Quackenbush Limits Access to Fair Plan

Saying a big earthquake could result in a broad default on paying claims, Insurance Commissioner Chuck Quackenbush on Wednesday ordered an end to most new sales of homeowners and earthquake insurance under the state’s Fair Plan as of May 31.

His action to restrict growth of the state’s insurer of last resort for homeowners unable to buy through the regular markets is sure to increase pressure on the Legislature. The state is wrestling with a possible insurance availability crisis resulting from heavy Northridge earthquake payouts.

While Quackenbush said present Fair policyholders could retain their coverage and the ban on new sales did not extend to brush fire areas and poor neighborhoods where private insurance is unavailable, his action cuts off purchases in most communities.

With one big insurance seller, 20th Century, about to cancel 200,000 homeowners policies at the rate of 15,000 a month, this could leave many customers without easy recourse to buying new coverage.

Insurance industry spokesmen promptly lauded the commissioner’s action, while first reaction of consumer organizations was negative.

Quackenbush insisted he had little choice. He explained that as insurance offerings from private companies dry up, the demand is increasing for policies under the more expensive Fair Plan. So many property owners are buying into the Fair Plan that it is already, at 3% of the market, the state’s fifth-largest insurance company.

It could have become the fourth-largest by the end of the year, he said, without his intervention.

But its assets from premiums are minuscule compared to its potential liabilities from quake losses, he added.

Quackenbush said that if a large quake should strike now, under Fair Plan provisions, private companies would be assessed a pro rata share of these liabilities that could mount to $10 billion in Los Angeles County alone and $17 billion statewide.

As his deputy, Richard Wiebe, put it Wednesday:

“An earthquake in Los Angeles could threaten the solvency of a number of companies, and if the companies go belly up, the consumers don’t get paid, either through their regular policies or the Fair Plan.”

Assailing Quackenbush’s action was consumer advocate Harvey Rosenfield, who charged that the Republican commissioner’s real goal is a bailout of an industry that is determined to reduce its exposure to quake losses.

“The question is, why has Commissioner Quackenbush cut off the only safety valve in the homeowners insurance marketplace, and the answer is to give insurance companies the power to interrupt the market place in order to pressure the legislature into capitulation,” Rosenfield declared.

Insurance lobbying associations in Sacramento disagreed.

Barry Carmody, president of the Assn. of California Insurance Companies, said: “Simply, the Fair Plan is a state-run insurance pool that is growing too big, too fast. And, if it is stretched to the breaking point, California property owners and insurers will be forced to bail out the program with surcharges and higher premiums.”

A spokesman for the Personal Insurance Federation, Jerry Davies, said: “We support Mr. Quackenbush’s action today, for two reasons. First, the fact that he recognized that the Fair Plan is becoming so overexposed. . . . And second, because by doing this, he’s going to help the consumers. Ceasing its growth now is protecting them in the future.”

At a session of a legislative conference committee that has been debating creation of a state insurance agency to handle earthquake insurance, reaction was mixed to Quackenbush’s action.

Some of the six members termed it necessary, but state Sen. Herschel Rosenthal (D-Los Angeles) said he thought Quackenbush should have waited for further legislative deliberations before acting.

Homeowners insurance is linked to earthquake insurance in the present imbroglio, because of a decade-old state law that homeowners insurers are obligated to offer earthquake insurance coverage at the same time.

As the companies’ fears increased of overexposure to quake damage, seen in the Northridge earthquake with its $14.5 billion in insurer payouts, they have sought a state cap on their liability, or an end to such linkage.

About 28% of California homeowners carry earthquake insurance. In the state of Washington, where no such offers are required of the companies, only about 5% do.