Garamendi Calls Farmers Plan to Raise Quake Deductibles Illegal

California Insurance Commissioner John Garamendi on Thursday accused Farmers Insurance Group Inc. of illegally planning to raise deductibles on earthquake insurance by 25% without prior approval.

Garamendi ordered Farmers to explain itself before him on Sept. 6. Afterward, he said, he will decide whether to issue a cease-and-desist order. “In declaring its intention to only renew earthquake insurance policies with 25% deductibles, the Farmers Cos. have basically declared their intention to offer worthless earthquake insurance,” he said.

Garamendi said the plan violates three state laws. The first guarantees a policyholder’s right to renew coverage at the same deductible. The second guarantees the availability of earthquake coverage. The third requires prior approval of rate changes.

Farmers, a wholly owned subsidiary of London-based B.A.T Industries, announced July 15 that it would raise deductibles on California quake coverage by between 10% and 25%, depending on the type of policy, while reducing premiums 25% to 40%.

The company had previously suspended the sale of new residential quake policies.

It said the moves were intended to protect Farmers’ financial strength and its ability to grow.

The company estimated that since 1973, it had collected $449 million in earthquake premiums but paid losses of $1.24 billion. It also said it had identified nine fault lines within California that had loss potentials ranging from $1 billion to $3 billion.