Few have insurance for a big earthquake
Southern California residents' coverage limited
Oct. 16, 2011 |
Cary Mann knows the risk of a major earthquake in the Coachella Valley. He has no doubt such a quake could be catastrophic.
But Mann doesn't carry earthquake insurance on either his Cathedral City home or on the peroXide hair salon he co-owns on Palm Canyon Drive.
"I've grown up in Southern California and none of my family have ever had it," he said. "They've always said that if there was ever going to be a 'Big One,' the damage would be so massive that the insurance would never be able to pay out to everyone."
"In hard times you look for whatever you can live without, and earthquake insurance is definitely in that category."
Mann isn't alone. According to the Insurance Information Network of California, fewer than 12 percent of Californians with homeowners policies also had earthquake insurance last year, and fewer than 10 percent of businesses had the coverage.
Conventional home and business insurance coverage does not cover the damage caused by ground-shaking in an earthquake, said Glenn Pomeroy, CEO of the California Earthquake Authority, a non-profit, public-private enterprise including about 70 percent of private home-insurers. The authority's mission is to provide affordable earthquake insurance in California.
When factoring in California homeowners who don't have any insurance coverage at all, the percentage who have earthquake coverage drops even further, Pomeroy said.
"It is surprising, when you consider the majority of the nation's earthquake risk is right here," he said.
The median price for earthquake coverage in California is between $800 and $825 per year, said Insurance Information Network spokesman Pete Moraga. Factors include a home's age, type of construction, and where it's located.
Homeowners in an area considered at high risk of a major earthquake — such as the Coachella Valley — can expect to pay more, he said.
And the deductible is high. The earthquake authority offers a standard deductible of 15 percent of the insured value of the home, or a more expensive 10 percent deductible.
A homeowner with an insured value of $200,000, for example, would pay a $30,000 deductible before insurance kicked in on an earthquake loss if the policy-holder took the standard deductible.
Research shows that historically, the southern San Andreas fault that runs along the Coachella Valley's northern edge has had a major earthquake every 150 years. But it's been at least 300 years since the last major temblor on that section of the fault.
A 2007 study by the Newark-based Rick Management Solutions Inc. looked at the potential costs today of an earthquake the equivalent of the last "Big One" anywhere on the San Andreas fault — the 7.9 magnitude Fort Tejon quake, which erupted 75 miles northwest of Bakersfield in 1857.
Such a quake today, the study found, would cause $150 billion in damage to homes, businesses and industries, with only about $15 billion to $25 billion covered by insurance.
By comparison, Hurricane Katrina's losses are estimated at $125 billion, with about half covered by insurance.
Many hold back on earthquake insurance because they believe the federal government will bail them out, Pomeroy said.
"It's in the country's interest to have more homes properly insured in California," Pomeroy said.
It was 1994's Northridge earthquake that changed the landscape for earthquake insurance in California.
Before that magnitude 6.7 temblor, private insurers offered their own earthquake policies, Pomeroy said.
"They didn't really have a handle on the size of the risk they were writing," he said.
The Northridge quake caused up to $8 billion in insurance losses.
"That minute-and-a-half wiped out 30 years of previous premiums insurers had collected prior to the event," the Insurance Information Network's Moraga said.
With California law requiring all companies offering home insurance in the state to also offer earthquake policies, many major insurance companies were ready to stop offering home coverage altogether, Pomeroy said.
To stem the crisis, the state legislature created the California Earthquake Authority in 1996. Private insurers were allowed to join and 17 companies did, representing about about 70 percent of the home insurers in California, including major firms like Farm Bureau, Allstate and Farmers.
The companies bought into the program at a cost totaling $700 million to start, Pomeroy said. A fund of $4 billion exists to provide earthquake coverage for those buying it through a member agency.
The authority also has up to $3 billion in coverage from reinsurance agencies — essentially insurance for insurance companies against major losses — and the ability to assess member companies for one more round of payments totaling another $3 billion if needed, he said.
The authority bears the risk for earthquake insurance for customers, not taxpayers, Pomeroy said.
"We're not caught up in any of that state budget mess, and the state is not exposed to any of our risk," he said. "We need to stand on our own."
The authority's analysis shows a repeat of the Northridge earthquake would cause about $4 billion in losses for its customers.
"We have access to up to $10 billion, so we have great financial strength," he said.
But it's the vast numbers of uninsured who pose a potential nightmare scenario in a "Big One."
Moraga noted that right after the Northridge quake, 29 percent of state homeowners had earthquake coverage.
"The longer we go from having a major earthquake in a major urban area, people tend to forget about the type of damage a Northridge-type of earthquake can bring," he said.
Following a magnitude 7.2 quake on April 4, 2010, near Mexicali, Mexico that shook homes into the Coachella Valley and beyond, Pomeroy said the earthquake authority had the biggest surge in business in its history.
That record was topped following last March's Japanese earthquake.
It's not only the out-of-sight, out-of-mind fact of human nature that holds back many from obtaining earthquake coverage, but the economy as well.
"With the real estate market tanking, some think, 'My home value isn't as much anymore; I should lower my insurance coverage,'" Moraga said.
Scott Turner of La Quinta buys earthquake coverage for his home.
"The San Andreas fault runs right through the valley," he said. "As we understand it, this end of the fault is overdue for a big rupture. Although the deductible is high, it's much lower than rebuilding and replacing the contents of the house on our own."
The California Earthquake Authority is working to make coverage more affordable, Pomeroy said.
A bipartisan bill currently under consideration in Congress would reduce costs by allowing the authority to reduce the amount it pays for reinsurance by more than half — $100 million each year. The bill would provide federal backing to the authority for borrowing after a major earthquake event, Pomeroy said.
"We would pass those savings on directly to policy-holders," he said.Keith Matheny
is an investigative reporter for The Desert Sun.
Earthquake insurance costs
To learn more about how much earthquake insurance coverage would cost on your home per-year, visit the California Earthquake Authority's website at www.earthquakeauthority.com and click on the "Premium Calculator" tab.
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