Garamendi Unveils Quake Policy Plans : Insurance: Industry officials and consumer advocates criticize proposal to offer bare-bones, stand-alone coverage.

In an effort to remedy the near meltdown of the California residential insurance market, Insurance Commissioner John Garamendi on Wednesday proposed selling stripped-down, stand-alone earthquake policies to all comers through the state’s high-risk property insurance pool.

The new policies are meant to plug gaps caused by the flight of most large insurers from the California homeowners market after the Northridge earthquake.

Both consumer advocates and industry officials criticized the proposal at a public hearing in Los Angeles on Wednesday, but Garamendi insisted that he would push to implement a modified version before he leaves office Jan. 4.

“I am not going to leave this mess for my successor,” he said.

No matter how the plan ultimately looks, it became clear Wednesday that most Californians who buy earthquake insurance will soon be paying more for it.

Some 56 insurers have asked the Insurance Department for rate increases since the Jan. 17 quake. Even the more moderate requests would boost rates by 50% to 100% for most policyholders, Deputy Insurance Commissioner William Ahern said.

In California, earthquake insurance now costs an average of about $2 per $1,000 of coverage. However, an official of a San Francisco engineering firm hired by the Insurance Department testified that projected annual losses from future quakes on pre-1950 homes in Los Angeles, San Francisco and other coastal areas would range from $2 to $24 per $1,000 of coverage, depending on the stability of the soil under the home.

Facing Northridge quake losses that may exceed $10 billion, insurers representing up to 80% of the California market have either suspended or sharply cut back sales of homeowners and earthquake insurance. State law requires that companies selling homeowners policies also offer earthquake coverage, so many insurers temporarily dropped both lines to avoid earthquake risk.

Garamendi and much of the insurance industry agree that the ultimate solution is to create a federal reinsurance pool to cover hurricanes, floods, quakes and other disasters. But such a proposal died in Congress this year, and the Legislature failed to act on a state pool. So Garamendi is proposing his own stop-gap program through the California Fair Plan, the industry-financed insurer of last resort.

The Fair Plan already offers earthquake insurance packaged with the bare-bones fire insurance policies it has traditionally sold in inner cities and brush fire zones. During the summer, Garamendi ordered the Fair Plan to offer those policies statewide.

But Wednesday’s proposal would allow an insurer to write a conventional homeowners policy and then refer the customer to the Fair Plan for an earthquake policy. The goal is to lure insurers back into the homeowners market while providing a mechanism for earthquake coverage.

The proposed Fair Plan policies would limit dwelling coverage to $400,000 and a maximum of only $10,000 for exterior structures. For example, swimming pool damage would be limited to $1,000.

Garamendi did not say what the Fair Plan policies would cost. He said he would announce the prices and act on the insurers’ rate increase requests at the same time, “well before” Jan. 4.

Consumer advocates said the coverage is too limited to be of much value. Besides, some said, the whole crisis is phony.

“The only homeowners insurance crisis in California is the one created by the industry in order to protect profits,” said Harry Snyder, co-director of the West Coast office of Consumers Union.

Insurers said Wednesday’s proposal wouldn’t change their ultimate exposure to earthquakes, since Fair Plan losses are passed straight through to them. They also challenged its legality.

Garamendi contends he has the authority to implement his plan without legislative action. He invited the industry Wednesday to challenge him in court.

Meanwhile, insurance agents complained they would get the blame for selling policies that offer far less protection than homeowners expect from earthquake coverage.

Said Stephen L. Young of the Independent Insurance Agents and Brokers of California: “As an agent, you can explain about the limitations of the Fair Plan till you’re blue in the face, but when the earthquake comes and people really find out what’s covered--here come the lawsuits.”