Insurance Pool Told to Cover Quakes, Fires : Disaster aid: Garamendi orders high-risk fund to offer policies statewide. Move is meant to avert availability crisis.

In an effort to block a potential meltdown of the California homeowners insurance market, Insurance Commissioner John Garamendi on Wednesday ordered the state’s high-risk insurance pool to extend its residential earthquake and fire insurance statewide.

Garamendi’s action, which he called “strictly a stopgap, short-term measure,” means that all homeowners will be able to buy at least bare-bones residential coverage even in areas considered at high risk for earthquakes. The coverage comes from the California Fair Plan, the industry-financed insurer of last resort that, until now, has mainly insured properties in the inner city and brush-fire areas.

The move appears to defuse--at least temporarily--the threat that a squeeze in availability of homeowners insurance will disrupt real estate sales and hurt California’s economic recovery. The squeeze came when several large insurers, including 20th Century Insurance Co. and Farmers Insurance Group, abruptly stopped writing new homeowners and earthquake policies after suffering huge losses from the Northridge earthquake.

Garamendi’s order, which takes effect July 1 and lasts for nine months, grants the Fair Plan a 100% hike in its earthquake insurance rates and a 20% hike in its fire rates. The new earthquake rates of $2.50 per $1,000 of coverage are slightly higher than the current state average.

Garamendi also called on Gov. Pete Wilson and the Legislature to impose a temporary moratorium prohibiting insurers from refusing to renew homeowners and earthquake coverage. The rate hikes and proposed moratorium are intended to keep insurance from flooding into the Fair Plan.

Marjorie M. Berte, Gov. Wilson’s insurance adviser, said of Garamendi’s order: “It’s fine to the extent that it solves an immediate availability crisis.”

Insurers, however, warned that the action does nothing to reduce companies’ exposure to devastating earthquake losses and could make the problem even worse.

Since the Fair Plan simply passes on its losses to California insurers according to their market share, Garamendi’s action “offers nothing but an unlimited and automatic assessment on the companies for whatever deficits may occur,” Bill Sirola, spokesman for State Farm Mutual Automobile Insurance Co., said Wednesday.

Although Garamendi has broad authority over the Fair Plan, it is a private fund that has no link to the state treasury. It was created after the Watts riots of 1965 as a means of providing insurance in urban areas that traditional insurers considered too risky.

Over the years, Fair Plan coverage has been extended to rural places at high risk for wildfire, such as the canyons of Malibu. Garamendi’s order now extends coverage statewide.

The residential policies--available from all California insurance agents--offer stripped-down fire insurance coverage, without coverage for liability, burglary or other risks. In order to obtain full coverage, consumers often supplement their Fair Plan policies with “wraparound” coverage from other insurers.

The Fair Plan has docked member insurers for $210 million in the last nine months--$150 million to cover losses from last fall’s wildfires in Southern California and an additional $60 million related to the Northridge earthquake.

Stuart M. Wilkinson, general manager of Fair Plan, said Wednesday that the fund may have to levy an additional assessment, as earthquake losses are expected to reach $100 million.

California’s three largest insurers--State Farm Mutual Automobile Insurance Co., Allstate Insurance Co. and Farmers Insurance Group--all are calling for repeal of the state law that forces companies selling homeowners insurance to also offer earthquake coverage.

After the Jan. 17 earthquake, which is expected to cost insurers more than $6 billion, the industry has reached the consensus that it is practically impossible to predict earthquake losses and therefore impossible to set a reasonable price for the coverage--even if regulators would let companies charge that price.

Garamendi, Berte and insurance officials agree that a long-term solution must come from the federal government.

The industry favors the Natural Disaster Protection Act, now before Congress, which would create a nationwide catastrophic insurance pool that would cover everything from earthquakes to hurricanes to ice storms. Garamendi doesn’t like aspects of that legislation but favors a similar approach.

In the absence of a national solution, State Farm, Allstate and Farmers--with some disagreement over details--favor a statewide earthquake insurance program that would draw on a specified amount of industry capital--say, $1 billion. If losses from an earthquake exceeded the capital, the program would sell bonds to raise more money.

Deputy Insurance Commissioner William Ahern said such a plan couldn’t work because it is doubtful that the program could sell enough bonds to cover a huge catastrophe.