COVER STORY : ECONOMIC Russian Roulette : Getting Insurance in Central Los Angeles Is Even Tougher Since the Riots. As Many as Half the Businesses in the Area May Be Without Policies.

SHOULD A MAJOR FIRE OR OTHER CALAMITY BEFALL HIS Boyle Heights auto parts store, Arturo Velazquez would see 21 years of work go down the drain.

Until last June, his business was insured for several years by a Caribbean-based company that was one of about 10 firms illegally selling policies in California. The bogus companies were exposed in the aftermath of the riots, when more than 100 business owners wound up with worthless claims.

Since then, Velazquez says, several insurance carriers have refused to cover him, saying that the stoves of a small diner next to his store at 1st and St. Louis streets create an excessive fire risk. Those companies willing to provide fire and liability coverage have quoted annual premiums of about $3,000, nearly twice his old rate and far more than the 65-year-old entrepreneur can afford.

“You just have to hope that nothing happens,” Velazquez says, “or else you’re out of business.”

Obtaining insurance--whether for automobile, home or business--has for years been an iffy proposition in Central Los Angeles. Today, two years after the riots left a swath of destruction across the central city, commercial insurance has become even more difficult to purchase. As many as half of the businesses in the area may be uninsured, based on surveys of area businesses.

Two insurance carriers active in selling commercial policies in the inner city went out of business because of riot-related claims, and other firms that historically have been skittish about writing policies in the area are even more so now.

“Absolutely, the industry has become a lot more leery,” said Javier Rodriguez, an independent South Gate insurance agent who has been selling policies on the Eastside and in southeast Los Angeles County since 1978.

Economists and brokers say the lack of commercial insurance can stifle business growth and retard economic development. For instance, even those businesses that can get insurance in Central Los Angeles face premium costs 15% to 30% above that charged in more affluent parts of the city, creating little incentive for them to move to or open new branches in the area.

The lack of carriers in Central Los Angeles has fostered veritable insurance monopolies for the area, contributing to inflated premiums, critics of the industry say. Further exacerbating the problem, they say, is that the void left by the departure of many legitimate insurance carriers has frequently been filled by unlicensed agents and companies that knowingly sell bogus policies.

The overall problem, according to state officials and insurance watchdog groups, is the result of years of redlining, the practice by which companies refuse to sell policies in poor or predominantly minority areas. Carriers redline by declining to write policies and refusing to contract with minority independent agents in certain ZIP codes.

“It is clear that the insurance industry blatantly discriminates against the inner city,” state Insurance Commissioner John Garamendi said last month at a California Department of Insurance public hearing on redlining in Los Angeles.

Insurance industry representatives contend that the problem is not redlining but affordability. Because low-income neighborhoods often have higher crime rates and other risks, they say, premiums are more expensive and beyond the reach of many residents and business owners.

“Redlining may indeed exist. But if it does, it is to a limited extent and is far overshadowed by the affordability issue,” said Richard Wiebe, the Sacramento-based spokesman for the American Insurance Assn., which represents 270 carriers nationwide. “I have yet to hear anyone at any public hearing say they could not obtain insurance” because of redlining.

George Bivins, a board member of the Black Business Assn. and an independent agent who has been selling insurance for 25 years in the central city, said that some insurance carriers redline Central Los Angeles by not allowing their policies to be sold by independent agents in the area at any price. Affordability is an issue, he said, because it is a direct result of redlining.

He added that independent agents sometimes take the brunt of criticism for high costs. “We just have to try to explain to them that the rates are established by the company and not us,” he said.

Bivins says that when he worked for Farmers in the late 1970s and early ‘80s, the carrier told him that he could not have his office in Central Los Angeles.

“I was told my office had to be in Playa del Rey,” Bivins told lawmakers at the recent hearing on redlining.

Officials at Farmers, which along with other agencies has been openly criticized by state officials for allegedly discriminatory practices, denied Bivins’ assertion. “I cannot believe that is true,” said Farmers spokesman John Millen, adding that brokers are independent contractors and can locate anywhere. “They can set up their office where they want to. They go where they can make money.”

Redlining is difficult to prove because the state mandates few disclosure requirements for insurance companies. But under new state insurance regulations proposed by Garamendi that become effective this month, carriers will be required to file annual reports detailing the ethnic and racial breakdown of their customers, the number of policies they decline to write in specific areas and language skills of their agents, among other information.

“This is a major milestone in the fight against redlining,” said Bob Gnaizda, general counsel for the Greenlining Coalition, an alliance of minority and consumer organizations.

Two other measures--a state bill sponsored by state Sen. Art Torres (D-Los Angeles) and federal legislation by Rep. Joseph P. Kennedy II (D-Massachusetts), both of whom attended the Insurance Department’s hearings last month in Exposition Park--would require similar disclosures by the insurance industry to determine the extent of redlining.

For small-business owners such as Velazquez, the issue is more than a philosophical debate over redlining versus affordability. Unable to obtain comprehensive coverage for whatever reason, they liken each workday to a game of economic Russian Roulette, where any unforeseen tragedy could spell the end for them and their families.

“This is a neighborhood store. We don’t make that much,” says Velazquez, who along with his 21 years in business has about $80,000 invested in his Mechanical Auto Parts store, which he operates with his wife, Eva. “We can’t afford to pay too much for insurance.”

He has been uninsured since his broker informed him almost a year ago that he was no longer covered and would have to switch insurance companies and pay twice the annual amount of his previous policy, or about $3,000. He said the broker did not explain why he would have to obtain new insurance.

His former policy was with Pacific Fire & Marine Insurance, a Caribbean-based carrier that had been writing policies in the area without a license. The California Department of Insurance last year declared the firm ineligible to do business in the state. The department has no data on whether policyholders were able to collect losses from Pacific Fire & Marine.

Velazquez was unaware that the company was illegally operating in the state until it was pointed out in a recent interview.

“I’ll be damned!” he exclaimed.

Although he paid a $1,668 annual premium for several years, Velazquez counts himself lucky because he never suffered insurance losses.

Many others were not so fortunate.

In April, 1993, 110 small-business owners--most of them Korean Americans--filed a lawsuit against about 50 insurance firms, wholesale brokers and agents who allegedly reneged on about $15 million in unpaid claims after the 1992 riots. The lawsuit is pending in Los Angeles Superior Court.

One of the merchants is Young Ki Kim, 47, who saw a business worth about $400,000 go up in flames when his liquor store at 95th and Figueroa streets burned to the ground the first night of the unrest. Kim had assumed that his annual $1,000 premium covered him for up to $550,000 in liability and fire losses.

His insurance carrier was First Assurance & Casualty Co. Ltd. of the Turks and Caicos Islands, a small British colony in the West Indies. The firm was declared insolvent last year and ruled ineligible to do business in the state by the Department of Insurance. The lawsuit claims that the carrier is responsible for about $7 million in unpaid claims.

Kim says the company was recommended to him by friends who also owned businesses. When he found out that he had been duped, Kim said, he approached his broker. “He told me, ‘I did my best.’ ”

Kim has a bachelor’s degree in agriculture and dreams of owning a farm far away from the crowded neighborhoods of the central city. In the meantime, he has started a new business with the help of a $200,000 disaster loan from the U.S. Small Business Administration.

Now, from behind thick, bullet-resistant glass, Kim operates a small gas station and convenience store in a neighborhood just south of Koreatown. He purchased a $3,000 annual fire and liability policy from Twin City Fire & Insurance Co. He found out about the carrier from a list provided the Department of Insurance.

No areawide analysis has been conducted to determine how many Central Los Angeles businesses are uninsured. But consumer groups say two narrower surveys conducted after the riots offer a fairly accurate picture of the overall situation.

The Department of Insurance interviewed 1,859 business owners who suffered riot losses. Of those, 890--or 48%--said they had no insurance. Another survey conducted by the Wilshire district-based Korean-American Grocers Assn. found that about half of its 3,300 members had no insurance.

Unlike many other riot victims, the Villa family had insurance for its South-Central flower shop, which was looted and burned the first night of the violence. But family members say their insurance carrier, Allstate, canceled their policy after it paid them the $14,000 for which they were insured.

“It is not fair,” said Maricela Villa, who operates the business near Manchester Avenue and Main Street with her husband, Luis. “This is not right.”

Allstate spokesman Al Orendorff said the insurance company was unable to locate records indicating whether the Villas’ policy was dropped. He said the carrier would be willing to write a new policy for the Villas or anyone else in South-Central provided they do not constitute an excessive risk.

“The idea that we take our urban business customers lightly is not true,” Orendorff said.

Maricela Villa said that when the shop reopened last year, the family was unable to obtain insurance from a major carrier and had to take out a policy with the California Fair Plan, usually the insurer of last resort.

The Fair Plan was started as part of nationwide insurance program after the urban unrest of the late 1960s. In California, the plan is funded by about 280 insurance companies doing business in the state, each of which contributes to the independent program based on the respective percentage of their market penetration.

Although the Fair Plan provides fire and vandalism coverage, brokers say its plans are not as comprehensive as those offered by private carriers and are generally purchased by people who cannot find any other insurance. But many business owners interviewed said they were unaware that the Fair Plan exists.

Fair Plan General Manager Stuart Wilkinson says it spends about $50,000 annually on marketing for billboards, media announcements and brochures in Spanish, English and Korean. “I think the problem is that people don’t pay a lot of attention to insurance ads,” he said.

Local brokers say the Villas’ experience illustrates how commercial coverage has become more difficult to obtain in the aftermath of the riots.

“It’s gotten worse,” Bivins said. “As a broker, I don’t have problems finding customers. I have a problem finding (insurance) companies.” Bivins sells a number of policies for Crusader Insurance Co., a primary insurer of small businesses in the central city.

Two companies that had insured many Central Los Angeles businesses are no longer writing new policies.

Western International Insurance Co., which was swamped by $22.4 million in riot claims, was declared insolvent in August, 1992. And just last month, Aim Insurance Co. was taken over by state regulators because its assets were below the $2.1 million required to sell insurance in California. Aim is paying claims but is not writing new policies.

The decline of smaller insurance companies has heightened already heated attacks against larger firms that allegedly do little or no business in underserved communities. Garamendi is especially critical of Farmers Insurance and State Farm Insurance, which he says have failed to establish offices in South-Central and other inner-city areas despite being two of the industry’s largest carriers.

“If you live in the inner city, some of the biggest of these companies might as well have their offices on Mars,” he said. “It happens to be blatant discrimination that’s going on with State Farm and Farmers.”

Representatives of both insurance companies dispute Garamendi’s discrimination charges and add that their offices and agents are listed in the telephone book, which makes them accessible to everyone.

Farmers spokesman Millen said the firm is the largest insurer of businesses statewide, including inner-city areas. The company sustained $50 million in losses after the riots--more than any other insurer, Millen said.

He called Garamendi’s charges “completely untrue.” State Farm spokesman William Sirola agreed, calling Garamendi’s allegations “absolutely, totally ridiculous.”

He said State Farm is very active in the central city, citing the more than $30 million that the company suffered in riot-related losses.

In testimony at the insurance hearing, State Farm representatives said the company has an agent within 3.6 miles of every resident in Central Los Angeles.

Times correspondent Jake Doherty contributed to this report.

The Cost of Car Insurance

Here are three scenarios for auto insurance coverage. The figures corresponding to each case explained at bottom are the average annual costs in the ZIP code areas noted. Included are the Los Angeles regional averages.

A: A 19-year-old ma, licensed two years with no violations. Liability coverage. Logs 15,000 miles annually.

B: A 45-year-old husband with a ’92 Toyota Camry four-door sedan. Logs 20,000 miles annually. His 43-year-old wife drives a ’93 Dodge Caravan minivan. Logs 12,000 miles annually. Each of them has one speeding ticket. Their 17-year-old son, a licensed driver for one year, is an occasional operator. Full coverage; $100 comprehensive and $200 collision deductible.

C: A 65-year-old driver with no violations. Liability coverage. Logs 7,500 miles annualy.

*

Pacific Palisades

A: $2,721

B: $6,164

C: $727

*

Pasadena

A: $2,321

B: $4,928

C: $597

*

Silver Lake-Echo Park

A: $4,192

B: $8,731

C: $1,068

*

South-Central

A: $4,063

B: $8,349

C: $1,057

*

Norwalk

A: $1,952

B: $4,528

C: $531

*

Monterey Park

A: $2,345

B: $5,348

C: $633

*

Regional

A: $2,708

B: $5,926

C: $713

On the Cover

Soon and Young Ki Kim stand outside the store they purchased after their original business burned down during the riots. They were victims of a bogus insurance policy and were forced to take a loan out on their home to finance a new store.

Their plight is typical of many Central Los Angeles business owners, who have found themselves underinsured or uninsured because of inflated rates, redlining and unlicensed companies.