2 Proposals Would Limit Quake Relief

Insurance legislation is pending on both the federal and state levels that would limit payouts to California earthquake victims as a means of reducing industry and government exposure to loss and averting an availability crisis for homeowners.

A key provision of the proposal in Congress would deny federal disaster relief to quake victims earning more than $60,000 a year who had not purchased a full package of quake insurance for their homes. The bill has 270 cosponsors in the House and 21 in the Senate.

But even its sponsors from the industry-backed National Disaster Coalition say Congress is unlikely to act this year on the measure, which also includes provisions that would affect Florida hurricane coverage.

There are signs, meanwhile, that action on state legislation for creating a California Earthquake Authority to offer quake insurance on behalf of insurance companies may not take place by the end of this month, despite the wishes of its chief sponsor, Insurance Commissioner Chuck Quackenbush.

Both the national proposal for a private insurance corporation to market disaster insurance and the state proposal are controversial because they lower the current limits on damage payouts.

For instance, in California there would be a payout limit by the new quake insurance agency of $10.5 billion, and one disaster could exhaust the entire fund. The payout in the 1994 Northridge earthquake was more than that.

Nationwide, after 15 to 20 years without major disasters, an accumulation of premiums would allow a $15- to $20-billion payout for the proposed federal disaster insurance, according to proponents. But that would still fall far short of payouts needed if a disaster in the $100-billion-plus price range were to strike in California.

The backers say, however, that without lower limits, insurers may refuse to offer the coverage they have in the past, even canceling some policies.

The rationale behind denying government aid to those who can afford to buy quake insurance but fail to do so is this: It is unfair, proponents say, to have the rest of the country, or even insurance buyers in California, subsidize with their taxes those who choose to live in areas of seismic risk but refuse to protect themselves.

An aide to one cosponsor of the bill, Rep. Howard L. Berman (D-Los Angeles), said Berman fears Congress is growing so tired of paying the costs of California earthquakes that the next time it will balk at appropriating the money.

It might be more willing to do so if the money isn’t going to those who have no insurance to defray at least part of their losses, suggested the aide, Gene Smith.

One provision of the National Disaster Coalition bill would also reduce the federal contribution for the costs of repairing freeways and public structures to 50%.

In the Northridge quake, the U.S. government paid as much as 90%. Such a change would put a heavy burden on state and local governments.

David DeSantis, legislative director for the coalition, said the bill is stalled over who would regulate the new private insurance corporation.

He added that there have been questions about the extent of a proposed line of government credit for the private corporation if quake damages exceed its resources. Some fear the legislation could lead to a broad new government entitlement, despite its limits on disaster aid.

DeSantis said it is too early to be certain what form the revisions might take and just when the bill will resume its progress in Congress.

But Robert Hunter, director of insurance for the Consumer Federation of America, declared there will be no progress. “The bill’s not going anywhere. It’s dead as a doornail.”

Hunter said many cosponsors signed up without being adequately informed of what was in the bill, and their requested revisions “are gutting it totally.”

Richard Wiebe, spokesman for Quackenbush, said the California insurance commissioner is not enthusiastic about some of the provisions in the federal bill, such as anything that could be construed as mandatory earthquake insurance.

If California’s Earthquake Authority is approved, Wiebe said, a lot of the pressure for federal disaster insurance would vanish, he said.

Quackenbush has called for speedy approval of the authority, now that he has obtained agreements from 80% of the insurance companies to participate, and says commitments for reinsurance totaling $1.8 billion give it the capital to operate.

The commissioner has warned that if the Legislature fails to act this month, he will begin losing some of those commitments.

But State Sen. Herschel Rosenthal (D-Los Angeles), chairman of the Senate’s insurance committee, said in an interview that while his committee may vote this month, a decision by the whole Legislature may not come until the end of the term next summer.

Rosenthal said he does not favor the Earthquake Authority, and “I can’t see why conservatives would want the government in the insurance business. If we’re going to be in it, why not the profitable lines of business, not just the most difficult?

“I think private enterprise ought to take care of earthquake insurance,” he said. “This is essentially an industry bailout.”

At hearings this month, he said, his committee will hear at least two alternatives.

California has already killed one state-run earthquake insurance plan. The California Residential Earthquake Recovery Act, adopted after the 1989 Loma Prieta earthquake, paid for up to $15,000 in home damage, with a deductible that was usually $1,000. Premiums were capped at $60 a year.

In force during the Landers and Humboldt County earthquakes of 1992, it paid out $54 million to quake victims, but was killed after then-Insurance Commissioner John Garamendi expressed concern that a big quake would exceed its resources.

About a year after it lapsed, the Northridge earthquake occurred.

Joseph Klun, who had been the Insurance Department official in charge of the program, said estimates are that it would have had about $400 million in resources at the time, had it been continued, but that valid claims could have amounted to $1.3 billion.

Had this been the case, it would have paid just 30 cents on the dollar.