Sparks Fly Between Wilson, Garamendi Over Quake Coverage

In an exchange of barbed letters, Gov. Pete Wilson has prodded Insurance Commissioner John Garamendi to stop undermining the state’s new residential earthquake insurance program, while Garamendi has responded that he feels there is not enough money to cover damage from a major quake.

Wilson said in his letter Tuesday that Garamendi had already done “a lot of damage to public confidence” in the program, which was passed hurriedly by the Legislature after the 1989 Loma Prieta quake and which takes effect Jan. 1.

Because of his statements questioning the program’s viability, Wilson added, “We believe that you (Garamendi) should undertake a public communications program to undo that damage and to foster public support.”

Garamendi responded Wednesday that Wilson has failed to support his suggestions for repairing the program’s flaws by increasing the surcharge paid by homeowners or by reducing the amount of damages to be paid.

In his letter to Wilson, Garamendi told the governor, “We need your active leadership to save California homeowners from the adverse effects of a new insurance premium (or tax) and the likelihood that they will not receive full benefits” if a big earthquake occurs.

Under the state plan, companies selling homeowners’ insurance after Jan. 1 are supposed to collect a surcharge from policyholders of $12 to $60 a year depending on a home’s vulnerability to earthquakes.

The surcharge would be the maximum in Los Angeles and Orange counties, areas that are judged to be highly vulnerable to damaging earthquakes. For most homes in San Diego, it will be $33 a year, and in the San Joaquin Valley, where earthquakes have been infrequent, it will be $12 to $16 a year.

Under the program, homeowners could recover damages up to $15,000 after paying a $1,000 deductible--assuming there is a sufficient amount in the newly created Residential Earthquake Recovery Fund.

Additional losses would be recoverable only if the homeowner has a standard earthquake insurance policy with a private company. Such policies usually contain a 10% deductible and the new state program is designed to fill that gap.

The state program does not cover renters, and they will not be required to pay the surcharge.

All homeowners will be automatically covered beginning Jan. 1, but their coverage will end if they pay their homeowners’ insurance premium without also paying the quake surcharge.

Garamendi delayed the program, saying that it is not sufficiently funded by the surcharge that the Legislature approved. He won a six-month delay from the Legislature earlier this year, and on Wednesday, in testimony to a legislative subcommittee, he suggested that the program be repealed and replaced with a disaster fund.

Should a big, damaging earthquake occur early in 1992, Garamendi said, there would not be enough money invested in the state fund to cover claims without the Legislature dipping into the state’s general budget.

“It’s a matter of successful prayer,” Garamendi said Wednesday in an interview. “It would take us several years to build the fund to the point that we could sustain the losses of a serious earthquake, such as Loma Prieta or Whittier.”

Garamendi said he has repeatedly asked the Legislature to increase the deductible, raise the surcharge or reduce the maximum coverage, but lawmakers have declined to alter the program.

Based on the state’s earthquake history, income from homeowners surcharges will be $313 million a year and the average annual payout will be $360 million a year, said John Holden, the official named by Garamendi to manage the program.