Mae and Freddie Mac if that building has unfunded repairs totaling more than $10,0 per uni t.This inability to sell condominium mortgages would require financial institutions that originated mortgages to retain those mortgages, thereby lessening their overall financial capacity to originate more mortgages. Further, the risk of loss if a hurricane occurs may impair a financial institution's financial safety and soundness, which would in turn hamper consumers' abilities to obtain financing to purchase dwellings of their own.The legislature notes that the wildfire in Lahaina, Maui, on August 8, 2023, has also impacted the way reinsurers and standard insurers view Hawaii's wildfire risk. The president of Insurance Associates estimates that while Hawaii has always been SB LRB 25-0143-3.docx Page 6S B. NO.12345678910121314151617181920rated for hurricanes for property insurance purposes, it has never been rated for wildfires. Now that the State has experienced wildfires, not only in Lahaina, but also in Kula, West Oahu, and Mililani, parts of all islands will be rated for wildfires. Moreover, it is surmised that some insurers will not maintain their current policy-count in the State because of their increased costs for reinsurance, geographical concentration of risk, and inadequate rates both pre- and post-wildfire. Insurers have the financial responsibility to pay losses, and if reinsurance and premiums are not sufficient to cover these losses, an insurer needs to reduce their exposure by restricting new policies, reducing their policy-count, or both. The legislature recognizes that the price impact on reinsurance from recent wildfires is not fully known and price increases may continue into the foreseeable future.The legislature also understands that the market for reinsurance, the insurance that property and casualty insurance companies pay to share their risk, is global. Therefore, storms and other catastrophic losses occurring anywhere in the world may potentially impact the amounts that homeowners andSB LRB 25-0143-3.docx Page 7S.B. NO.1234567891012131415161718192021condominium associations in Hawaii pay for their insurance coverage.The legislature also acknowledges that although insurance coverage, excluding hurricane coverage, for condominium buildings is available in the standard insurance market, the availability of this coverage is not guaranteed. If this coverage became unavailable to condominium buildings, then under this Act, the Hawaii property insurance association would be authorized to provide this coverage.This Act expands the authority of these State-established insurance entities to assist in the stabilization of the property insurance market until risks can be depopulated back to the standard insurance market when market conditions improve and risks become more insurable because of building component replacement or maintenance, or mitigation equipment or protocols have been implemented for fire, wildfire, or hurricane events.The legislature also recognizes that, although there has been much focus on the instability of the condominium insurance market in Hawaii, the broader property insurance industry faces uncertainty amidst changing economic and regulatory conditions, rising costs, increased reinsurance costs, and more frequentSB LRB 25-0143-3.docx Page 8S.B. NO. lO’AQf1234567891012131415161718192021severe weather events. Given these precarious conditions, it is possible that a future disaster or other unforeseen circumstance could cause the availability of insurance to shrink for classes of real property other than condominiums, including single family homes and townhouses.Accordingly, this Act authorizes the Hawaii property insurance association to provide additional insurance coverage within the State for certain categories of properties if the Hawaii property insurance association and insurance commissioner determine that those categories of properties are experiencing a casualty and property insurance market failure. This authority will provide the Hawaii property insurance association with the flexibility to quickly address potential future disruptions in the insurance market. This flexibility is critical to ensure that Hawaii residents living in non-condominium properties such as single-family homes and townhouses are protected following unexpected disasters that could otherwise increase the cost of insurance to the point where residents cannot afford to continue living in their homes or in the State.The legislature believes that it is critical to begin the process to adequately capitalize the Hawaii property insuranceSB LRB 25-0143-3.docxiniHiBii Page 9S.B. NO. lOtm1234567891012131415161718192021association and Hawaii hurricane relief fund because insuring these risks could bring an enormous amount of risk exposure to the funds. Therefore, funding mechanisms must be broad on an initial and ongoing basis and spread among as many parties involved in real property transactions within the State as possible to ensure that the financial impacts are apportioned as equitably as practicable, and that reserve funds are adequately capitalized if losses exceed the funds' capacities.In the past, the Hawaii hurricane relief fund was funded in part through the special mortgage recording fee, which was imposed on each mortgage recorded with the bureau of conveyances. The legislature recognizes concerns that the special mortgage recording fee is regressive because homebuyers who need to finance more of their purchase price are assessed proportionally more than buyers who need to finance less or who can afford to complete their purchase using cash.Therefore, this Act repeals the special mortgage recording fee and instead authorizes the Hawaii hurricane relief fund board of directors to establish a temporary recording fee, which will be imposed as a flat assessment on each document that is recorded with the bureau of conveyances or filed with theSB LRB 25-0143-3.docx Page 10S.B. NO. WQ12345678910121314151617181920assistant registrar of the land court of the State, as appropriate. This fee, if activated by the Hawaii hurricane relief fund, is intended to be a temporary funding mechanism that will spread costs out in a way that will reduce the regressive financial impact imposed on individuals and families who can only afford to purchase a residential dwelling by financing the purchase. If the Hawaii hurricane relief fund board of directors determines that the fee revenue is no longer required, this Act allows the board to terminate collection of the fee without seeking legislative action.This Act provides additional funding mechanisms through the:(1) Appropriation of general funds for the Hawaii property insurance association; and(2) Option for the Hawaii hurricane relief fund to reactivate the assessment of insurers at an assessment rate determined by the Hawaii hurricane relief fund's board of directors to augment the capitalization of the Hawaii hurricane relief fund.The legislature finds that this Act is necessary to:SB LRB 25-0143-3.docx10 Page 11s.B. NO. icMMr1234567891012131415161718192021(1) stabilize the property insurance market so that insurers continue to insure properties in the State;(2) Ensure access to adequate property insurance for certain properties located within the State to allow lenders to finance mortgages that meet the requirements of the secondary mortgage market; and(3) Serve an important public purpose.This Act is a stop-gap measure to provide insurance availability for condominium associations that are unable to purchase adequate property insurance for their respective condominium buildings that are in insurable condition. Condominium associations that apply for coverage through the Hawaii property insurance association will need to pay premiums that are sufficient to cover the condominium association's exposure to losses. This measure is not designed to be a long-term solution, and therefore the legislature has imposed a one-time five-year coverage period and commissioned a study to recommend long-term solutions to stabilize the property insurance market in the State. To that end, in addition to providing for the issuance of short-term property insurance coverage, this Act also effectively requires the insuranceSB LRB 25-0143-3.docxl■lillSi Page 12S.B. NO.12345678910121314151617181920commissioner to conduct a study to develop a long-term solution. The legislature notes that a long-term solution may potentially include the issuance of property insurance policies for condominium buildings that are in need of repair or replacement of components.The purpose of this Act is to:(1) Amend state laws governing the Hawaii property insurance association and the Hawaii hurricane relief fund to enable these entities to underwrite certain insurance risks in the State that no standard insurer is currently willing to underwrite; and(2) Require the insurance commissioner to conduct a study to monitor and identify the most effective methods of stabilizing the property insurance market in the State.PART IISECTION 2. Section 431:21-102, Hawaii Revised Statutes, is amended by adding three new definitions to be appropriately inserted and to read as follows:""Condominium" means real property that:SB LRB 25-0143-3.docx12 Page 13S.B. NO. W'V12345678910121314151617181920(1) Has a condominium association that is registered with the real estate commission in accordance with chapter 514B, part VI;(2) Consists of units, as defined in chapter 514B;(3) Is used for residential purposes; and(4) Is in insurable condition as determined by the association's board of directors."High-rise condominium" means a condominium that has four or more stories that contain units that are or can be occupied by a person."Property insurance" means policies, riders, or endorsements of insurance that provide indemnity, in whole or in part, for the loss, destruction, or damage of property and against legal liability for the death, injury, or disability of any human being, or from damage to property. "Property insurance" does not include any indemnity for loss, destruction, damage of property, or death, injury, or disability of any human being, or from damage to property, caused by a hurricane."SECTION 3. Section 431:21-105, Hawaii Revised Statutes, is amended to read as follows:SB LRB 25-0143-3.docxlt■lHn■nlHl■13 Page 14S.B. NO.12345678910121314151617181920"§431:21-105 Powers and duties of the association. (a)In addition to any other requirements imposed by law, the association shall:(1) Formulate and administer a plan of operation to insure persons having an insurable interest in real or tangible personal property in [the] an area designated by the commissioner;(2) Establish in the plan of operation a maximum period of time during which a high-rise condominium association may be eligible to be insured by the association, which shall not exceed sixty months 3-)-] (3) Reimburse each servicing facility for obligations of the association paid by the facility and for expenses incurred by the facility while processing applications and servicing policies on behalf of the association; and[-(■34-1 (4) Collect and maintain statistical information and other information required by the commissioner.(b) In addition to any other powers allowed by law, the association may:SB LRB 25-0143-3.docx14 Page 15S.B. NO.123456789101213141516171819(1) Add additional insurance coverages with the approval of the commissioner, including coverage for commercial risks up to the limits of coverage [for residential r4-&ks-] as set forth in the plan of operation;(2) Employ or retain persons as are necessary to perform the duties of the association;(3) Contract with a member insurer to perform the duties of the association;(4) Sue or be sued;(5) Borrow funds necessary to effectuate the purposes of this article in accord with the plan of operation;(6) If approved by the commissioner, [assess] activate, reduce, or terminate the collection of an assessment on member insurers in amounts necessary to cover extraordinary losses incurred by the association[—]£ provided that:(A) Each member insurer shall be notified of the assessment not later than thirty days before it is due[—];SB LRB 25-0143-3.docx15 Page 16S.B. NO. IWV1(B)10The association, subject to the approval of the 2commissioner, may set the amount of the 3assessment; provided further that:4No member insurer may be assessed in any5year an amount greater than two per cent of6that member insurer's net direct written7premiums for the preceding calendar year[—]£8and9The association may at any time reduce theamount of the assessment;11(C)Theassociation, subject to the approval of the12commissioner, may establish the period of time13during which the assessment shall be collected;14provided that the time period shall not15exceedmonths; provided further that the16association at any time may terminate the17collection of the assessment; and18The association may exemptor defer, in whole or19in part, the assessment ofanymember insurer if20the assessment would causethemember insurer's21financial statement to reflectamounts of capitalSB LRB 25-0143-3.docx16 Page 17S.B. NO.1234567891012131415161718192021or surplus less than the minimum amounts required for a certificate of authority by any jurisdiction in which the member insurer is authorized to transact business;(7) Devise a method to give credit to member insurers [for ■homeowners and fire—inourancG policies—individually u-nderwr-itten on- risks—located in the area designated f-or covoragc by the association; ] as set forth in the pj^au}of o£er^jt3^ony(8) Negotiate and become a party to contracts as are necessary to carry out the purposes of this article; [aftd](9) Establish outside the state treasury a reserve trust fund and any accounts thereunder and any other trust fund or account necessary to carry out the purposes of this article. Moneys deposited in the reserve trust fund and any accounts thereunder or any other trust fund or account established by the association shall be held by the association, as trustee, in a depository as defined in section 38-1 or according to a similar arrangement at the discretion of the board.SB LRB 25-0143-3.docx17 Page 18S.B. NO.1234567891012131415161718192021including but not limited to trust or custodial accounts created for the benefit of the fund's secured parties under contractual claims financing arrangements. These moneys may be invested and reinvested in accordance with the plan of operation. Disbursements from the trust funds shall not be subject to chapter 1Q3D and shall be made in accordance with procedures adopted by the board;(10) Receive moneys for deposit into a trust fund or account from the revenues received from sources of revenue available to the board; and[-(-9-)-] (11) Perform all other acts as are necessary or proper to effectuate the purpose of this article."SECTION 4. Section 431:21-106, Hawaii Revised Statutes, is amended as follows:1. By amending subsection (a) to read:" (a) The association shall submit to the commissioner a plan of operation and any amendments to the plan necessary or suitable to [uoaurc] ensure the fair, reasonable, and equitable administration of the association. The plan of operation and any amendment shall become effective upon approval in writing bySB LRB 25-0143-3.docx 1inini Page 19S.B. NO. W12345678910121314151617181920the commissioner. If the association fails to submit a suitable plan of operation or if at any time the association fails to submit suitable amendments to the plan, the commissioner shall adopt the rules necessary to carry out this article. The rules shall continue in force until modified by the commissioner or superseded by a plan submitted by the association and approved in writing by the commissioner."2. By amending subsection (c) to read:" (c) The plan of operation [-steilr] :(1) [Establish] Shall establish procedures for performance of all the powers and duties of the association under section 431:21-105;(2) [Establish] Shall establish maximum limits of liability to be placed through the association;(3) [Establish] Shall establish reasonable underwriting standards for determining insurability of a risk [which] that are comparable to the standards used to determine insurability of a risk located outside the area designated by the commissioner as eligible for association coverage;SB LRB 25-0143-3.docx19 Page 20S.B. NO.1234567891012131415161718192021(4) Shall establish a schedule of deductibles,if appropriate;(5) Shall establish a maximum period of time during which a high-rise condominium may be eligible to be insured by the association, which shall not exceed sixty months;[ (5) fistafeii-sh-] (6) Shall establish the commission to be paid to licensed producers 64- Katabia-sh-] (7) Shall establish the rates to be charged for the insurance coverages, so that the total premium income from all association policies, when combined with the investment income, shall annually fund the administration of the association. The administration of the association shall include the expenses incurred in processing applications, conducting inspections, issuing and servicing policies, paying commissions, and paying claims, but shall not include assessments approved by the commissioner 74- Establish] (8) Shall establish the manner and scope of the inspection and the form of the inspection SB LRB 25-0143-3.docx 2 Page 21s.B. no.1^4M'12345678910121314151617181920report. The inspection guidelines may include setting minimum conditions the property must meet before an inspection is required 84- Establish] (9) Shall establish procedures whereby selections for the board of directors will be submitted to the commissioner for the commissioner's information 94- Establish] (10) Shall establish procedures for records to be kept of all financial transactions of the association, its producers, and its board of directors;[(10) Establish] (11) Shall establish procedures by which applications will be received and serviced by the association;[ (11) ] (12) Shall establish guidelines for theinvestigation and payment of claims; [and(12) Establish] (13) Shall establish procedures whereby the association may assume and cede reinsurance on risks written through the association £(14) Shall include the following:SB LRB 25-0143-3.docx21 Page 22S.B. NO.10’141234567891012131415161718192021(A) Coverage forms, endorsements, limits, and deductibles for the covered condominium; provided that the association may categorize these forms, endorsements, limits, and deductibles by the type of peril being covered;(B) Rate tiers, including potential high deductible options and surcharges for condominiums that remain in the plan of operation;(C) Provisions authorizing the association to decline providing coverage;(D) Potential annual premium rate increases; and(E) Establishment of adequate rates to avoid assessment of the voluntary market;(15) Shall require, prior to issuance or renewal of coverage, the applicant for condominium insurance coverage or renewal to:(A) Provide the following to the association:(i) The condominium association's declarations, bylaw^2 2^2ther documenhs yia^^d^s c£i^ their process for paying claims, including the portion of the claim to be paid by the SB LRB 25-0143-3.docx 2 Page 23S.B. NO.I^1234567891012131415161718192021condominium association and the portion to be paid by each unit owner; and(ii) The condominium association's declarations, bylaws, or other documents that describe their process for handling losses both pursuant to the applicable master policy and by the applicable condominium association;(B) Cause to be completed an inspection of the applicable condominium; provided that the inspection shall be consistent with any inspection and reporting standards established by the board of directors of the association and incorporated into the plan of operation pursuant to paragraph (8); and(C) Satisfy any relevant reguirements established by the board of directors of the association and incorporated into the plan of operation;(16) May prohibit coverage under this article for any high-rise condominium for which the association or its servicing entities or any agents thereof have identified maintenance issues that materially affect SB LRB 25-0143-3.docx23 Page 24S.B.12345678910121314151617181920the insurability of the high-rise condominium for the type of coverage being sought; and(17) Shall adopt procedures, guidelines, installment amounts, and a timetable for the repayment of any general fund moneys that are loaned to sufficiently capitalize the fund and deposited into the separate account within the Hawaii property insurance association reserve trust fund established pursuant to section 431:21-105 (b) (9); provided that the repayment shall not commence until the fund is sufficiently capitalized as determined by the board of directors."SECTION 5. Section 431:21-107, Hawaii Revised Statutes, is amended to read as follows:" §431:21-107 --Designati-e^n of area. ] Coverage eligibility. JaL After consultation with representatives of the United States Geological Survey, the state department of defense, and the county in which the area is located, the commissioner shall designate the geographical area eligible for coverage in lava zones 1 and 2 through the association. Those properties in the designated area that meet the standards setSB LRB 25-0143-3.docx24 Page 25S.B. NO.1234567891012131415161718192021forth in the plan of operation shall be provided, insurance through the association.For the purposes of this subsection, "lava zones 1 and 2" means the two zones designated on the United States Geological Survey's lava flow hazard zone map that are the most hazardous and includes volcanic vents in the summits and rift zones of the two most active volcanoes within the State.(b) A condominium association registered under chapter 514B, part VI, having an insurable interest in real or tangible property that is a condominium that is subject to this chapter, located within the State, and that meets the criteria and requirements set forth in the plan of operation, may be provided property insurance through the association.(c) Additional insurance coverages may be provided statewide, including but not limited to single family residences, townhouses, or any other categories of property for which the insurance market is experiencing a failure of the casualty and property insurance market, as determined by the association and approved by the insurance commissioner."SECTION 6. Section 431:21-109, Hawaii Revised Statutes, is amended to read as follows:SB LRB 25-0143-3.docx 2 Page 26s.B. NO. lOHMr1234567891012131415161718192021"§431:21-109 Insurance coverages available under plan.[-(e4-] All properties qualifying for coverage under the plan of operation shall be eligible for the standard fire policy and extended coverage endorsement. The association shall provide additional coverages when directed by the commissioner or when approved by the commissioner. Nothing in this section shall be construed as authorizing the association to provide hurricane coverage.--At the written request of any person w-ho is,— attempting to bec-eme,—a mortgagor on real—property that qualifies—for coverage under the -plan of operation,—the association shall provide—coverage—for an amount eot less—theft the amount- of the mortgage obligation,—het-eie—greete^^thafi—the value of the property being insured;—provided that it docs—net- cxcd the-limits of the plan.--The policy shall name the ie-teftded-efteetgegee—as—the bcncficeary for the amount equal—te the—outstanding balance—on the mo-rtgagc .the application of sabscction——the amount covered under thc^olicy shall comply with article lOE. ] " SECTION 7. Section 431:21-115, Hawaii Revised Statutes, is amended as follows:SB LRB 25-0143-3.docx26 Page 27S.B. NO.12345678910121314151617181920 §431:21-115 --Credita for] Recoupment of assessmentspaid. [ft—member insurer may offset against its premium, fes* liability to thio—State an assessment made with the commiooionor's approval to the extent of twenty per cent of the amount of the assessment—for each of the—five calendar yea-rs following the year in which the assessment was paid.--In the event a member insurer should cease doing buoinoos—in this Statev—all uncredited assessments' may bo credited against its premium tax liability for th... [Content truncated due to size limits]