Consumer Advocates, Regulators Criticize Disaster Insurance Bill

With the Northridge earthquake intensifying the political pressure for a national disaster protection program, California insurance regulators and consumer advocates warned Friday against rushing into an industry-supported plan that they consider seriously flawed.

The Natural Disaster Protection Act now before Congress would shift catastrophe risk away from insurance companies and “dump the unprofitable perils on the government,” Mark Rakich, legislative aide to Insurance Commissioner John Garamendi, testified at a special state Senate committee hearing at Burbank City Hall.

Insurance industry officials at the hearing endorsed the Natural Disaster Protection Act as a long-term solution but repeated their calls for an immediate repeal of the California law requiring insurers that write homeowners policies to also offer earthquake coverage.

State Sen. Art Torres (D-Los Angeles), chairman of the Senate Insurance Committee and Democratic nominee for state insurance commissioner, called the hearing after several large insurers, including Farmers Insurance Group and 20th Century Insurance Co., quit writing new homeowners and earthquake policies in California, citing huge losses from the Jan. 17 quake.

Torres is sponsoring legislation to temporarily prohibit other insurers from withdrawing. He noted that Florida enacted a similar ban when carriers tried to pull out after Hurricane Andrew in 1992.

The withdrawals are already affecting consumers.

Thomas McVarish, whose home in Granada Hills was badly damaged by the earthquake, told the panel that he got a letter from 20th Century notifying him that his earthquake policy will not be renewed when it expires in August.

But with his home in shambles, no other carrier will cover him.

McVarish asked for legislation to keep insurers from dropping policyholders at least until their earthquake damage is repaired.

On Wednesday, in what he called a stopgap measure, Garamendi ordered the California Fair Plan--the industry-financed high-risk insurance pool--to extend its residential fire and earthquake coverage statewide.

He said he took the action to make sure that there would be a carrier of last resort for people who couldn’t find insurance.

But Harvey Rosenfield, author of the Proposition 103 insurance rate rollback initiative, said the crisis is being manipulated by insurance companies as a way of steamrollering through rate increases to fatten their profits.

He said the industry did the same thing in the 1970s and 1980s, inventing crises in medical malpractice insurance and liability coverage for day-care centers.

Earthquake insurance revenue “is not and never has been adequate to cover the risk,” Bill Gausewitz of Farmers testified. Since Farmers started writing earthquake policies in 1968, it has collected a total of $448 million in premiums. But its losses from the Northridge quake alone will exceed $1 billion, Gausewitz said.

“You may have lost a lot on earthquake, but maybe you made it up on auto and commercial” insurance, Torres countered.

Homeowners and earthquake insurance must remain linked, he said, because earthquake coverage can never be profitable on its own in California and must be subsidized by other lines.

Hawaii, after Hurricane Iniki, and Florida, after Andrew, instituted stand-alone insurance pools to deal with hurricane risk, but they do not appear to be a solution, Torres said. If another bad hurricane occurs in Hawaii, for example, policyholders will be hit with a potentially huge surcharge to cover the victims’ losses.

Norma Garcia, attorney for the Consumers Union in San Francisco, criticized the federal Natural Disaster Recovery Act for placing a cap on potential insurance industry losses. As long as the government will handle all losses beyond a certain level, she said, there is no incentive for insurers to underwrite carefully or control expenses.