Farmers Halts Sale of Homeowner Policies : Insurance: The move, called temporary, also applies to quake coverage. It raises fears of a chain reaction in the state.

Farmers Insurance Group, California’s third-largest home insurer, abruptly pulled the plug on homeowners and earthquake coverage Thursday, ordering its agents to immediately stop writing new business in California.

The action, which Farmers described as temporary, raises fears of a chain reaction that could imperil the state’s fragile economic recovery. At a minimum, it will worsen consumers’ problems finding coverage after the devastating Northridge earthquake.

“This is quickly developing into a crisis,” Marjorie M. Berte, insurance adviser to Gov. Pete Wilson, said Thursday. She cited last week’s decision by 20th Century Insurance Co. to withdraw from the homeowners and earthquake insurance market, as well as moves by other major insurers to restrict the number of new policies they write.

Wilson is very concerned that a squeeze in the availability of homeowners insurance could disrupt real estate sales and hurt the recovery, Berte said. Mortgage lenders require borrowers to obtain homeowners insurance.

Farmers actually suspended its earthquake writings nationwide, though by far the bulk of its quake policies are in California. It extended the suspension to homeowners coverage in California only, because state law here requires that insurers who write homeowners policies must also offer earthquake coverage.

Among the five largest California insurers, only No. 2 Allstate Insurance Co. has continued to write earthquake coverage without restrictions, and that company is having second thoughts.

“We’re not in a position to be the only company doing business out here, because we have exactly the same concerns as everybody else,” Dick Donegan, Allstate’s regional underwriting chief, said Thursday.

Those concerns are that another quake similar to the 6.8-magnitude temblor that hit Los Angeles on Jan. 17 could threaten the survival of some insurance companies.

Farmers, which had its claims-paying ability rating downgraded Monday by insurance rating firm A.M. Best Co., on Thursday raised its estimate of gross claims costs from the Northridge quake to more than $1 billion, from an earlier estimate of $800 million.

The quake is expected to cost the insurance industry more than $6 billion, making it history’s second-worst insurance disaster after Hurricane Andrew, which caused $16 billion of insured damage in Florida and Louisiana in 1992.

Last week, Woodland Hills-based 20th Century announced its withdrawal from the homeowners and earthquake markets, saying that $600 million in earthquake claims had wiped out two-thirds of the company’s surplus. 20th Century is writing no new policies, its 90,000 current earthquake policies will not be renewed, and its 240,000 homeowners policies will be phased out over the next two years.

Farmers writes about 200,000 new homeowners policies a year in California. About 30% of its 1 million California homeowners customers have quake insurance.

Farmers, unlike 20th Century, said it will renew existing policies. The company did not indicate when it will resume writing new policies. A spokesman acknowledged that Farmers is buying time while it ponders how to reduce its earthquake exposure.

The insurer said Thursday that it is considering applying for an increase in its earthquake and homeowners rates.

Aware that its sudden exit from the homeowners market could disrupt pending real estate sales, Farmers said it will accept new policies that “are already in process and due to close within a reasonable time.” Farmers did not define “a reasonable time.”

State Farm, California’s largest insurer, adopted a “managed growth” program a year ago, placing a cap on the dollar amount of its new homeowners business.

Safeco Insurance Group stopped writing policies for homes built before 1960 unless they have been retrofitted against earthquakes. TIG Insurance Co. (formerly Transamerica) and Chubb Group have also placed restrictions on new coverage.

The result is that the flow of business has been diverted to the companies that continue writing. Allstate’s Donegan said new business is up 60% over last year’s levels.

State Insurance Commissioner John Garamendi, in a statement from Washington, said, “There are a number of significant statutory powers available to the insurance commissioner, which I can and will invoke if necessary to ensure the continued availability of homeowners and earthquake insurance to all who seek coverage.”

By coincidence, Garamendi was in Washington to push for passage of federal legislation to create a national disaster insurance fund.