Earthquake coverage exemption issue confronts returning legislators.

State lawmakers returning to Sacramento this week from summer recess will be faced with deciding whether or not to excuse homeowner insurers from a state requirement that such insurers also offer earthquake insurance.

Under state law, insurance companies which write homeowners' insurance must also offer earthquake insurance to their policyholders. But at least three bills in Sacramento sponsored by insurance industry groups would "de-link" that requirement from an insurers' ability to do business in the state's lucrative homeowners' market.

Since June, the major homeowner insurance companies, representing 70 percent of the homeowners' market, have stopped writing new policies in order to limit their exposure to earthquake claims, said Tim Hart, lobbyist for the Association of California Insurance Cos. That situation is a "crisis," Hart contended.

"It's the industry's perspective that the mandatory earthquake offer has gotten us into this pickle," Hart said.

Gina Calabrese, an attorney with the L.A.-based Proposition 103 Enforcement Project, a consumer group, said the insurance industry had manufactured the crisis in order to "de-link" earthquake coverage from homeowners' coverage. (The earthquake coverage issue is unrelated to Prop. 103, a property tax measure that just happens to be part of that particular consumer group's name.)

Insurers' attempts to get out of the earthquake business are "repugnant," Calabrese said. The proposals "allow insurers to dump the earthquake responsibility and run away with the profit from homeowners' (policies)," she said.

"Our belief is that if an insurance company has the privilege of doing business in the state of California, an insurance company has the obligation to meet the needs of the residents in California," Calabrese said. "In California we need earthquake insurance."

But insurers, rocked by more than $6 billion in claims from the Northridge earthquake, say they can not risk further exposure to earthquake -- a risk they say is uninsurable.

The homeowners' availability problem began in mid-June, shortly after Woodland Hills-based 20th Century Industries Inc. announced its exit from the earthquake and homeowners' markets.

20th Century, once one of the most profitable and highly regarded insurers in the industry, paid out more than $600 million in claims from the Jan. 17 quake.

The payments cost the company two-thirds of its capital, and company officials warned that another big quake could bankrupt the company.

In June, via a special order, Insurance Commissioner John Garamendi allowed the company to begin canceling earthquake policies immediately and exit the homeowners' market over a two-year period.

Soon after the 20th Century move, other companies, too, sought to lessen their earthquake exposure. But unlike 20th Century, those companies did not get a special order from the Department of Insurance allowing them to continue offering homeowners' insurance without offering earthquake coverage.

In late June and early July, the state's three largest insurers -- L.A.-based Farmers Insurance Group of Cos., Bloomington, Ill.-based State Farm Insurance Group. and Northbrook, Ill.-based Allstate Insurance Group -- announced they would no longer write new homeowners' policies.

Hart, lobbyist for ACIC, said the lack of new coverage is starting to take its toll.

"We have indications from bankers and Realtors that people are having difficulty closing escrow (on property purchase transactions)," Hart said.

Hart noted that new-home sales and new-home starts are essential elements in economic recoveries. The lack of insurance for new-home owners poses "a real threat to the California economic recovery," Hart said.

De-linking earthquake and homeowners' insurance through legislation might be difficult in this election year because state legislators might not approve a measure that consumer groups would likely perceive as an insurance industry "bail-out."

Hart said the chance of passage of a plan to de-link earthquake from homeowners' is directly related to how bad politicians view the availability crisis.

"As of this moment, our members believe the crisis will become serious enough to require legislative action," before the legislative session is over on Aug. 31, Hart said.

Assemblywoman Juanita Mac Donald, D-Carson, has agreed to introduce a bill that would de-link the earthquake requirement from homeowners' insurance, said David Benesh, spokesman for the Independent Insurance Agents and Brokers of California. That insurance agents' trade group would sponsor the proposed bill.

The agents' bill would place a temporary moratorium on the insurance law requiring homeowners' insurers to offer earthquake insurance, Benesh said.

The moratorium would be in place until Jan. 1, 1996 or until Congress creates a federal natural disaster plan, whichever comes first, Benesh said.

Insurance industry experts said they expect Congress to eventually create a federal insurance pool from which all natural disaster damage claims would be paid. But that pool would not likely be in place until at least 1996, they predicted, which may be too late for California. By that time, many insurers would have pulled out of the California market or, worse yet, another major earthquake might have hit, they speculated.

Benesh said a number of insurance agents are having trouble finding homeowners' insurance for clients now. "I talked to an agent this morning who has 10 houses in escrow in Los Angeles which he's hoping he can find insurance for," Benesh said.

In addition to the agents' bill, insurance company groups have convinced legislators to introduce two bills to create a state-run insurance pool.

Assembly Bill 1132 was introduced by Assemblyman Mickey Conroy, R-Santa Ana, for the Personal Insurance Federation, which represents State Farm and Farmers. Senate Bill 212 was introduced by Sen. Newton Russell, R-Glendale, for Hart's group, ACIC, which represents Allstate and other insurers.

The two insurer-sponsored bills, which are identical, were introduced July 7, the day before the Legislature adjourned for summer recess, said Dan Dunmoyer, a lobbyist with the Personal Insurance Federation.

The two insurer-sponsored bills propose the same basic plan. Under it; homeowners' insurance companies would collect earthquake insurance premiums and put those premiums into a pool, explained Bob Pike, Allstate general counsel. The bills' sponsors estimate that annual premium in the pool would be about $600 million.

Claims on earthquake damages statewide would then be paid from that pool, Pike said.

If claims from a major quake were to deplete that pool, a number of levels of additional financing would kick in to increase the size of the pool.

The first level of additional funds would come from a general revenue bond issuance, Pike said. The state could raise $3 billion to $6 billion through such a bond offering, which would be five to 10 times the original pool's annual revenue, he said.

If those funds were insufficient to pay off earthquake claims, a second level of funding could be raised by assessing homeowners' insurers $1 billion. Homeowners' insurers could be asked to pay up to 30 percent of their total residential premium written.

If that was still insufficient to cover claims, a third level of funding would be secured by assessing all property-casualty insurers -- not just homeowners' insurers -- up to $3.5 billion. Property-casualty companies would be assessed up to 10 percent of all premium written.

Consumer advocate Calabrese noted that, under the insurance industry plan, insurers would be able to assess surcharges on policyholders to recoup their assessments.

This ability to surcharge would essentially mean insurance companies would not have to pay any earthquake claims, she said.

Whether or not state legislators pass these bills depends "on whether insurance companies make good on their threat to leave the state homeowners' market," noted one Sacramento insider.

"I don't think people have a good sense if we're over a big barrel or if we're in a position to tell the insurance companies to stuff it," the source said.