QUEST FOR QUAKE INSURANCE : SOME CALIFORNIANS FINDING FAULT WITH STATE-OPERATED COVERAGE PLAN.

Byline: Deborah Adamson and Dave McNary Daily News Staff Writers

Philip Lipp looked at the new insurance policies offered by the California Earthquake Authority and decided to take his chances without them.

If a major temblor destroys his North Hollywood home, he said, he would respond the old fashioned way.

``I'll cry,'' he said. ``Then my lender and I will have to have a discussion.''

Lipp would have to pay about $800 annually for less coverage than under his previous earthquake policy, which carried a $350 premium before it was canceled after the massive 1994 Northridge Quake. Lipp's reaction to the new policies is similar to significant numbers of Californians who have reviewed them and decided to gamble that another major seismic catastrophe won't happen for a while.

``We're paying a higher premium for less coverage and having a bigger deductible. Given our (no) equity situation and just how thin the coverage really is, it would be some time before I would consider earthquake coverage through the CEA or anyone,'' he said. ``It's not a situation I like but it seems like the most logical course of action to take.''

Lipp's jarring introduction to the altered world of quake insurance has occurred in thousands of homes as policies expired since Jan. 17. 1994, when the Northridge Quake struck and radically altered the state's homeowners insurance market.

The Northridge Earthquake, with $12.5 billion distributed in residential and commercial claims, became the insurance industry's second-largest disaster payout after Florida's Hurricane Andrew in 1992. CEA policies - which became available Dec. 1 - create a dilemma for Valley residents, simply because most homeowners can easily recall a time not that long ago when the market was far friendlier. Those days are long gone.

On the plus side, the CEA opens up the state's quake insurance market again for homeowners and renters, who had faced an increasingly difficult task in obtaining coverage following the 1989 Loma Prieta Quake and the 1994 Northridge Quake.

On the other hand, the new policies aren't nearly as attractive as quake policies once were.

CEA policies cover earthquake damage to the home, but limits compensation for loss of its contents to $5,000 and temporary living expenses to $1,500. The CEA has set the deductible - the amount a homeowner has to pay before the insurance kicks in - at 15 percent. And the policies won't cover the adjacent structures.

Policies offered before the 1994 quake generally had a 10 percent deductible and adjacent structures such as fences, swimming pools and freestanding garages could be covered. Some large insurers such as State Farm even offered policies with 5 percent deductibles.

California regulations require that companies selling homeowners insurance also offer earthquake coverage, but the terms have become so much less attractive that participation statewide has dropped from the historical range of 28 percent to 33 percent to just above 25 percent, according to Greg Butler, the CEA's chief executive officer.

Butler notes that the terms of CEA policies are the same as specified under 1995's Assembly Bill 1366, also known as the ``mini-policy'' legislation for standardizing minimum coverage. Creating the CEA established the nation's first state-run earthquake authority and set up a risk pool, currently valued at $7.5 billion and projected to grow by $600 million annually.

Jerry Miller, president of the trade group Insurance Brokers and Agents of the West and owner of Miller-Robertson Insurance Services Inc., said consumers are going to have to get used to terms of CEA policies.

``There aren't going to be too many good deals anymore,'' Miller said. ``I don't think anyone is going to be better than what CEA is offering. The average consumer is going to see rates go up slightly and coverage go down significantly. That's just a fact of life in California.''

Prior to the quake, a hypothetical 2,000-square-foot home in Reseda built in 1979, now worth $200,000, would have been covered for its value with an annual premium of $400, with payouts of up to $100,000 for contents, $40,000 for living expenses and a 10 percent deductible, according to Miller. Additionally, insurers were able to offer far more flexible terms.

Today, the same house under CEA policy would have a premium of $780 and a deductible of $30,000 with payouts for contents capped at $5,000 and living costs at $1,500.

``If I were a homeowner who just bought a home with very little equity in it and I was on limited budget, I think I'd have a hard time buying this because it is expensive and it's not going to be a great benefit to me,'' said Miller, who operates agencies in Novato and Ventura. ``I don't like the product but on the other hand, I'm able to write homeowners policies. Had it not been for CEA, we probably would have had a major crisis in California.''

Steve Brooks, president of Brooks Insurance Services in Calabasas, said the unattractiveness of policies will make many people decide to go without quake insurance. Despite the lessening of coverage, though, he still strongly recommends buying a policy.

``I advise all my clients to buy some form of coverage because your home is the biggest thing you'll ever buy.''

CEA came into existence after Gov. Pete Wilson signed enabling legislation in September and 15 companies representing 71.6 percent of the market agreed to participate.

In campaigning for the legislation, insurers had gained attention by citing overexposure to disaster coverage and threatening to cancel 1 million policies if the Legislature failed to act. Additionally, real estate agents were complaining that the scarcity of homeowners insurance had been delaying residential real estate deals in the state.

``We were set up to reinvigorate competition,'' Butler said. ``The insurance companies' solution (to minimize their risk of paying for huge quake losses) was to offer no earthquake insurance. They wanted to leave homeowners, including those in the San Fernando Valley, without any coverage.''

The fund is designed to meet the needs of two back-to-back Northridge-style quakes, with theoretical damage claims of $10.5 billion. At the time of passage, critics complained that the legislation amounted to a massive bailout of the insurance industry because companies were able to transfer their policies into the new state fund, dramatically cutting their liability from another major quake.

Insurers that joined the CEA include State Farm Fire & Casualty, State Farm General, Allstate Insurance Co., Allstate Indemnity, Farmers Group, USAA, USAA Casualty, CSAA, Automobile Club of Southern California, Liberty Mutual, Prudential, Mercury Insurance, Preferred Risk, MidWest Mutual, Armed Forces Insurance Exchange, Continental, CNA and the California FAIR Plan.

Existing policies with those carriers are converting to CEA terms upon the renewal date.

The renter's policy under CEA calls for payments of about $90 a year with only the first $5,000 worth of belongings covered and a 15 percent deductible.

The remaining 90 insurers licensed to sell homeowners insurance in California did not join CEA. Safeco, Fireman's Fund and TIG were the major players in that category.

Other insurers offer quake policies with widely varied premiums depending on soil conditions, proximity of fault lines and the record of seismic activity in the neighborhood.

For example, the hypothetical Reseda house would carry a premium of $664 a year from the California Insurance Group for the same coverage as the CEA. The Civil Service Employees Insurance Co. would charge $960, with the proviso that the soil is relatively solid.

But many homeowners figure that the 15 percent deductible makes it nearly impossible to justify buying quake insurance. ``We'd have to have massive damage in order to get a dime back on the insurance premiums,'' said Pasadena resident Roy Williams. ``If you go past that point, the house is probably too damaged to rebuild.''

Additionally, the rate structure provides for higher rates in areas of the state - including San Fernando, Encino and Northridge - that are considerably higher than other areas because of soil conditions, fault lines and historical seismic activity. Particularly notable is the disparity between Sylmar, site of the destructive 1971 quake, and Northridge, near the epicenter of the 1994 quake. Sylmar's CEA rates range from $1.50 to $2 per $1,000 of coverage, while Northridge's average between $3.90 and $5.10.

The response to the availability of the CEA policies has been significant but not overwhelming. The authority sold 4,516 policies during its first four weeks of existence and collected $2.4 million in premiums with an average cost to homeowners of $550 per policy.

The CEA began selling residential property policies Dec. 2 through Farmers and Allstate. State Farm, California's largest property-casualty insurer, is expected to begin marketing its CEA policies Jan. 15 and several others will start in late February and early March.

State officials had hoped the CEA would be able to keep the level of participation among homeowners at somewhere in the historical range of 28 percent to 33 percent, and Butler said recently that he is now hopeful that quake coverage eventually should climb back above the 25 percent range.

Butler also said insurers have started to explore offering more flexibility in quake coverage options. ``I'm very encouraged by what's going on,'' he said.

But Bill Ahern, a senior policy analyst with the Consumers Union, publisher of Consumer Reports magazine, has advised most Californians against buying the CEA policies.

``You should not consider it if you have a fairly recently built house on fairly firm soil and you don't have a lot of your assets tied up in your house,'' he said, noting that a homeowner will face between $500 and $1,000 in annual payments in exchange for a policy with a 15 percent deductible. For the policy to pay off on a typical $200,000 home, the damage would have to top $30,000.

``For your damage to go above $30,000 your house would need to go off your foundation,'' Ahern said. ``You're talking serious structural problems. That would have to be a very large earthquake.''

Ahern said the CEA presents another risk - if a major quake occurs causing about 60 percent more damage than Northridge, policyholders will be hit with a 20 percent surcharge on the premium.

``If there's a big quake in the San Francisco Bay Area and the CEA needs more money to pay claims, people in Los Angeles could be charged more money on their premiums,'' he explained.

Ahern also pointed out that should another catastrophic quake occur, the federal government would be likely to pay out emergency funds and shelter allowances to those without coverage. The Federal Emergency Management Agency released $3.4 billion in direct disaster aid for victims of the Northridge Quake.

What's more sensible, though, is strengthening the property, according to Ahern. ``If it's not bolted to the foundation, get it bolted no matter what and put in plywood to strengthen the walls underneath the house,'' he said. The average cost is $5,000 for a house built before 1960.

Agents say that more options may appear as the industry becomes accustomed to operating with the CEA. Jim Armitage of Arroyo Insurance Services said he found at least three lower rates for the hypothetical Reseda home, ranging from $326 to $482 a year.

Unfortunately, he said, these insurers are not writing new homeowners policies as yet. But he expects that more insurers will start doing so once the CEA gets going.

For example, in a turnaround of its fortunes, Woodland Hills-based 20th Century Insurance will start selling quake coverage next month.

20th Century's quake-related troubles were so profound that it nearly went out of business. Regulators ordered it in July 1994 to stop selling polices and then told it to stop renewing its remaining 170,000 policies in July 1996. It was hit with 46,000 claims amounting to $1 billion as a result of the quake.

But 20th Century recently decided to move back into the homeowner business and start offering earthquake insurance as of Feb. 15, though not as part of the CEA, in response to demands from its auto insurance customers for home insurance coverage. The new policies will be underwritten through a subsidiary of American International Group, the insurance giant that is also 20th Century's largest shareholder.

20th Century also will renew the last 70,000 policyholders who were scheduled to be canceled after that date. Bassil Nahas of Burbank, who said he became aware a month ago that his policy would cancel at year-end, said the search for replacement homeowners insurance has been rough.

Nahas also wants to buy quake insurance for the first time. ``After Northridge, I'd like to have it, but I'm having a hard time finding anything right now,'' he said.

Nahas said he spent two days recently searching for a policy with homeowner and quake coverage. He could only find one available - with a premium four times what he had been paying for basic home coverage - from an insurer with a lower credit rating than 20th Century.

``So if you're out there in the market, God help you,'' he said.

One alternative for consumers is to seek a policy from an out-of-state company offering quake insurance as a ``nonadmitted'' company, meaning it is not regulated by the state. The major problem: When a ``nonadmitted'' company fails, homeowner policies are not covered by the state.

United States Fidelity & Guaranty Co., [phone], through a subsidiary, writes stand-alone quake policies that may provide better rates and coverage, according to Brooks. He recently wrote a quake policy from this insurer for a 1964 Woodland Hills home.

For $275,000 worth of coverage, which includes contents and living expenses and a deductible of 10 percent, premiums are $600 a year. There also is a $1,000 allowance on the pool, patio and other outside structures.

Under the CEA, the Woodland Hills homeowner probably would pay premiums of $1,080 with much less coverage.

``It's the only comprehensive earthquake policy in the market,'' said Richard Campagna, president of F&G Specialty Insurance Services, a division of USF&G. ``We're still writing a policy with 10 or 15 percent deductible, full coverage for contents and a year of temporary living expenses.''

The company started offering this policy in California last February.

Asked why the insurer came into a market that many had left, Campagna said, ``that's exactly the kind of market you want to get into, where people are deserting it. It's still a good market. Of course, there's more risk, but we watch that risk carefully.''

The insurer spreads out its policy coverage all over the state to balance the risks and carefully scrutinizes all structures, Campagna said. About 60 percent of all applicants are accepted, he added.

F&G Specialty Insurance Services' parent company, USF&G, is an ``admitted'' company. An ``admitted'' insurer is one licensed to do business in California and is a member of the California Insurance Guarantee Association. Its policyholders are covered by the state up to $500,000 in case the insurer becomes insolvent.

Richard Wiebe, deputy commissioner for the state's Department of Insurance, said consumers must carefully scrutinize ``nonadmitted'' insurers by checking its financial stability among rating agencies that include A.M. Best, Standard & Poor's Corp., Weiss, Moody's Investors Service and Duff & Phelps.

Butler predicted that the out-of-state marketers will lose this business as the core insurers regain their confidence. ``We think insurers will begin to make policies more and more flexible as time goes on,'' he said.

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CHART: EARTHQUAKE INSURANCE COSTS

Photo (color): State insurance polices were revamped after the 1994 Northridge earthquake.

Daily News File Photo