Fred and Anne Willaumy, first-time home-buyers here from Arkansas, recently passed up their dream of buying a suburban California house with a white picket fence. The problem: No company would sell them earthquake insurance.
"We had enough money for downpayment and qualified for a mortgage," recalls Mr. Willaumy, a contractor. "But our bank backed out when they found we had no one to underwrite a disaster policy that included earthquakes."
As California, which boasts the world's seventh largest economy, begins to accelerate out of recession, many analysts see a nasty speed bump that could seriously impair full recovery - a developing homeowner-insurance crisis.
The story may have implications for other parts of the United States that experience recurring natural disasters, from the hurricane-threatened coasts to tornado- and flood-prone Midwest, as a new bill for national disaster relief languishes in congressional committee.
'The deal's off'
The current Golden State problem: Of those companies that offered quake coverage before the nation's second most costly disaster (an early-morning temblor on Jan. 17, 1994), 95 percent no longer offer policies to home-buyers.
"When I have a buyer ready to buy, I used to be calling for standard inspections from termites to foundations," says Vince Malta, a realtor at San Francisco-based Malta & Co. "Now the first thing I do is call insurance brokers to see if I can get coverage.... If I can't, the deal's off."
The insurance crunch dates to the Northridge earthquake, which socked several dozen insurance companies here with more than $10 billion in liabilities.
Lynea Olsen, vice president of the Association of California Insurance Companies, notes that California requires any company offering homeowner insurance to offer quake policies as well.
"As a result," she says, "most [insurance companies] have moved out of the marketplace entirely."
As the attrition rate of companies has grown, the situation has slowly worsened, albeit with little public outcry. But as of Saturday, the issue may have reached critical mass.
California's one backup plan was closed off as an option for homeowners by state Insurance Commissioner Chuck Quackenbush. Known as FAIR (Fair Access to Insurance Requirements), the program was considered an insurer of last resort for homeowners who could not find insurance elsewhere.
The program was originally designed to offer coverage only to certain inner-city residents and those in fire-prone rural areas. After the Northridge quake, however, Mr. Quackenbush temporarily expanded FAIR's scope to meet new concerns. Meanwhile, the state legislature ostensibly was developing new solutions.
But after a few months, and with no new legislation to help, it became evident that consumer demand for FAIR was expanding out of control. The problem: only $166 million in premiums had been collected to cover $59.5 billion in possible losses.
"The FAIR plan has grown so large that it threatens the solvency of a number of companies in the state," says Quackenbush spokesman Richard Wiebe. By state law, any company participating in the plan's mandatory financial pool would be liable for losses. "The commissioner had no choice but to return it to its original purpose. That means as of June 1, thousands will have nowhere to turn."
State considers its options
The situation has stepped up pressure for the state legislature to create its own California Earthquake Authority, a publicly run and privately financed $10.5 billion program to supply earthquake coverage for homeowners. Two versions of such a plan have been winding their way through the state legislature for months but are dangerously stalled.
One, backed by Commissioner Quackenbush and sponsored by Republican Assemblyman David Knowles, calls for voluntary participation by insurance companies and a 15 percent deductible. It would require less participation by insurance companies and allow nonparticipating companies to decline coverage.
A second, sponsored by Democratic Sen. Charles Calderon, mandates higher liabilities for insurers, 10 percent deductible coverage, and higher payouts for living expenses.
"Both these bills are trying to battle successfully with the basic problem of how to keep insurance companies from being overexposed while solving the problem of availability to consumers," says Mark Leonard, principal consultant to the California Assembly Insurance Committee.
But he and other observers decline to guess when such bills will be reconciled in conference committee and then be passed by the full legislature. "The current state budget plans are front burner now," says Mr. Leonard. "I don't see that being over soon."
Meanwhile, home-buyers and realtors are forging new coalitions to lobby California legislators.
"We don't see any hope for action at the national level this year," says Ms. Olsen, "so our efforts are concentrated here."
Meanwhile, in Congress...
The Natural Disaster and Protection Act of 1995 was introduced by Sen. Ted Stevens (R) of Alaska last year. It would amend a 1977 federal law and may create a national financial pool that could be dipped into by states suffering catastrophic losses. But because earthquakes are far harder to predict than seasonally occurring problems such as tornadoes and hurricanes, the federal legislation may not apply to the California situation.
"We can't wait on a federal solution," says Olsen. "There is no guarantee that a national program will necessarily go far enough to help us."