Insurers Criticize Quake Legislation : Rebuilding: Industry officials say law stemming from Northridge disaster was changed from the one they originally supported. They want a voluntary plan.

The state’s insurance industry--which is making five times more in payouts for Northridge earthquake damage than it estimated immediately after the temblor--is now rethinking its support for a proposed state earthquake insurance agency.

In a strongly worded letter to the chairman of the Senate Insurance Committee, signed by virtually every important insurance lobbyist and five of the largest companies, the industry is taking issue with many elements of a new law crafted by legislators and signed by Gov. Pete Wilson.

The law, in attempting to solve enormous earthquake insurance availability problems that followed Northridge, gave Insurance Commissioner Chuck Quackenbush the go-ahead to organize a publicly managed, privately financed California Earthquake Authority to sell quake coverage on behalf of the companies. It is contingent on final legislative approval next year.

Under the tentative plan, claims from future quake victims would be paid up to the first $4 billion by the insurance companies, according to their market share.

The next $4.5 billion would be paid by reinsurance, $1 billion in new assessments on policyholders, and capital raised from investors. After $8.5 billion in losses, the insurers would pay the next $2 billion. All payments would be capped at a total of $10.5 billion.

Payments for damage from any larger disaster would be left to government relief, or, possibly, a federal disaster insurance system that the industry has proposed to Congress. So far, that has not gone anywhere legislatively.

Northridge is the only quake in the state’s history for which insurance payouts, now projected at $12.5 billion, have exceeded the $10.5-billion limit in the new plan. But researchers from Stanford University and a quake mitigation company recently estimated that under California’s existing insurance system, payouts could reach $120 billion in a magnitude 7.0 quake on the Newport-Inglewood Fault in Los Angeles and Orange counties.

Despite the fact the new law is designed to avert such possibly bankrupting payments by private insurers, the industry’s letter to Sen. Herschel Rosenthal (D-Los Angeles) suggests that without revisions, the industry may not be willing to support the California Earthquake Authority (CEA).

“There were a number of fundamental changes made to the original CEA proposal [in a legislative conference committee] that differ substantially from the original,” said the letter signed by the lobbying organizations and the State Farm, Farmers, Allstate, Auto Club and ITT Hartford companies. “Many of these changes cause us grave concern.”

The letter contends that the whole system should be made voluntary, “limited to residential earthquake insurers who choose to participate in a voluntary program,” and should provide specific caps to each participating insurer’s monetary exposure.

Furthermore, the insurers object to provisions that would put five public members on an advisory board.

“Since insurance carriers will provide the initial capital and maintain multibillion- dollar exposures to losses associated with the California Earthquake Authority, carriers must maintain a majority of the vote on the . . . Advisory Committee,” the letter states.

Some provisions in the legislation adopted in September also leave unclear insurance company liabilities and the triggering of assessments on the companies, the insurers say.

Also, the companies express uneasiness over being required to re-offer earthquake insurance along with regular homeowners insurance should the Earthquake Authority cease to exist.

The insurers say they want to be cooperative and find a solution to the problems they perceive, but the letter suggests that they cannot accept the authority as contemplated in the recent legislation.

Deputy Insurance Commissioner Richard Wiebe responded to the letter by saying Quackenbush still intends to proceed with assembling financial commitments to the Authority from the insurers.

“I think the political momentum is there,” Wiebe said in an interview. “We’ve come too far to go back to Square 1. . . . We have made a long step ahead from the status quo, and I think we can work to resolve the concerns the insurers have expressed.”

Rosenthal did not respond to a call for comment.

But Peter Gorman, Western regional manager for the Alliance of American Insurers, said the insurers feel legislators duped them when a conference committee revised provisions of the proposal that had been worked out between Quackenbush and the industry.

“The day of the hearing we were handed a completely revised draft and were given only four hours to go through it,” Gorman declared. “I said at the time it was a substantial change and we might not be able to go along.”

Later, when the large companies studied the final product, they were taken aback and decided to join in sending the letter to Rosenthal, he said.

Now, he added, as Quackenbush seeks financial commitments to establish the new agency, he may find them conditioned on the Legislature revising the bill in accord with the insurers’ wishes.

Since the Northridge earthquake, many companies have refused to issue new homeowners policies because a state law links earthquake insurance to homeowners insurance, requiring companies that sell the latter to offer the former.

Despite this, however, some experts have suggested that the industry’s perceptions of exposure to monumental earthquake losses under the existing system has not diminished, but may even have grown.

The reason, they explain, is that Northridge showed that claims were much higher under existing policies than had been expected, and the insurers--who have not actually canceled many existing policies--now understand that their exposure is much greater than they had thought.

Just after Northridge, Wiebe said, computerized models done by the industry predicted that total payouts to the earthquake’s victims would run between $2 billion and $2.5 billion. Instead, even the present projection of $12.5 billion may grow.