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INSURANCE

Support for quake fund in dispute

Companies want to cut their obligations to the state authority that provides coverage for 755,000 homeowners.

August 03, 2007|Marc Lifsher | Times Staff Writer

SACRAMENTO — California hasn't suffered major earthquake damage since 1994 when the Northridge temblor's $44 billion in damages prompted a statewide insurance crisis.

Fears grew of huge losses from inevitable catastrophic earthquakes, and within a year insurers were threatening to stop writing all home insurance, including earthquake policies.

The crisis was averted when the Legislature, the governor and the insurance companies agreed to establish a state-backed earthquake insurance authority to sell residential policies, with insurers agreeing to cover a substantial part of the authority's losses.

Now, 12 years later, the insurers want to slash the amount of money they would be obligated to pay under the original agreement.

If that happens, members of the California Earthquake Authority offer a potentially glum picture. They fear that the price of already expensive premiums would skyrocket, customers would flee, and the system could collapse.

"If the CEA is not financially viable, there will be a crisis again in California in regards to who provides earthquake insurance," state Insurance Commissioner Steve Poizner said.

California law requires that all insurers offer customers earthquake coverage every time they sell home insurance. The compromise allowed them to stay in the lucrative home insurance business by offering customers the state's earthquake policy instead of their own.

Some insurers still sell their own earthquake policies. But 17 of California's biggest companies, writing 73% of the state's 8.2 million home insurance policies, offer coverage through the state program.

Since 1996, the companies participating in the CEA have been obligated to cover up to $2.2 billion in early claims against the $8 billion the state wants to have available if a catastrophic temblor occurs. That legal requirement expires in December of next year.

Insurers are firm about getting out from under much of their current risk. "My view is that this is a very clear, integral contractual obligation" that is being lifted, said Ken Gibson of the American Insurance Assn., one of three trade groups currently in discussions with CEA staff about how to cover future claims.

But, Poizner, who serves along with the governor and the state treasurer on the CEA board of directors, opposes any full-scale retreat by insurers. "I do think they should be on the hook for helping to provide a significant amount of claims-paying capacity for the CEA," he said.

State Treasurer Bill Lockyer, another CEA board member, says he is adamant about not letting insurers reduce their stake in the CEA. "The insurance industry has to maintain at least the level of responsibility that it currently has," Lockyer spokesman Tom Dresslar said.

Consumer activists are irate. "The industry should not be allowed to turn its back on California by walking away from the ever-impending calamity that is the next big earthquake," said Douglas Heller, executive director of the Foundation for Taxpayer and Consumer Rights in Santa Monica.

Consumer advocates note that insurance companies have gotten close to a free ride over the last 11, relatively earthquake-free years because none of the $2.2 billon they put up was needed to pay claims. The CEA reported that it paid out only $3.5 million in losses for 130 claims since 1996.

A steep reduction in the authority's customers -- who currently number 755,000, about 12% of eligible homeowners -- could cause the Legislature to determine "that it's not worthwhile to keep the CEA running," said Tim Richison, the authority's acting chief executive.

In the face of such concerns, industry negotiators say they might be willing to cover some smaller portion of the CEA's potential liability, particularly if it is less likely to be called upon than the current $2.2 billion of exposure.

They also question the CEA's assumption that it needs to be ready for a monster quake of the magnitude that might occur once in 600 years. That's somewhat larger than the 1906 San Francisco earthquake, which has been rated at just under a 1-in-500-year possibility and would generate an estimated $6 billion in claims in today's dollars.

"We were suggesting to the CEA that it could function very well and survive serious earthquakes with a risk level less than the current standard," Sam Sorich of the Assn. of California Insurance Cos. said.

He contended that the CEA could handle three Northridge-size quakes even without the industry's current $2.2-billion participation.

They're offering to underwrite $1.2 billion worth of claims but only at the less risky level. What's more, insurers say they want to be paid for any costs for providing the extra resources, even though the top layer of funding probably would be needed only if the quake is larger than San Francisco in 1906.

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