NEWS ANALYSIS : Fires Fan Debate on Insurance Rate Fairness

The light blue haze from the lower canyon was like a thin smoke from slowly burning money. Even the sea looked precious through it.

--Ross Macdonald, “The Moving Target” (1949)

It did not take an L.A. detective novelist to imagine the smell of money burning in the Malibu canyons last week, but a question being asked increasingly since the fires is whose money was it?

Are the vast majority of Orange County and Los Angeles flatlanders--through insurance premiums and taxes that reflect the tremendous costs of fighting urban wildfires--subsidizing the few who choose to live on remote slopes choked with flash-paper chaparral?

There is strong evidence that homeowners’ insurance rates in the most dangerous brush-fire zones--including some of those in Orange County--are too low to reflect the risk.

And at the same time, there is a political groundswell building to pressure insurers to compensate fire victims beyond the limits of their individual policies, as was done after the Oakland firestorm of 1991. The rationale is that it was the duty of the companies and their agents to make sure that homeowners had adequate coverage.

The California Fair Plan, the industry-sponsored insurer of last resort in brush-fire zones, covers 26,000 homes in the Santa Monica and San Gabriel mountains, with an average coverage amount of $318,000 per home. The average yearly premium: $715.

A comparable policy for a house on Los Angeles’ Westside right next to a fire station would cost about $600.

Sheldon Richman, an analyst at the Cato Institute in Washington, D.C., said the existence of a Fair Plan--a high-risk pool for situations where standard carriers will not write insurance--proves that there is subsidization.

If companies were unregulated and free to price their policies to reflect the true risk, Richman argues, there still would be coverage available, but it would be far more expensive to live in a fire-prone canyon under a cedar shake roof. Or on a Missouri riverbank or a South Florida beach.

“The government in many ways is afraid to force people to take responsibility for where they live,” said Steven Goldstein of the Insurance Information Institute in New York.

Some insurance industry officials maintain that as long as society insists on subsidizing coverage in areas prone to fires, floods and hurricanes, many people never will take the steps necessary to protect their homes against disaster.

Fewer than one in five victims of last summer’s disastrous Midwest floods had bought federal flood insurance even though the program is widely publicized and is relatively inexpensive.

“There’s what I call a 911 mentality in this nation today,” said Chuck Mills, a program manager with the National Assn. for Search and Rescue and a 27-year veteran with the Forest Service in California. “People think they should be able to get help anywhere within three minutes of dialing the phone.”

To be sure, many Southland homeowners in the areas hit by the recent wildfires understood the hazards of the canyons and took such preventive measures as clearing brush and installing water tanks and high-pressure hoses.

Legislation before Congress would help institutionalize such self-reliance.

The proposed Natural Disaster Protection Act, backed by Rep. Norman Mineta (D-San Jose), among others, would create a federal disaster insurance pool with a difference. The surplus that builds up between catastrophes would be used to undertake disaster mitigation projects--planting fire-retardant shrubs in California canyons, or providing grants to help poor Florida residents bring their homes up to code.

People would be required to pay into the fund through their homeowners policies, with rates varying according to the riskiness of their locations.

Supporters say the legislation would force people to take a role in their own protection.

Even if insurance customers sometimes act helpless, consumer advocates say, the industry has its own reasons for keeping them that way.

After the vicious Oakland firestorm of two years ago, the insurance companies--by their own acknowledgment--got off to a terrible start handling claims. They were disorganized; they shuttled adjusters in and out of the fire zone, giving customers conflicting answers; some firms offered paltry advances for living expenses; some played hardball over settlement offers and damage estimates.

The dismal opening left the industry vulnerable to a backlash, and when it came, it was powerful.

At the forefront was Ina De Long, a former State Farm agent who had founded a group called United Policyholders to give consumers more leverage in dealing with insurers.

De Long argues that insurers contribute to consumers’ confusion and dependence by creating policies that are impossible to understand. That allows the companies to tailor their coverage to suit their business goals rather than their customers’ needs.

De Long helped organize Oakland fire victims into separate groups for each insurance carrier so that they could share information about settlement offers and push collectively for better treatment. The group also enlisted politicians, principally state Insurance Commissioner John Garamendi, to lean on the companies.

The result was that insurers paid out $339 million more than the coverage limits of their policies. In all, 1,140 homeowners got “policy upgrades” out of about 3,000 who lost homes, De Long said Thursday.

“They did it in Oakland and they should do it here,” De Long said. She has helped organize several meetings for victims of the recent fires, using the same techniques that worked in Oakland.

Pushing for higher payouts for the Laguna Beach or Calabasas/Malibu fire victims presents a thorny problem for politicians because of the nature of the Fair Plan, the area’s largest insurer.

The Fair Plan, which covers more than half the homes in the Santa Monica Mountains and has thus far received claims of $116 million from the Calabasas/Malibu fire alone, has another, larger constituency. It insures businesses in the inner city that other carriers would not touch.

The program was created in 1968 in response to federal legislation after the 1965 Watts riots. The aim was to make sure that inner-city businesses and homes could obtain coverage in areas deserted by traditional insurers.

But with the memory still fresh of the Bel-Air wildfire of the early 1960s, the insurance industry and state legislators added brush-fire coverage to the program. The program uses no public funds but is financed by assessments against private insurers.

If Malibu residents get higher payouts, what about the thousands of Los Angeles store owners who had only bare-bones Fair Plan coverage and received no upgrades for their policies after the 1992 riots? Special treatment for the Malibu victims could be especially unpopular in light of their relative wealth.

Some argue, however, that a well-to-do victim of a canyon fire is no less worthy of sympathy than other disaster victims.

According to some, the media--attracted by the magic of the Malibu name and the movie stars who live there--have helped fan the fires of class resentment.

Entertainer Shelley Berman wrote a stinging letter to The Times this week, upbraiding the newspaper for what he called its “mean-spirited treatment of the people of Malibu.” He singled out a story that mentioned a fire victim’s tasseled loafers.

If people on the floor of the Los Angeles Basin believe they are subsidizing the “filthy rich” who live in the canyons, they should elect municipal officials who will put a halt to the development there, Berman said in an interview Wednesday.

But Berman, who lives in Bell Canyon north of Calabasas, acknowledged that the “911 mentality” exists in some places. He pointed out proudly that he and his neighbors band together to make sure that brush is cleared and the fire hazard is reduced as much as possible.

“We get on our own case,” he said.

Times staff writer Chris Woodyard contributed to this report.