Despite the claims of the state's lieutenant governor, the issue of underinsured homeowners in the wake of the recent California wildfires cannot be blamed on the insurance industry, according to the head of an insurance industry group.

Robert P. Hartwig, president of the Insurance Information Institute, said allegations by California Lieutenant Governor John Garamendi "held no water," given the facts of the issue.

At an Oct. 24 press conference with Gov. Arnold Schwarzenegger, Mr. Garamendi commented that the state would keep its eye on the industry.

In the aftermath of the fires, he said, "rebuilding mechanisms" were in place "with the insurance industry playing its appropriate role and the state watching carefully that they do so." Additionally, a recent news report attributed remarks to him expressing his belief that insurers and their agents may be to blame for giving consumers bad information and unclear policy language.

Mr. Garamendi was previously the state insurance commissioner and after the state's last major wildfires in 2003 was reported to have said that major insurers were "screwing" their customers. Back then he also assailed insurers over underinsurance and claim payouts that were insufficient to cover rebuilding costs.

Mr. Hartwig said the "most bizarre" element of Mr. Garamendi's recent claims was that the lieutenant governor argued that somehow insurers and their agents would encourage clients to significantly underinsure their home, which makes little sense. "That's the first time in history that insurance agents have been accused of not selling," he said.

Mr. Hartwig noted there is "not a single report" that supports the idea of a systemic plot to underinsure, and that a majority of homes have been rebuilt since the last series of major wildfires in 2003, with many being rebuilt even larger.

As for the number of homes that haven't been rebuilt, Mr. Hartwig said the reason was not a grand conflict with insurers but something much more ordinary. "People took the money and moved somewhere else, which they are allowed to do," he said.

Another "more telling" aspect of the aftermath of the 2003 fires, he said, is that not a single lawsuit filed against an insurer concerning the coverage issue that made it to the courts was found in favor of the plaintiff. In fact, he said "only a handful" had even made it as far as the court room.

"The allegation fails," he said of Mr. Garamendi's claims, which he noted can be seen in the various reviews done by newspapers and others, and in the fact that the state Department of Insurance has not even found the issue worth investigating.

A Tuesday New York Times article on the coverage issue reported on two families whose homes were destroyed by the fires and are now facing steep construction costs that may outpace their insurance policy limits.

The piece described their realization that they lacked coverage for the contents of their homes. One homeowner was quoted as saying his coverage covered construction costs of roughly $230 per square foot, while the actual rebuilding of his home could be more than twice that.

While there may not be a conspiracy to underinsure homes, Mr. Hartwig said that does not mean homes aren't underinsured. "Of course there are" homes that should have more coverage, he said.

Typically risks are underinsured, he said, because the homeowner fails to report changes or additions they have made to the structure. There have been enormous amounts of money pumped into home equity loans, he noted, "and much of that has gone unreported."

As an example, Mr. Hartwig mentioned a report he had seen recently in which a homeowner had put an $800,000 addition on his house that was burned in the fires but hadn't told his insurer about it. "Is that the fault of the insurer?" he asked. "Of course not."

However, he said that in the wake of the fires, he expects insurers to become "more aggressive" in trying to inform their policyholders about the issue, sending surveys to policyholders and calling them to try and find out if any changes have been made that could affect their risk or the amount of coverage they need.

Special Reports /

Calif. Underinsured Homes Not Insurers' Fault, Says Hartwig

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