Living High Should Cost a Premium : Re-examination of insurance rates for fire-prone zones is obviously needed

Insurance Commissioner John Garamendi’s decision to hold hearings into the California Fair Plan, which provides fire coverage to high-risk property owners, is welcome. The question of whether the plan provides adequate and realistically priced insurance coverage to homeowners in Southern California’s hillside areas is becoming an issue as fire victims settle their claims arising out of the recent firestorms. Certainly insured fire victims must be fairly compensated. But it might also be an appropriate time to reassess the Fair Plan.

The Fair Plan is a state-mandated, industry-sponsored insurer of last resort. It is faced with claims of more than $140 million for homes damaged in the fires. As a result, for the first time in its 25-year history the plan has had to tap its 280 insurance-company members for cash to replenish depleted reserves.

The plan, originally established in 1968 to provide insurance to the inner city and later extended to hard-to-insure fire-risk areas, is funded by assessments on insurance companies that make up the gap between premiums paid in and claims paid out.

But has the cost of those assessments been passed on to other insured homeowners, one way or another, so that they in effect subsidize high-risk canyon dwellers? For instance, in the wake of the 1991 fire in the hills of Berkeley and Oakland, insurance companies moved aggressively to persuade customers to expand coverage. The Insurance Department is now investigating whether 20 companies overreacted to the fire by overinsuring customers.

Garamendi’s hearings will also want to examine whether California Fair Plan premiums accurately reflect the true risk of insuring homes in fire-prone areas. The Fair Plan premium is based on fire rates that have not been raised since the early 1980s. Surcharges ranging from 9 cents to $1.25 per $100 of insured value are then added, based on the proximity and density of flammable brush near homes. The average premium for the 26,000 homes in high brush areas insured by the plan is $715, excluding theft and liability coverage. A directly comparable policy for a home next to a fire station in Los Angeles’ flatlands would cost about $600.

Living in canyons is a gamble with Nature. Homeowners in such areas should be willing to accept special responsibility--by doing all they can to diminish the fire risk by building and landscaping safely. Garamendi must determine whether they are also paying for insurance that correctly assesses the remaining danger.