California shakes, but many go without quake insurance

Richard M. Allen, director of the Berkeley Seismological Laboratory, points out the American Canyon Quake. (AP Photo/Alex Menendez)

California is known as much for earthquakes as it is Hollywood or surfers, but only a relatively small portion of homeowners in the temblor-prone state have bothered to buy earthquake insurance.

Perhaps  one in every 10 homes is covered throughout California. In the Napa area, where Sunday’s 6.0 magnitude quake caused an estimated $1 billion in damage, the coverage level is even lower than that – about 5 percent, according to the California Earthquake Authority, a publicly-managed entity created in the wake of the 1994 Northridge quake.

Interest in coverage spikes after an earthquake hits, then gradually subsides as time passes.

The scant coverage means millions of people are financially exposed in a state where there is a 99.9 percent probability of a 6.7 earthquake or greater in the next 30 years.

“Their home is their major asset. It’s their retirement plant, it’s their nest egg,” said Glenn Pomeroy, the Authority’s CEO. “For that major asset to be sitting out there completely unprotected – that is the main reason why people ought to have coverage.”

Interest in coverage spikes after an earthquake hits, then gradually subsides as time passes.

On any given Sunday, the CEA receives an average of about 3,000 hits on its website. Last Sunday, after the American Canyon quake struck at 3:20 a.m., the website got about 17,000 hits, and it received a similar number the following day.

Of the earthquake insurance sold in California, the not-for-profit CEA represents about 70 percent, with the remainder sold directly through private companies. The CEA-sanctioned policies are sold through some 21 participating insurance companies, which provide the coverage.

About 856,000 properties are covered through CEA policies, a gradual rise during the past decade. In 2003, there were about 724,000 policies.

Although costs vary widely, depending on geographic location, type of structure, type of foundation and other factors, the average cost of a CEA policy is $789 annually on a house with a replacement cost of $435,000. The policy does not cover out buildings, garages, swimming pools, gazebos and other structures on the property.

In Sacramento, coverage for a house on a cement foundation with a $400,000 replacement cost is about $675 annually, or $56.25 a month. The policy reflects a 10 percent deductible and $100,000 for contents.

The deductibles are one reason some property owners have not purchased the coverage. A 15 percent deductible on coverage to replace a $435,000 home is more than $65,000 – a major out-of-pocket expense. In this case, insurance would provide about $370,000 for reconstruction.

The CEA was created in 1996, two years after the 6.7 magnitude Northridge earthquake, which devastated the homeowners’ insurance market and limited coverage. According to a committee analysis, shortly after the quake some 82 insurers had restricted the sale of new homeowners’ policies. After the CEA was created, that number dropped to three.

  • mreky

    The key point is that earthquake insurance only pays in the case of massive structural damage. In any give person’s property-owning lifetime, that’s likely to occur once or less even if they live in an earthquake-prone area. The deductible is so high that only major structural damage would exceed it – then how do you pay it? No bank will loan you $50-100K against a trashed property that already has a (now worthless) mortgage. Whether or not you have EQ insurance, you need the federal disaster $$ for real damage or you declare bankruptcy promptly and walk away.

    The only way EQ insurance will become more widespread is if EVERYBODY has it at a reasonable rate. The cost has to bear some reasonable relationship to the probability of qualifying damage and have a deductible that’s not laughable. The way it’s done now, the fund will just keep growing with few payouts until the Big One hits, then get wiped out like the insurers would be anyway.

    PS: the flood insurance model is just as broken. Non-flood-area coverage (useful only for catastrophes) costs $400-500/year now for a single-family house, comparable to what it costs in low-lying areas behind 100-year-flood levees and not much less than what it costs in a real flood zone. That’s is unreasonable for the coverage provided. Come to think of it, that describes current EQ insurance too.

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