By George de Lama.

Sunday, July 17, 1994

Ever since the Northridge earthquake in January, Phillip Contreras, 24, has been tortured by nightmares, often waking up screaming in the middle of the night.

His mother has her own trouble sleeping, even aside from the frequent aftershocks that leave her terrified. Their insurer has not paid to repair a brick wall that collapsed in the quake, exposing one side of their suburban Mission Hills home.

"We have no security at all," said Marcie Contreras, 46. "Anybody could just walk into our house off the street."

After 10 years of paying premiums to 20th Century Insurance Co., of Woodland Hills, Calif., she received a notice in March that the company no longer would provide her with homeowners or earthquake insurance.

The company said the Contreras had too many claims within one year-$700 for wind damage to the roof last year, then the earthquake and a $99,000 claim the firm said it had to pay one of its employees after her dog bit him the day after the quake.

Company officials refused to comment. But now Contreras faces her own nightmare: No insurance for her home and no prospects of getting any. "I've broken out in hives all over," she said.

As Los Angeles marks the six-month anniversary of the Northridge earthquake Sunday, a growing homeowners insurance crisis in California looms as a bedeviling legacy.

Three of the state's largest insurance companies-State Farm Mutual Automobile Insurance Co., Allstate Insurance Co. and Farmers Insurance Group-have announced they were halting or slowing the writing of new homeowners and earthquake insurance policies.

The action stunned California politicians and prompted fears that curtailing access to insurance coverage could stunt real estate growth, the state's principal engine for its rebound from deep recession.

The troubled insurance outlook in California has intensified calls for nationwide insurance reform of the type envisioned in the Natural Disaster Protection Act, whose passage in Congress this year is uncertain.

The legislation would create an industry-funded national pool for disaster insurance coverage, with a disaster component built into all homeowners insurance policies and premiums adjusted by region according to local risk of earthquake, wildfire, tornado, flood or other catastrophes.

Stung by more than $6 billion in claims from the Jan. 17 quake, insurers are sobered by seismologicial forecasts that the 6.8 temblor will be dwarfed by more killer earthquakes to come in the San Francisco Bay Area and the Los Angeles basin.

"Everybody recognizes that Northridge was a wake-up call," said Jeff Beyer, spokesman for Farmers, which suspended all new homeowners and earthquake coverage after paying $1.1 billion in damage claims from the quake.

Before then, the most the firm ever paid in claims for an earthquake was $72 million in the 1989 Loma Prieta quake in the Bay Area. Now the company is convinced Northridge is nothing compared to what lies ahead.

"There are nine faults in California that have the potential to produce a $1 billion to $3 billion earthquake for Farmers alone," he said.

Even before the Northridge earthquake, State Farm announced a "managed exposure program" to reduce its potential liabilities from its 1.76 million residential insurance policies in California.

State Farm has paid out $1.3 billion in claims so far from the Northridge quake and $1.8 billion in claims from four other California disasters in the last five years.

"Nobody is even sure you can realistically underwrite insurance coverage," said State Farm spokesman Bill Spirola. "If it's a 1-in-100-year chance for a Big One, but you get an 8.1 earthquake in Los Angeles, you can't save up that much in 100 years."

The company now only will write new homeowner and earthquake policies to replace ones that lapse when owners sell their home or move. Like Allstate and Farmers, it also will renew existing policies.

State Farm underwrites a whopping $192 billion in California homeowner insurance and $66 billion in earthquake coverage.

"Without immediate action to pass a rational plan to provide relief, additional companies will be driven from the market," State Farm President Edward Rust wrote to Gov. Pete Wilson and state Insurance Commissioner John Garamendi.

Leading the way was 20th Century, which announced last month it would suspend all new homeowners and earthquake insurance, not renew its 90,000 current earthquake policies and phase out its 240,000 homeowners policies over the next two years.

The company paid $685 million in claims from the January quake, wiping out more than two-thirds of its surplus.

Hoping to avert a full-blown crisis, Garamendi last month ordered the state's high-risk insurance pool to extend its residential earthquake and fire insurance to California residents.

Under the plan, most homeowners will be able to buy at least minimal homeowners insurance from the California Fair Plan, an industry-financed insurer of last resort that until now mostly has served inner-city and brushfire areas.

Describing his plan as "strictly a stopgap, short-term measure," Garamendi has convened industry representatives, consumer advocates and state officials to formulate a plan for reform before the California legislature returns from recess in early August.

The large insurers want the state to repeal the law requiring that all companies offering homeowners insurance must also offer earthquake insurance. They also propose creation of a statewide earthquake insurance program funded by industry capital and bonds.

Garamendi instead is considering plans to make earthquake insurance mandatory for both insurers and mortgage borrowers. He also has called on Wilson and the legislature to impose a moratorium on premium and deductible hikes.

In the meantime, insurers seek new ways to limit their exposure. On Friday, Farmers announced it would raise its earthquake deductible to 25 percent.

"If we were IBM or GM, we could work our way out of trouble by selling more products," Sirola said. "But in insurance, selling more of our product is what can get us into trouble."

Some consumer groups are skeptical. "It's an artificial crisis," said George Kehrer, head of Community Assistance Recovery, a consumer group in the hard-hit San Fernando Valley.

"They are using the earthquake as a means of recontrolling the market. There is a large consumer movement in California that is being felt. The industry is paying out claims far more than they have in the past because they have controlled the claims process."

While the politicians and insurance companies try to find a solution, the Contreras despair.

No other insurer would agree to cover their home because it is damaged. Not even the state's FAIR plan would accept them; it requires a signed contract from a licensed contractor proving their home will be repaired.

But without insurance money, they cannot afford to get one. So each day they wonder what they will do as they stare at the open wall on their house.

"I found a little boy sneaking in our home," Contreras said. "We have a swimming pool. If he were to fall in and drown, we could lose our home. We could lose everything."