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Homeowners Insurance Crunch Leaves Few Options for Coverage

Companies representing 95% of the market have either stopped or restricted the sale of new homeowner policies, according to the California Department of Insurance. Most of the companies that are still writing new policies have severely limited their activity in the San Fernando Valley and Ventura County because of earthquake risks. And local real estate agents report that they are having trouble closing deals because of the insurance shortage.

Insurance Commissioner Chuck Quackenbush said last month that the California homeowners insurance market “is approaching meltdown.”

In May, only two insurance companies were restricting or limiting new homeowner policies in brush areas and/or near earthquake fault lines, according to the California Department of Insurance. As of Sept. 1, that number climbed to 45 out of 66 insurers. Only one company in May was limiting new policies on hillside dwellings. Six months later, 35 companies were turning away would-be policyholders.

The growing insurance shortage is particularly acute for residents of the San Fernando Valley and for condo buyers and owners, said Lynette Findlay, owner of Aberdeen Management, a Burbank-based condo management company and president of the greater Los Angeles chapter of the Community Assns. Institute, a group of homeowners associations.

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Condo owners need to worry about insurance for their associations and for themselves personally, Findlay said. Finding decent and affordable insurance is increasingly tough, she said.

Robert W. Little, a Northridge resident and president of Robert W. Little Insurance Agency Inc. in West Los Angeles, believes insurance companies are being generous in renewing policies for currently insured homeowners.

“We’re keeping clients we currently have but we won’t add any more homeowner policies,” Little said. “Because of major disasters happening on a regular basis, insurance companies don’t want to add to their exposure,” he added.

“Nobody has a right to expect that they’ll get insured,” Little maintained. “I don’t believe anybody is entitled to anything. It’s now up to the government to try and make insurance more available or to stop requiring insurance companies to offer earthquake coverage,” he said.

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Two bills signed in October by Gov. Pete Wilson are intended to ease the insurance crunch by creating a state earthquake insurance mini-plan policy and the California Earthquake Authority, which would pay for earthquake insurance claims out of a pool of public and private-sector money. Congress is also considering passage of the National Disaster Protection Act, which would provide catastrophic loss coverage to everyone who has a federally insured mortgage. None of these plans has actually fallen into place yet.

Meanwhile, property owners and buyers who can’t get coverage from traditional insurance companies can turn to the California Fair Plan. It’s essentially an industry-sponsored pool of California insurance companies operating under the auspices of the insurance commissioner’s office. The Fair Plan reports that it gets more than 5,000 applications a week and now insures nearly 160,000 dwellings in California.

The Fair Plan isn’t exactly the best plan. Organizers developed the plan basically as the insurer of last resort for property owners who can’t get any other insurance; the plan does not include theft or personal liability coverage. It is, however, readily available through licensed insurance agencies or brokers.

One of the biggest drawbacks to the Fair Plan is that 95% of its policies are for actual cash value. Actual cash value policies pay out for losses based on the fair market value of the insured residence. This type of coverage is generally considered inadequate, explained Cindy Ossias, senior staff counsel at the California Department of Insurance, because the policyholder may not get enough money to rebuild if the market is down.

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There are two other basic types of insurance policies offered through most traditional insurance companies. The first is a replacement cost policy. Despite the name, replacement value won’t necessarily replace a residence, Ossias said. If construction costs go up, for example, such a policy may not pay for the higher construction costs to replace the home.

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The second basic insurance type is a guaranteed replacement cost (GRC) policy. This policy provides for rebuilding or replacing a lost dwelling in “like kind and quality” no matter what the cost and regardless of policy limits. Don’t be fooled by the word guarantee , though. Some companies will guarantee the replacement cost only if a property owner rebuilds and does not purchase a replacement dwelling.

GRC will probably not cover the additional costs of replacing a structure that has to meet more updated and expensive building code requirements. Another caveat is that GRC policies actually guarantee costs only to a certain percentage above the so-called declarations page. Finally, not everyone is eligible for a GRC policy. Condo residents or owners of homes that are of a certain size or age may be ruled out for GRC coverage. It is also very hard to find GRC earthquake coverage.

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Making sense of insurance can be tough because most policies are complex and difficult to decipher, Ossias said. “There’s too much for the average person to understand,” Ossias said. She and three other attorneys in her office reviewed her own policy and had trouble making sense of it. “We could barely understand the language of the endorsements; it was indecipherable,” Ossias said. “If we had these problems, how would a typical person get through it?”

Ossias also warned property owners to beware of under-insuring. Thanks to an insurance industry concept known as coinsurance, a policyholder who insures for less than the replacement value of his or her residence runs the risk of being heavily penalized.

A simple example illustrates what coinsurance is all about. The Smiths have a home that would cost $125,000 to rebuild, but they have only $100,000 in casualty insurance. If the Smiths have an $80,000 casualty loss, many insurance policies will pay out just $64,000. The assumption is that the Smiths were basically self-insuring 20% of their residence by insuring just 80% of the cost of rebuilding their home.

Because insurance is increasingly complicated--and tough to get--it’s advisable to shop around and ask lots of questions. Consumers should look for a policy that has an adequate inflation adjustment to account for increased replacement costs, advised Marsha Davis, a public affairs coordinator for State Farm in Westlake.

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She also suggested that homeowners get a “checkup” every year from their insurance agent to make sure there is enough insurance to cover all possible losses. Policyholders may also want to request extra coverage that pays for replacing a structure according to any new and more expensive building codes.

More information about homeowners insurance is available by calling the industry’s Western Insurance Information Service, which offers several insurance-buying brochures that consumers can receive for free, at (800) 397-1679. Another place to call is the National Insurance Consumer Helpline at (800) 942-4242. Consumers may also call the California Department of Insurance, which offers licensing backgrounds of insurance agents and other consumer information at (800) 927-HELP or (213) 897-8921.

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Galperin is a real estate attorney with Wolf Rifkin & Shapiro in West Los Angeles .


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