Some Leadership in the Home Insurance Mess : Garamendi steps forth in the wake of Legislature’s inaction

Is there a homeowners insurance crisis in California? Ask insurance companies and they respond with an emphatic “yes.” Ask homeowners or real estate or escrow agents and they are unsure--but they do acknowledge it takes more time and money to secure less coverage.

If there is no crisis yet, there soon could be. Currently insurers that provide 65% of California’s homeowner policies--they include the biggest providers, such as Farmers, Allstate and State Farm--are refusing to write new policies. That’s because insurers have to offer earthquake coverage, the cost of which has become exorbitantly high since the Northridge quake. Companies that account for the remaining 35% are still offering new policies, but when they reach their limit, then what? We could have a full-blown crisis in the availability of insurance.

Preemptive moves are needed. The Legislature, however, ducked its responsibility and ended its session without addressing the problem, save for passing one bill that might help in the future but certainly doesn’t now. Fortunately, Insurance Commissioner John Garamendi has announced that because the Legislature failed to act he will exercise his authority to come up with an interim plan. At least leadership is being shown on his part.

In the aftermath of the enormously costly Jan. 17 earthquake, major insurance companies have scrambled for support for eliminating the state requirement that they offer earthquake coverage when they sell homeowner policies. They proposed creating a separate earthquake insurance pool funded by a state bond issue, but the idea received virtually no support in Sacramento.

Garamendi has been looking at expanding the California Fair Plan--the industry-sponsored insurer of last resort traditionally used in high fire risk areas--as a vehicle for a stand-alone earthquake insurance pool. It would involve some risk-sharing mechanism for insurance companies. The program would “sunset” if and when Congress passed the proposed National Disaster Protection Act, which clearly would be the best solution to the earthquake insurance problem.

To be sure, the Northridge earthquake resulted in huge claims. But critics maintain that insurers, in refusing to write new policies, are trying to create a crisis in order to eliminate the requirement that they offer new earthquake coverage.

The insurance companies also are asking to raise deductibles and rates for existing earthquake coverage, which could make such protection too expensive for most homeowners. Farmers Insurance, for example, is seeking a 174% increase in personal earthquake coverage rates. Garamendi’s hearings on the rate requests will begin this month and will be expanded to explore extending the Fair Plan to provide earthquake coverage.

Facing the prospect of an earthquake is no fun, and neither is dealing with the losses after one. Washington helped immensely with the rebuilding after the Northridge temblor. And, ultimately, the best answer to the insurance problems posed by disasters like major quakes, hurricanes or floods is a national insurance fund, such as would be created by the proposed National Disaster Protection Act. However, California cannot wait for Congress to move.

Garamendi seems to be offering the most realistic short-term solution. He should do all he can to implement it before he leaves office in January.