Insurers push to 'de-link' quake coverage.

They say move would solve homeowners' crisis

In 1984, state legislation requiring earthquake insurance to be offered with homeowners' coverage was signed into law after receiving broad support from carriers.

How times change

With the homeowners' market crippled by the Northridge earthquake, insurers and state Insurance Commissioner Charles Quackenbush are lobbying hard to have the earthquake requirement severed from homeowners' policies. Called "de-linkage," the concept is considered by its advocates as a way to make homeowners' insurance widely available in California again.

Prior to the quake, insurers preferred linkage because the legislation that brought it into existence also removed the burden of "concurrent liability." That concept holds that insurers are liable to cover homeowners' damages due to fire, flood or other factors brought on by an earthquake.

A prime example is the 1983 Coalinga quake. Carriers paid off on an extensive amount of homeowners' damages from that quake, even though many of those homeowners didn't have quake coverage.

But the Northridge temblor - which insurers claim has caused them to lose more than $11 billion - has completely reversed insurers' views on linkage.

Quake coverage scarce

More than a year after the quake, homeowners' insurance is extremely difficult to obtain in California. Accounts from the Insurance Commissioner's office and the Association of California Insurance Companies indicate that about 75 percent of the 250 or so homeowners' insurance carriers in California currently refuse to write new policies.

"The remaining capacity is filling up very quickly," Quackenbush said at a recent media briefing.

Those carriers still writing new policies, such as San Francisco-based Fireman's Fund, are being very selective, often declining applications for homes that have not been retrofitted with earthquake protection or for those built before World War II.

"They're not accepting the majority of applications," said a Fireman's Fund broker in West Los Angeles who asked not to be identified.

Other insurers have entered the market, but state officials are warning consumers to pick carefully, fearing the new arrivals are out-of-state or offshore carriers issuing policies that would not be honored in the event of a claim. A similar scenario occurred with automobile carriers in the mid-1980s.

Flocking to FAIR

As a result, the state-run pool of insurers, called the California Fair Access to Insurance Requirements (FAIR) Plan, has seen its volume of applications rise more than 200 percent since last summer, when former Insurance Commissioner John Garamendi mandated that the FAIR Plan could write policies in most areas of the state.

Previously, the FAIR Plan had been restricted to covering homes in brushy areas with a high fire risk, or inner-city neighborhoods where coverage has always been difficult to obtain.

But while Garamendi supported expanding the FAIR Plan, successor Quackenbush has shown reluctance to rely on it during the crisis. That has drawn fire from critics, who point out that Quackenbush's November election victory was underwritten by more than $2 million in contributions from the insurance industry.

After seeming to favor letting the Garamendi-extended FAIR Plan coverage expire March 31, Quackenbush extended it for six more months. Bat industry observers and FAIR Plan insiders said that six-month extension was merely a political move to counter the recent negative media coverage Quackenbush has received.

"If he didn't start taking the consumers into consideration, he wouldn't be able to run for dogcatcher come the next election," said Gina Calabrese, staff attorney with the Proposition 103 Enforcement Project, a leading consumer advocacy group. Prop. 103 is the auto insurance rate-limitation measure over which the insurance industry and consumer groups have long been squabbling.

Prospects uncertain

Whether homeowners' insurance availability improves in California between now and the time the FAIR Plan's extended coverage expires depends on a variety of factors, all of which are tenuous, observers said.

First, there is a bill pending in the state Legislature that would de-link homeowners' and earthquake insurance policies. However, the bill, Senate Bill 58, sponsored by Sen. John Lewis, R-Orange, is receiving considerable opposition from real estate agents and the Prop. 103 Enforcement Project. Those opponents fear de-linkage would not guarantee improved availability, and that earthquake coverage in any form would cease to exist, meaning widespread financial ruin for homeowners in the event of another major temblor.

Quackenbush vowed that catastrophic scenario would never unfold. "I support de-linkage, but I don't want it to occur unless there is earthquake product available for consumers," he said.

Quackenbush's skeptics are wary, however.

"We can't abandon the linkage concept," said Alex Creel, vice president of legislative affairs for the California Association of Realtors, an influential trade group. He noted that, since the earthquake, lenders have become more concerned about the availability of earthquake insurance.

Indeed, the Federal Home Loan Mortgage Corp., also known as Freddie Mac, a government guarantor of mortgages and a popular lender for first-time buyers, recently issued regulations requiring condominium buyers to obtain earthquake insurance as a requirement for financing.

Swapping sour notes

While the California Association of Realtors and Quackenbush have met on several occasions to discuss strategies, Quackenbush has accused the real estate group of inertia on the issue. "They haven't done anything to help out; as long as escrows are still closing, they don't feel a need to address the problem," he said.

Quackenbush also expressed displeasure with the Prop. 103 Enforcement Project, which is also suspicious of de-linkage and has been critical of his stances on other issues.

"I'm probably not going to work closely with (Prop. 103 author and Enforcement Project director) Harvey Rosenfield after the way he has attacked me," Quackenbush said, after the group criticized him for favoring insurers over policyholders in recent Prop. 103 rulings.

Calabrese responded that her group is pressing Quackenbush to address the seismic issue.

"What we want is for the commissioner to hold a (legislative) hearing about seismic risks," Calabrese said. "Once we have such a heating, we can get some rules on how to set rates." Calabrese, however, said she is skeptical such hearings will occur.

As for tackling the issue himself, Quackenbush has floated various suggestions: establishing a new statewide risk pool among insurers, similar to the joint underwriting authorities that write hurricane policies in Hawaii and Florida; requiring insurers to offer bare-bones earthquake policies to cover homes only and not outside structures, such as brick walls and patios; setting higher deductibles and caps on policy payments.

Quackenbush also said he is in talks to bring new carriers into the state, to help spread risk. But he declined to name any carriers that might be willing to come to the state, and he even refused to specify the number of companies negotiating to come to California.

"One thing is for sure - the market has changed in such a way that earthquake insurance simply can't be written the way it has in the past," Quackenbush said.