State Insurance Program Too Late to Aid Recovery

In a star-crossed combination of fate and politics, Friday’s earthquake hit just three days before the scheduled start of a state insurance program that would have left every homeowner covered for property damage up to $15,000.

The new earthquake insurance program was proposed by former Gov. George Deukmejian last year to help protect homeowners after the 1989 Loma Prieta earthquake caused extensive damage in the San Francisco Bay Area. Under a law passed by the Legislature, the state Department of Insurance was given until July 1 to gear up for the program and begin operations.

However, state Insurance Commissioner John Garamendi says the program is so flawed and behind schedule that it cannot reasonably be expected to take effect until next year. At Garamendi’s urging, the Assembly approved legislation Friday night to delay the start-up of the program until Jan. 1.

Garamendi said he felt “terrible” promoting the bill on the day of a major earthquake. But the timing, he said, would have been even worse if a faulty insurance program had already been in place.

“There’s no pleasure in it,” he said. “Politicans want to offer people everything under the sun. I can’t do that.”

Garamendi, who took over the Insurance Department in January, said he has been unable to set up the program because the budget he inherited from the Deukmejian Administration provided no money or staff to run it.

Furthermore, Garamendi said, the program would not collect enough money from property owners to pay the $600 million in damage expected annually from tremors that shake the state.

If the program had been in place before Friday’s Sierra Madre quake, homeowners paying between $12 and $60 a year would have received compensation for damage that is not covered by private earthquake insurance.

“It is insolvent before it even begins,” Garamendi said in an interview. “If it were a private program it would never get a license in California. If it already existed, I would shut it down.”

Barely 12 hours after the Sierra Madre Earthquake struck, the Assembly voted 67 to 0 to approve the emergency legislation sought by Garamendi to postpone the program’s start-up. The measure previously had been approved by the Senate.

Garamendi had urged swift action on the bill so that Gov. Pete Wilson can sign it by Sunday, before the program is scheduled to begin. Aides to Wilson said he has not decided whether he will sign the measure into law.

Sen. Frank Hill (R-Whittier), who carried the bill on behalf of Deukmejian last year to establish the program, said he was frustrated by Garamendi’s proposal to delay it for another six months.

He noted, however, that under Deukmejian, former insurance Commissioner Roxani Gillespie did nothing to prepare for providing the earthquake insurance. Furthermore, he said, all of the financial data that now appears flawed was provided under Gillespie.

Hill, whose home in Whittier suffered $80,000 in damages during the 1987 Whittier quake, was philosophical about the timing of the Sierra Madre quake just three days before the program was to begin.

“You’ve got to pick a date,” Hill said. “The earthquake just proves the point, there’s a need out there for the program. There will be other quakes and we need to put together a statewide program to deal with it.”

The program is designed to fill the gap left by conventional earthquake insurance, which usually has a deductible of 10%. For a home with a $150,000 replacement value, that means homeowners can face costs of $15,000--even if they purchased private insurance.

Of 25,000 houses damaged in the Loma Prieta earthquake, 24,000 suffered damage less than the amount of the 10% deductible of conventional coverage.

To help property owners recover from the Loma Prieta and Whittier earthquakes, the state approved hundreds of millions of dollars in aid. After the 1989 earthquake, for instance, the Legislature and Deukmejian approved a temporary increase in the sales tax that raised nearly $800 million.

In part, the new earthquake insurance program was designed as a disaster relief program as much as an insurance program. Its goal was to help raise money from property owners likely to be hit by an earthquake so that the state would be better prepared to provide aid than in the past.

However, Garamendi, the state’s first elected insurance commissioner, said the program could never meet its goal because property owners would not be charged enough. Even with the $60 maximum premium, the state would only raise $360 million a year, he said. Damage could reach $8 billion in the event of a catastrophic quake, he estimated.

That means that California, already facing a $14.3-billion shortfall, could be liable for repairing many thousands of homes in the event of a major temblor, he said.

To adequately cover the costs, Garamendi said the premium charged should average $119 a year.

“Our recommendation is make the thing actuarially sound or tell the public they’re going to get less than dollar for dollar payment,” he said.