GARAMENDI ATTACKS FARMERS
THE DISPUTE CENTERS ON THE INSURER'S PLAN TO RAISE
QUAKE POLICY DEDUCTIBLES TO 25%.
Friday, August 12, 1994
MARK SCHWANHAUSSER, Mercury News Staff Writer
Accusing Farmers Insurance Group of illegally changing its earthquake insurance rates,
California Insurance Commissioner John Garamendi on Thursday ordered a hearing at which he
will decide whether to order the company to rescind its plan to raise the deductible it
charges on quake policies.
''Clearly, Farmers thinks they don't have to play by the rules," Garamendi said in
a news release announcing the administrative hearing, which will be held Sept. 6 in San
Francisco. "But as the referee, I'm blowing the whistle on their fouls."
Farmers, the state's third-largest homeowners insurer, showed no signs of backing down
from the fight, which it says centers on an insurer's right to reduce its exposure to
potential earthquake losses.
''He interprets the law differently than we do. . . . " said Farmers Vice
President Jeffrey C. Beyer. "We think when he is presented with the evidence (at the
hearing) . . . he'll have no choice but to acknowledge that."
The legal confrontation is the latest twist in what some have described as an insurance
"crisis" for California homeowners that has developed since the Northridge quake
in January. Insurers don't want to write more earthquake policies, but by state law they
cannot sell homeowners coverage unless they also offer quake policies.
As a result, one by one, in recent weeks the state's most powerful insurers have
limited their homeowners sales by tightening underwriting standards, selling policies only
to renewing customers or accepting new policyholders only on a one-for-one basis when
current customers drop coverage.
Farmers stopped writing new homeowners and quake policies in June. Last month, it took
the issue one step further, announcing it would raise the deductible on its quake policies
to 25 percent -- up from the 10 percent it typically required -- on renewals starting
Sept. 1. While raising the deductible -- the amount the homeowner must pay out-of-pocket
before the insurance kicks in -- Farmers said it would lower its premiums 25 percent to 40
Beyer contends it would be "irresponsible" for Farmers not to implement the
plan, saying the company must be financially prepared to weather an earthquake that could
cause up to $3 billion in damages -- almost three times its cost from the Northridge
But Garamendi says the Los Angeles-based insurer's move is illegal on three counts:
(box) Renewing policyholders wouldn't have their legal option to continue coverage at
the same deductible as the prior policy.
(box) The mandatory 25 percent deductible constitutes a rate change, and rate changes
require the commissioner's approval.
(box) The 25 percent deductible is so high it effectively prices Farmers out of the
Two consumer groups lauded Garamendi's move, saying he had caught Farmers trying to
skirt the law by offering quake insurance -- but with a deductible consumers can't afford
''A 10 percent deductible is enough to discourage many homeowners; 25 percent is just
outrageous," said Norma Garcia, an attorney with Consumers Union in San Francisco.
Added Gina Calabrese, staff attorney for the Proposition 103 Enforcement Project:
"Selling a policy no one can afford or no one can use is the same as not selling