Quake Insurance Bill Offers Less Coverage

With a key hearing on creating a state earthquake insurance agency scheduled today in Sacramento, new legislative language warns clearly that coverage will be less than in the past and that not all claims may be honored.

Provisions newly included in a bill to conditionally establish the California Earthquake Authority require that policyholders be told in large print: “The coverage in the policy we are offering you with this renewal has been reduced.”

A further warning would tell homeowners buying the policy that the agency may run out of money in a big earthquake or series of quakes, and be unable to pay all legitimate claims.

“It is possible that your claim may not be paid in full,” the buyers would specifically be warned.

Among the changes from traditional quake insurance policies would be a higher deductible, requiring policyholders to pay more--15% of the house’s value, as opposed to the usual 5% or 10%--before the first dollar of claims reimbursement, a dramatic drop in coverage for contents and additional living expenses, and an end to regular coverage for swimming pools, outbuildings and landscaping.

Also, the new language specifies that policyholders may have to pay a 20% premium surcharge indefinitely if the Earthquake Authority needs it to fortify its ability to pay claims.

This surcharge would apply to quake policyholders statewide, even if the earthquake that forced it affected only a small part of the state.

The language was developed in a closed-door meeting last week involving Assembly Speaker Curt Pringle (R-Garden Grove), Assembly Insurance Committee Chairman David Knowles (R-Placerville), and the chairman of today’s legislative conference committee meeting, state Sen. Charles M. Calderon (D-Whittier).

A Consumers Union representative who has opposed creating the Earthquake Authority said Sunday that she hopes the stark language will show Californians that the insurance company-backed proposal strips them of substantial protections they have had in the past.

Betsy Imholz said she is pleased at clear disclosure provisions in the bill, but noted that when potential policyholders read them, they may be inclined to drop earthquake coverage they once considered vital.

The insurance companies--which made $14.5 billion in payouts over the 1994 Northridge earthquake--have been threatening to cancel hundreds of thousands of California homeowner policies unless the state reduces their liability.

Under current state law, homeowners insurance sellers must also offer earthquake insurance. Under the proposal now being considered, companies could sell the state policy instead.

And, as the language released over the weekend also makes clear, if the Earthquake Authority were put out of business by a catastrophic quake, that prior linkage between homeowners insurance and earthquake insurance would not be immediately reestablished.

Instead, the new language gives the state insurance commissioner six months “to establish when participating carriers shall be required to offer” quake insurance. During that time, in what might be a politically peculiar post-quake atmosphere, insurers could lobby the Legislature to get rid of the requirement that any quake insurance be offered.

Legally tying homeowners’ insurance and earthquake insurance offerings is called “linkage,” and it is the main reason 28% of California homeowners now have quake insurance, compared with only 5% of the homeowners in Washington state, where linkage is not required.

Undoing this connection is called “de-linkage,” and Calderon and other Senate Democrats had said for months that they would not tolerate de-linkage in the bill creating the Earthquake Authority. Assembly Republicans support de-linkage.

Imholz on Sunday called the six-month waiting period “back door de-linkage,” and warned that it goes a long way to accomplishing the Republicans’ de-linkage goal.

Earlier versions of the proposed compromise bill to be heard today did not focus either on the large-type disclosure about less coverage or on the six-month delay in linkage if the Earthquake Authority founders.

Calderon, however, has promised a protracted hearing in the conference committee today, and Senate President Pro Tem Bill Lockyer (D-Hayward) has suggested that if the measure passes the committee, he will send it to other policy committees for hearings before it can reach the Senate floor.

The Earthquake Authority could not begin functioning without a grant of a federal tax exemption by the Internal Revenue Service, which has been reviewing the matter since April 30.