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Quake Plan May Be Headed for Collapse : Insurance: Skeptics question whether the complex proposal lets the industry off too easily at the expense of homeowners.


SACRAMENTO — Under skeptical questioning from lawmakers and consumer groups Tuesday, a plan to establish a state-run earthquake insurance fund appeared headed for the legislative scrap heap, at least for this year.

The complex plan, drafted by Insurance Commissioner Chuck Quackenbush and backed by the state's largest insurers, is meant to do two things: supply earthquake coverage that private carriers are afraid to write and end the industry's virtual moratorium on sales of new homeowners insurance.

But in the month since Quackenbush proposed the plan--and during a lengthy legislative hearing at the State Capitol on Tuesday--critics have questioned whether it lets the industry off too easily at the expense of homeowners.

Sen. Steve Peace (D-Chula Vista) said the plan would "make the homeowners of California the insurer of last resort."

The legislation would cap the industry's risk from earthquakes in exchange for a one-time contribution of up to $1 billion to capitalize the new fund, to be called the California Earthquake Authority.

In the event of an earthquake twice as destructive as last year's Northridge quake, holders of homeowners policies statewide could face surcharges of up to 30% a year for 10 years regardless of whether they had earthquake coverage or even lived in the affected area.

And if losses drained the fund, earthquake policyholders would receive only a pro-rata share of their claims.

If that happened, Sen. Tom Campbell (R-Stanford) predicted, the Legislature would feel compelled to make up the difference because the authority--although funded with private money--would be under state control.

Even without a disaster, the authority would be offering stripped-down coverage at prices as high as those paid today for conventional policies.

Quackenbush said that without the plan, the current, barely functioning insurance market will get even worse, disrupting home sales and potentially stalling California's economic recovery.

Representatives of the California Chamber of Commerce and of real estate and banking groups echoed those concerns Tuesday and supported his approach.

However, with only three weeks left until adjournment, several key lawmakers said the plan is too complex and controversial to pass this year. Nor is it likely to slip through quietly in the crush and confusion that typically marks the end of a session.

"It's too visible and there's too much opposition to it" for such sleight of hand, said Sen. Herschel Rosenthal (D-Los Angeles), chairman of the Senate Insurance Committee and a supporter of the Quackenbush plan.

That leaves open the possibility that the Legislature could embrace a less radical measure or simply do nothing and leave the state to muddle through until next year.

Faced with $12 billion in losses from Northridge, the insurance industry hit the brakes about a year ago. California law requires insurers to offer earthquake coverage to their homeowner customers, so in order to duck earthquake exposure, they stopped writing new homeowners policies.

Quackenbush estimates that only 7% of the market is writing insurance normally today, although most carriers continue to renew existing customers' policies. But he said several insurers have submitted contingency plans under which they would stop renewing the policies of about 1 million customers.

The industry has been pushing hard for "delinkage" of homeowners and earthquake insurance, but the idea doesn't seem to have a political prayer unless there were assurances that earthquake coverage would still be available.

Assemblyman David Knowles (R-Placerville), chairman of the House Insurance Committee, has proposed letting homeowners' insurers satisfy their requirement to offer earthquake coverage with a new "mini-policy." The idea is to reduce the industry's overall exposure by raising deductibles from 10% to 15% and sharply limiting the payouts for damaged home contents, exterior structures and alternative living expenses while a home is under repair.

But that would not satisfy State Farm Mutual Automobile Insurance Co., the state's largest insurer, with 24% of the market. State Farm insists that it needs a cap on its potential earthquake exposure, such as that provided in the Quackenbush plan, a spokesman said Tuesday.

Peace said the plan puts so much of the risk on policyholders that it amounts to the same thing as delinkage. Rather than create a new bureaucracy, he suggested delinking now and letting the Legislature appropriate money to pay for a disaster when it happens.

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