A Crisis on Hold : State Plods On Despite Pullback by Insurers
When the time came this week for the insurance industry to rally state lawmakers to alleviate the California insurance crisis, the crisis turned up missing.
Despite predictions that the pullback of big insurers from the state’s homeowners and earthquake market would stymie home sales and cripple the economic recovery, it hadn’t happened by the time the Legislature closed up shop for the year on Wednesday.
The industry, accordingly, had no luck securing passage of legislation that would have created a state-backed earthquake insurance pool to help insulate insurers against another Northridge earthquake--or a worse one.
“It’s tough trying to sell a future crisis,” admitted Bill Sirola, spokesman for State Farm Mutual Automobile Insurance, which, as the nation’s largest homeowners carrier, took the lead in vainly pushing the earthquake pool idea in Sacramento.
Besides the lack of a clear-cut emergency, other factors also contributed to the industry’s inability to put its plans across. Those factors included the complexity of the issue, the lack of time to consider it and fears that a California solution would take pressure off Congress to pass federal disaster legislation.
Insurers and officials such as Marjorie M. Berte, Gov. Pete Wilson’s insurance adviser, still fear the shoe will drop. For the moment, however, real estate and escrow agents insist they have seen few if any sales scuttled because a buyer failed to secure insurance. Delays, yes; busted deals, no.
But if the crisis hasn’t emerged full-blown, that’s not to say that the Jan. 17 earthquake hasn’t caused real problems.
Today, earthquake and homeowners insurance--particularly for new customers--is harder to find and often less comprehensive and more expensive than it was last spring, before three-quarters of the state’s insurers began restricting sales.
Take Mark Green of Santa Monica, for example. He got a letter in the mail last June from his carrier, New Jersey-based Chubb Insurance Group, telling him his homeowners policy would not be renewed because his house was built before 1945.
Chubb, of course, had known the age of the house when it renewed his policy the previous seven times, but that was before Northridge.
Facing an Aug. 24 expiration date--Chubb gave him a month’s extension at no cost--Green scrambled to get his 1925 home retrofitted. Some carriers will insure old homes if they’ve been bolted to the foundation, for example. But Green still couldn’t find a conventional insurer to take his business, so he was forced to buy a fire and earthquake policy from the California Fair Plan, the industry-sponsored insurer of last resort.
Historically, the Fair Plan has sold its bare-bones fire insurance in brush-fire zones that regular companies consider too hazardous to write. Last June, however, as major carriers such as State Farm, Allstate Insurance Co., Farmers Insurance Group and 20th Century Insurance Co. were restricting their writings of new homeowners and earthquake insurance, Insurance Commissioner John Garamendi ordered the Fair Plan to extend its coverage area statewide.
Fair Plan policies don’t include liability coverage and other features found in most homeowners policies, so Green had to find a “wraparound” policy to fill in the gaps. He ended up paying substantially more--without even including the money he spent on retrofitting.
“It’s not so much that I’m mad at Chubb as at the industry,” Green said. “I don’t feel they’re really taking care of their customers.”
A comprehensive policy that used to cost $1,000 a few months ago can cost three times that today, said Trish Halfacre, an independent agent in West Los Angeles. Several times, she has had to cobble together coverage from the Fair Plan plus one or two specialized--and expensive--carriers such as Lloyd’s of London to replace a conventional homeowners policy.
And even those with current homeowners policies have often been unable to increase their coverage limits or add earthquake coverage, Halfacre said. “I feel sorry for people trying to find coverage, I really do,” she said.
Despairing of any legislative solution and fearful of Northridge II, the sequel, Dallas-based Republic Insurance Co. last week became the first sizable company to announce that it would withdraw from California rather than simply declare a moratorium on new sales.
One bill that did emerge from the Legislature this week would empower the governor--upon a finding by the insurance commissioner that an availability crisis exists--to prevent insurers from terminating or refusing to renew policies.
Garamendi is urging Wilson to sign the bill. However, Berte, Wilson’s adviser, said the legislation presents “philosophical problems” in that it orders a private company to sell a product. “This is not a public utility we’re talking about,” Berte said.
With the Legislature through for the year, Garamendi is planning to jump into the breach. He has scheduled hearings for Sept. 28-29 in San Francisco on earthquake rate increase applications filed by numerous carriers.
At the same time, Garamendi--whose term ends in January--will try to develop his own solution to the availability problems, an approach that may involve using the Fair Plan as a vehicle for a stand-alone earthquake insurance pool. The issues are complex, Garamendi’s chief spokeswoman said, so he will proceed deliberately.
Meanwhile, some consumers are waiting. Said Green, the Santa Monica homeowner: “It’s sort of a small crisis, but not for people that are stuck in it.”
Insurance Aftershocks
Predictions of an “insurance market meltdown” in California following the Northridge earthquake have yet to come true. But the aftershocks continue, as the following chronology shows:
Jan. 17: Northridge earthquake, magnitude 6.8, jolts Los Angeles. Early estimates of insurance losses approach $2 billion.
April 7: Official insured loss estimate jumps to $4.5 billion.
April 20: 20th Century Industries posts record $256-million first-quarter loss, wiping out more than half its capital, on estimated quake claims of $475 million.
May 24: 20th Century, at its annual meeting, says losses may force it to go on the sales block.
June 9: 20th Century strikes a deal with the state allowing it to stop selling earthquake insurance and wind down its homeowners insurance business.
June 16: Farmers Insurance Group, No. 3 in California, stops selling new homeowners and earthquake policies.
June 21: Market leader State Farm warns of a “looming crisis” and proposes creation of a state-backed earthquake insurance pool. It also continues tightening restrictions on sales.
June 22: Insurance Commissioner John Garamendi orders the California Fair Plan to extend its limited fire and earthquake coverage statewide.
June 30: No. 2 Allstate suspends new sales of homeowners and earthquake policies.
July 7: Garamendi begins holding private meetings with insurers, consumer advocates and others to seek a solution.
July 15: Farmers moves to hike deductibles on earthquake policies to 25%.
Aug. 18: California Supreme Court upholds Proposition 103 regulations, clearing the way for rebates of up to $1 billion--more than $100 million of which is owed by 20th Century, whose estimated quake claims are now $685 million.
Aug. 29: Republic Insurance Co. announces withdrawal from California.
Aug. 31: Legislature adjourns without passing industry-sponsored bills to create an earthquake insurance pool. Quake loss estimates now exceed $7 billion.
