Homeowners Rush for State Quake Coverage

Anxious homeowners have besieged the Mid-Wilshire offices of the California Fair Plan as the state’s insurer of last resort prepares to stop accepting most new applications for earthquake and homeowners coverage after today.

As warnings of an insurance crisis spread, homeowners trying to beat the application deadline have jammed into the Fair Plan’s office lobby all week long, said spokesman Michael Harris on Thursday. In addition, applications have poured in by mail and through overnight delivery services.

“On Tuesday they were beating the door down when we closed,” said Harris, who adds that the flow of applications has been running far above the normal rate of 1,100 a day. “We just don’t have time to count.”

New homeowners coverage has grown scarce as private insurers have restricted sales in the wake of the massive losses related to the 1994 Northridge earthquake. The private companies must offer quake coverage to their homeowners insurance customers, and about 28% of California homeowners have quake insurance.

As many private insurance firms have restricted the availability of new homeowners coverage, many California homeowners have turned to the Fair Plan, an insurance pool backed by private companies that was originally created to cover residents of brush-fire zones and inner-city neighborhoods where private insurance is hard to obtain.

The rush of Fair Plan applicants began late last week after state insurance Commissioner Chuck Quackenbush said the state insurance pool would stop writing new policies for applicants who lived outside designated brush-fire areas and inner-city neighborhoods. The agency will continue to renew all existing policies.

Quackenbush said he took the action because the Fair Plan’s assets from premiums are tiny compared to the potential liabilities stemming from a large earthquake. The condition could lead to a broad default on paying claims, he said.

Under the Fair Plan provisions, private insurers who back the insurance pool would have to share the burden of earthquake-related liabilities that could reach $10 billion in Los Angeles County and $17 billion statewide. A large earthquake in Los Angeles, for example, could lead to the insolvency of many insurers to cover the Fair plan liabilities, according to insurance department officials.

Quackenbush pointed out that the Fair Plan has already swelled in size to become the state’s fifth-largest insurance company, with about 3% of the market. The insurance pool would move up to fourth place by year’s end if the flow of new applications had not been stopped, he said.

The insurance industry supported Quackenbush’s decision as one that would prevent a potential default and head off a costly bail-out.

But consumer advocates attacked the ban on new policies as one aimed primarily at helping insurance companies reduce their risk.

Insurance applications are being accepted today at only one location: 3435 Wilshire Blvd., Suite 1200, in Los Angeles.