The scarcity of homeowners’ insurance coverage here in California threatens to shut down the state’s housing industry, insurance and mortgage professionals say.
Home buyers also are having difficulty obtaining hazard insurance in Florida, other Atlantic and Gulf Coast states and other regions prone to natural disasters. But the problem is particularly acute in the Golden State, where insurers who sell homeowner’s coverage must by law also offer earthquake coverage.
Because insurance companies say they can’t stand another hit like the one they took as a result of last year’s Northridge quake, they have all but stopped writing policies in the state.
According to the California Department of Insurance, 93 percent of the state’s insurers have stopped writing homeowner’s policies altogether or have imposed strict limits on the policies they will sell.
The Northridge quake, a 7.1 temblor near Los Angeles, wasn’t big as earthquakes go. But it has turned out to be the nation’s second most expensive disaster ever. So far, it has cost insurance companies some $12.5 billion in claims, an amount they say is more than three times the total earthquake insurance premiums they’ve collected over the last 25 years.
“We’re trying to avoid financial ruin,” says Dolores Tuohy, who operates the San Ramon Insurance Agency with her husband.
To solve the problem, Insurance Commissioner Charles Quakenbush has proposed that the state take over responsibility for earthquake coverage.
Under the plan, the state would establish an insurance fund solely to offer earthquake coverage. Similar to uninsured motorist funds operated by many states, the earthquake fund would be financed in large-part by private insurers.
The proposal has been endorsed by most insurers and has bi-partisan support among state lawmakers. But the legislature has only a week to pass the measure before it adjourns Sept. 15.
Even if the plan is approved, however, it won’t be up and running until next spring at the earliest, and then only if 75 percent of the companies selling homeowners insurance in the state agree to participate.
In the meantime, Tuohy, the San Ramon insurance broker, says she won’t be writing any more homeowners policies. Actually, she hasn’t written a new homeowners policy in a year, even though she takes 20 calls a week from people begging for coverage.
Most callers are more than willing to sign a waiver rejecting quake coverage, Tuohy says. But insurers are reluctant to do that because the law also requires them to offer policyholders similar coverage every two years, and, says Tuohy, “they could change their minds.”
Larger, well-known carriers have been pulling out of California for some time. But now the small and medium-sized shops, which had been taking up the slack, often at inflated rates, are doing the same.
So far, lenders, who require that buyers have homeowners coverage in place before they close escrow, haven’t felt the pinch, largely because many are owned by banks which also have insurance subsidiaries. But several say that’s changing, and rapidly.
“It’s tough, really, really tough,” says John Marcell of Better Mortgage Brokers in Upland. “Our escrow department spends hours on the phone to find coverage for our clients. We bust our butts.”
And BMB’s clients pay dearly, too, adds Marcell, who tells of a recent Victorville buyer who was charged almost $700 for coverage on a $52,000 house. Normally, the mortgage broker says, the premium would be about $200.
The insurance industry says the solution isn’t a rate increase. Though they never argue against higher rates, insurers say that even with the recent rate hike of 138 percent, the risk they are being asked to take on is beyond their capacity to absorb.
“It’s immeasurable,” Tuohy says of the peril. “A big one like the $110 billion Kobe earthquake in Japan could bankrupt the industry.”
Lynnea Olsen of the Sacramento-based Association of California Insurance Cos. says that while the insurance business is often accused of “cooking the books or creating a false crisis” to obtain rate hikes, the truth is, “the industry does not have enough money from earthquake premiums and interest from those premiums to cover its policyholders’ losses” from a major temblor in a leading California population center.
In California, insurers believe the insurance commissioner’s proposal will solve the crisis. But nationally, they say Uncle Sam needs to establish a federal catastrophic insurance system patterned after the national flood insurance program and covering not only earthquakes but also hurricanes and tornadoes.
Bi-partisan legislation to create such a program has been introduced in the House by Reps. Bill Emerson, R-Mo., and Norman Mineta, D-Calif., and in the Senate by Sens. Ted Stevens, R-Alaska, and Daniel Inouye, D-Hawaii.
The “pay-as-you-go” measure would condition future disaster relief on the purchase of private insurance. If consumers turned down coverage, they would be precluded from receiving assistance from a nationwide, privately-funded catastrophic insurance pool.
The bill also would set “actuarially sound” rates based on the degree of risk and the quality and enforcement of local building codes, and provide for privately funded grants to help communities reduce their exposure.
Back in California, meanwhile, insurance carriers and their agents think that “de-linking” quake and homeowners’ coverage “would be a significant step” forward.
But “there’s very little political incentive” for that, says Olsen of ACIC. And Tuohy, the San Ramon insurance agent, says there’s probably even less motivation for consumers to part with quake coverage.
The industry also supports another “novel approach,” as Olsen calls it. It would permit insurers to write “bare bones policies” that cover the main structure of the house and its plumbing, electrical and mechanical systems but not the contents and or swimming pools or other appurtenant structures.
This kind of policy would not only “get people back into their homes,” says Olsen, it would protect insurers against having to pay for “a Picasso or Aunt Mabel’s china” that was never there in the first place.
But these are only piecemeal solutions compared to the comprehensive approach offered by Commissioner Quakenbush, which calls for participating insurers to ante up $1 billion in nonrefundable cash plus a commitment from the industry to put up $3 billion more if needed to pay claims.
A lot of money? Certainly. But its peanuts to what insurance companies have to pay if and when the Big One hits.
