Shaky Stand on Insurance

When Charlie Bott got an offer in the mail recently for earthquake insurance, he stared long and hard at the bottom line. Then he threw it away.

“It was way beyond anything you pay for house insurance. Not even in the same league,” said Bott, a nuclear engineer with a baby on the way.

Now, like millions of others, he’s hoping the Big One doesn’t strike -- or if it does, that the government will come to the rescue.

Californians have built vast metropolises atop seismic faults, but 86% of the state’s homeowners have no quake insurance, a proportion that has crept upward as memories of past quakes fade.

“It’s a game of Russian roulette,” said Norman Williams, an assistant deputy commissioner at the state Department of Insurance.

State officials are hoping that next month’s 100th anniversary of the 1906 San Francisco earthquake will inspire Californians to prepare. That quake and subsequent fires destroyed 28,000 buildings and left 225,000 of the city’s 400,000 residents homeless. Estimates of the death toll range from less than 500 to more than 3,000, making it one of the deadliest natural disasters to strike the United States.

Hurricane Katrina, which killed more than 1,300 people, has had a dual effect on homeowners in the Bay Area, where geologists project a 62% probability of a magnitude 6.7 or greater earthquake in the next 26 years.

Some Californians called their insurance agents and signed up for quake coverage. But for many others, watching billions of dollars in federal aid pour into the Gulf Coast merely bolstered a sense that the government would come to the rescue after a big earthquake.

There’s a joke in the insurance industry about this mind-set. It’s nicknamed the “Air Force One Solution” -- based on the myth that the president would surely fly over a disaster zone dropping $100 bills from his plane.

“Good luck with that,” said Nancy Kincaid, director of public policy, mitigation and communications for the California Earthquake Authority. The authority is the state’s privately funded, publicly managed quake insurance provider; its member companies provide coverage to about 70% of Californians who have such protection.

“Everyone thinks the government will bail you out,” she said, “but we’ve learned it’s absolutely not true.”

The Federal Emergency Management Agency provides only limited assistance, spokeswoman Nicol Andrews said.

“FEMA’s not designed to make people whole after disaster, but to get people back on their feet,” she said. The cap on FEMA grants to a single household is currently $26,200, and on loans, $150,000.

“It would be a false sense of security to rely on FEMA to rebuild a life the way it was before a disaster,” Andrews said.

FEMA still maintains an office in Northridge for reconstruction projects 12 years after the deadly earthquake there. It’s a testament to the limited powers of the government to swiftly rebuild lives.

The Northridge quake had a magnitude of 6.7. It killed 72 people, left 9,000 injured and wreaked an estimated $25 billion in damage.

Yet most Californians still pin their hopes on the federal government, should a quake badly damage their homes.

“That would be the only thing that would save the region,” said Matthew Park, an information technology manager who owns a home in Corte Madera, near San Francisco.

“I am hopeful, but I think it’s dicey,” Park said of the federal government marching in with aid. “Based on Katrina, my confidence is low.”

Still, Park decided against adding earthquake insurance to his homeowner’s policy. “The deductible is ridiculously high, to the point where the level of protection you actually receive is anemic,” he said.

The cost of earthquake insurance varies widely based on the home’s location, age, type of construction, proximity to faults and type of land it’s built upon -- bedrock or landfill, for instance.

One homeowner in Oakland will pay $1,468 this year for $306,000 in insurance coverage for his house, with a deductible of nearly $46,000. A house insured for $500,000 in the Marina district of San Francisco -- a neighborhood built on more unstable fill from the bay -- costs $2,400 a year to insure through the California Earthquake Authority, with a $75,000 deductible.

In a region where many homeowners are already stretched thin by some of the highest home prices in the country, quake insurance is another expense they can’t afford to add.

If the worst-case scenario struck, for example, Park would still owe the bank hundreds of thousands of dollars, on top of his reconstruction bill.

“I don’t know where my funds would come from to manage that beefy mortgage and the additional costs of rebuilding,” he said. “I guess it would be a foreclosure scenario.”

The earthquake authority’s rates will drop practically across the board in July, with the average decrease 22%, Kincaid said. This is driven in part by a recent government study that found the risk of quake damage was lower than previously thought in many densely populated areas.

Earthquake authority officials are also hoping the rate cut will help reverse a long slide in the number of homeowners who have quake insurance.

But some acknowledge they are simply gambling with their homes.

“The costs seem not to justify the expense,” said Mike Janover, a marketing official at an Internet company. “My home is on bedrock, as well as the fact the place is 96 years old.” With that, “I made a bet it can hang in there for another five years before I sell it.”