Quake Aftershocks on the Home Front : Insurance: With fewer companies offering new policies on houses in wake of state law, many sales have been stalled.
Home buyers and sellers are beginning to feel the pinch of California’s shrinking homeowners insurance market.
Realtors in the San Fernando Valley, where the problem is especially acute, say the crisis that was widely predicted after January’s devastating earthquake is now in sight.
With many insurance companies no longer issuing new homeowners policies because under state law they would also have to offer earthquake coverage, it is often taking home buyers several weeks to line up insurance.
The catch is, without insurance, they can’t get a mortgage, and without a mortgage, they can’t buy the house.
People trying to buy or sell houses damaged in last January’s earthquake are even more frustrated.
Even insurance companies that are accepting new customers won’t insure those homes until the present owners settle any open claims with their former insurers. After that, the owners must have their damage repaired and, then, wait another two weeks or more for an insurance company inspector to come out and verify that the repairs were made.
Some real estate industry leaders, fearing the insurance problem will slow down or reverse the long-awaited recovery in the sluggish home sales market, are minimizing the problem.
But others say their business is definitely more difficult because of the shortage of insurance carriers.
These brokers accuse insurance carriers of using strong-arm tactics on homeowners, buyers and realtors. The companies are hoping that those people, in turn, will pressure state insurance officials to abandon the state regulation that requires companies that sell homeowners policies to also offer earthquake coverage.
“Unfortunately, the insurance companies have a political argument they want addressed,” said Pat Neal, president of the 104,000-member California Assn. of Realtors. “We empathize with their problem, but this isn’t the way to handle it. They’re trying to panic the real estate market.”
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Many insurance companies, fearing they will be wiped out by claims in the next major earthquake, want to get out of the quake insurance business altogether, but are hindered by the state law tying quake policies to overall homeowner policies.
Some companies are refusing to take on new customers to avoid that requirement, continuing coverage only for their present customers.
Others are phasing out of the homeowners business entirely, notably 20th Century Insurance Co. of Woodland Hills, which was especially hard hit by claims from the Northridge quake. Under a special exemption from state insurance authorities, 20th Century will issue no new quake coverage, even to its present customers, and withdraw from the homeowners insurance market as policies expire over the next two years.
So far, real estate brokers in the Valley say the crunch hasn’t prevented any home sales from eventually going through. But the difficulties many people are having are starting to hold up escrow closings, causing headaches for everyone concerned.
“I would say it’s created a problem with at least a third of our transactions in the past two weeks,” said Donna Beebe, regional sales manager in the Northridge office of Brentwood-based Fred Sands Realtors. The office averages about 100 sales a month.
“If you’re scheduled to close escrow on a certain date, and suddenly you learn it’s going to be three or four weeks before the buyer can obtain another policy, you can imagine the hardship,” Beebe said.
“It causes a chain reaction. You have a buyer poised to move into the seller’s home, the seller poised to move somewhere else, people ordering moving vans and all the rest of it. Their lives are really very disrupted.”
Moreover, “there’s a concern that the few companies that are still writing homeowners insurance will become saturated,” increasing their risks and driving them out of the business as well, Beebe said.
“Then what?”
Her fears are shared by Alice McCain, president of the San Fernando Valley Assn. of Realtors. “It’s a serious problem. I just hope it doesn’t get to be monumental.”
Reeling from $6 billion in claims from January’s temblor, home insurers have been fleeing California since the shaking stopped. Lately, the pace appears to have accelerated.
But even the state Insurance Department can’t say how many companies are either limiting the number of new policies they will write or not writing them at all. “We’re having trouble pinning it down,” said Bill Schultz, a department spokesman.
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The department’s best guess is that more than half the carriers that were doing business in California before the Northridge quake have backed off at least somewhat, and the figure may well be higher.
Harvey Rosenfield, executive director of the Proposition 103 Enforcement Project, a nonprofit Los Angeles consumer group, said that Farmers, Allstate and State Farm insurance companies are seeking safer ground by limiting their exposure to California quake claims. Those three companies are responsible for 61% of California homeowner policies, he said.
Insurance executives say they won’t go back to doing business as usual in California until Insurance Commissioner John Garamendi drops the regulation obliging them to offer earthquake insurance if they sell homeowner policies.
After witnessing the destruction wrought by the Northridge quake, “insurance companies now believe they have a much greater exposure to the Big One,” Schultz said, referring to the even-stronger quake that many seismologists are convinced will shake Southern California at some undeterminable time in the future.
“This is a very serious situation and it is the commissioners’ top priority,” Schultz said.
But, he added, “Garamendi is fundamentally opposed to any action that would de-link homeowners and earthquake insurance or otherwise make earthquake insurance unavailable. Homeowners ought to be able to protect themselves in the event of an earthquake.”
Schultz added that, as a long-range solution, Garamendi supports a federal disaster insurance system that would cover earthquakes and other major natural disasters, spreading the risk among insurance companies across the country.
Meanwhile, Garamendi recently ordered the state’s insurer of last resort, known as the California Fair Plan, to begin providing fire and earthquake insurance for homeowners statewide through an industry-financed pool. Real estate agents say that is cold comfort, because Fair Plan policies generally cost more for less coverage.
“We’re stressing to everybody: When you buy a house, start shopping for home insurance that day because you can’t get it in the last hour when escrow is closing,” said Michael Glanfield, assistant manager of the Sherman Oaks realty office of Jon Douglas Co.
“The main problem is that insurance companies want to know if there’s quake damage,” Glanfield said. “They’ll insure the house if it is fixed, and it’s mostly little things. A wall finished, a gate fixed, maybe $300 or $400 of work, but they want it done.”
Neal, president of the California Realtors Assn., admitted that the insurance issue was a hot topic at a meeting of 1,000 of the group’s brokers in Monterey last week.
“There’s been lots of talk, lots of rumors and people saying there are problems,” said Neal, whose office is in Garden Grove. “But so far, I have seen no transactions falling out or canceling because of problems getting homeowners insurance.
“The big delays are only because buyers didn’t start looking in time,” Neal said. “We have been cautioning brokers to tell their people they might have to look to a number of carriers and might have to dig deeper to find the policy they want.”
But a lengthy search can be expensive.
A mortgage maker’s commitment to lend a home buyer money at a specified interest rate is “only good for so long, 10 days usually,” said Glanfield. “Then they want to review the situation.”
Meanwhile, “if interest rates go up, it could end up costing you a lot of money.”
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