Senate OKs Quake Insurance Plan

The state Senate on Thursday narrowly approved legislation intended to resolve California’s homeowner insurance crisis by putting the state government in the earthquake insurance business.

Despite the action, the Legislature will miss a Sunday deadline imposed by Insurance Commissioner Chuck Quackenbush for creation of a California Earthquake Authority.

The Legislature recessed until April 8 for its spring vacation and will consider the issue when members return.

The public-private agency would cover homeowners’ losses in earthquakes more catastrophic than the 1994 Northridge or 1989 Loma Prieta temblors, backers said.

Since the Northridge disaster, which caused about $12.5 billion in private losses, major insurance carriers have refused to issue new homeowner policies. The carriers say they are overexposed.

As a result, many consumers have been unable to find new homeowner insurance in the customary market and often have ended up in a state-imposed pooling program of last resort, in which consumers pay high prices for bare-bones policies.

In California, insurers who sell homeowner policies also must offer earthquake coverage, but insurers are balking at writing new homeowner policies because they believe that earthquakes are too high a risk to insure against. The decline in insurance availability has also adversely affected other sectors, including the home loan and construction industries.

Under the California Earthquake Authority proposed by Quackenbush and supported by major insurance companies, a $10.5-billion fund would be established to cover the earthquake losses of home and condominium owners. The authority would issue no-frills policies.

Quackenbush and other supporters say no taxpayer funds would be involved because the enterprise would be financed by consumer premiums, insurers, bonds and international insurance investors.

Located in England, Europe and Bermuda, these so-called reinsurers are considered key to the plan because they insure the insurance companies and would provide $1.5 billion in capital.

Quackenbush, ordered by the Legislature last year to examine contracting with reinsurers, said he has obtained investment commitments from reinsurers. But he repeatedly warned that they would consider spending their money elsewhere if the Legislature failed to act by Sunday.

Even though his deadline was ignored, Quackenbush said Senate approval of an earthquake authority bill sent the reinsurers an important message that the Legislature wants to resolve the crisis by creating a public-private insurance enterprise.

He said he hopes reinsurers will stay committed “for the additional days or weeks necessary” to enact the legislation.

The Senate version of the bill, by Sen. Charles Calderon (D-Whittier), was sent to the Assembly on a 27-9 vote, the bare two-thirds margin required. But the Assembly got into a partisan fight and failed to act on its own plan supported by Speaker Curt Pringle (R-Garden Grove).

After the recess, the tentative agenda calls for the competing bills to be reconciled in a conference committee. Senate Leader Bill Lockyer (D-Hayward) said he hoped that a compromise could be reached soon, but he refused to recommend a new deadline.

“From Day 1, this earthquake authority, as structured, will be able to cover a San Francisco 1906 earthquake. It would be able to cover two back-to-back Northridge earthquakes,” Calderon promised the Senate.

If such quakes do occur, he said, “every policyholder will be paid.”

But Sen. Herschel Rosenthal (D-Los Angeles), chairman of the Insurance Committee, who voted against the bill, charged that the proposal unfairly provided protections for the industry at the expense of consumers.

“It’s a bailout of a few large insurance companies,” Rosenthal said. He accused the industry of threatening to “create chaos in the marketplace” in order to get its way in Sacramento.

Calderon agreed that the industry has “begged” the Legislature for relief, but he insisted that the bill contains so many consumer protections that “there’s no insurance company that will stand up here and say this is their proposal.”