Farmers to Raise Deductible for Earthquakes : Insurance: Customers will pay 25% of maximum coverage instead of 10%. Garamendi calls the change illegal.

In the latest consumer aftershock from the Northridge earthquake, Farmers Insurance Group said Friday that it will raise the deductibles on most of its California earthquake insurance policies to 25% from 10%, meaning a homeowner with a $160,000 policy would have to absorb the first $40,000 of losses.

Insurance Commissioner John Garamendi denounced the action as illegal and “a violation of the trust and faith between Farmers and its policyholders.” He said he will attempt to block Farmers from putting the plan into effect.

But Farmers, California’s third-largest homeowners insurer with more than 1 million policyholders, said it believes the move is permissible under a rate filing approved by the Insurance Department in 1989, in which the company indicated a range of deductibles.

“We would never have taken action that we did not think we were fully authorized to take,” said Jeffrey C. Beyer, Farmers vice president. “It was one of the very few things we could do on our own authority to take some steps to incrementally reduce our exposure to earthquakes.”

Farmers faces an estimated $1.1 billion in claims from the Jan. 17 earthquake.

For current homeowners customers who want to add earthquake coverage, the higher deductible is effective immediately, Farmers said in statement. For those renewing their earthquake policies, the effective date is Sept. 1. Farmers has 394,000 earthquake policyholders in the state.

Because a higher deductible reduces a policy’s value, Farmers will cut its earthquake insurance premiums by 25% to 40%, it said.

Garamendi said he has already rejected applications from two insurers seeking to raise deductibles to 20%. He said he will continue to reject requests to raise deductibles beyond 15%. A majority of earthquake policies carry a 10% deductible.

It was not possible to tell Friday whether other companies might try to follow Farmers’ lead and raise their deductibles under the authority of previously approved rate filings. Garamendi said his staff is researching whether other companies have similar flexibility in their filings.

He said the California insurance code forbids companies changing the terms of policies upon renewal, but he conceded that Farmers might be able to impose the higher deductible on customers who hadn’t previously bought earthquake coverage.

Farmers’ action adds to the turmoil in the California insurance market. Beginning last month, most of the state’s largest carriers--including Farmers, State Farm Mutual Automobile Insurance Co., Allstate Insurance Co. and 20th Century Insurance Co.--either stopped writing new homeowners and earthquake policies or severely restricted their sales.

In taking its action Friday, Farmers, a wholly owned subsidiary of London-based BAT Industries, cited the fact that the insurance rating firm of A.M. Best Co. had downgraded Farmers’ claims-paying rating to A- from A in June.

Were its rating to drop any lower, Farmers said, its homeowners policies would be deemed unacceptable by certain mortgage lenders, hurting the company’s ability to do business nationwide.