Plans May Be Suitable for Many : Cool Reception Seen for Quake Insurance

Millions of California homeowners will receive certified letters this year asking them to buy earthquake insurance, the result of a new law requiring insurance companies operating in the state to offer such coverage.

The vast majority will refuse the insurance, say insurance experts, often because they believe that the plans are too expensive. Others figure that their homes will not be severely damaged by minor temblors, and that the federal government will bail them out if the Big One comes.

Some of these homeowners could be making a risky mistake, earthquake experts say.

Some Misconceptions

Although homeowners living outside of prime quake areas or with well-built homes generally don’t need coverage, those living in earthquake-prone areas or in poorly constructed homes should give earthquake insurance more serious thought, these experts say. These homeowners often base their decision to reject earthquake coverage on lack of information or misconceptions, they say.

Among these misconceptions:

- Earthquake insurance is uniformly expensive. In fact, while plans offered by most major carriers require annual premiums as high as $200, with deductibles as high as $10,000 for a $100,000 home, lower cost plans are expected to be available at least by year-end from independent insurance brokers. It might be worthwhile to wait and then shop around.

- Homeowners will be able to collect for earthquake damage even without earthquake insurance. That happened after the May, 1983, quake in Coalinga, when about $10 million was paid to homeowners even though very few had earthquake insurance. In fact, the new state law mandating insurance firms to offer quake coverage has greatly diminished homeowners’ chances of such a windfall.

- The federal government will bail out homeowners in case of a major catastrophe. In fact, disaster aid has been cut back in recent years. Under current federal and state disaster-aid programs, the highest grant any individual homeowner can receive is $5,000.

“Anybody assuming that the government will rebuild their home and restore to its original condition is really operating under an illusion,” says James D. Goltz, planning officer for the Van Nuys-based Southern California Earthquake Preparedness Project, a branch of the state Office of Emergency Services.

Risk Factor

In addition, homeowners often mistakenly assume that their homes are safe from earthquake damage. These homeowners might do well to perform some quick inspections to make sure, such as finding out whether the house is bolted to the foundation, the experts advise. Many of the homes in Coalinga were not, and as a result they slid off their foundations.

“If you determine your risk of earthquake damage is very high, insurance may be the only alternative,” says David Strykowski, president of Earthquake Building Inspection Service, a San Francisco-based firm that inspects homes to determine their susceptibility to earthquake damage.

On the other hand, he says, “if your determine the risk is low, then it probably is not worth it.”

In recent years, California homeowners have been increasing their earthquake coverage, possibly due in part to publicity about recent quakes in Coalinga, the city of Morgan Hill near San Jose, and the Imperial Valley.

The dollar amount of earthquake liabilities written by insurance companies increased by 30% in the high-risk Los Angeles and San Francisco areas between 1982 and 1983, according to the California Department of Insurance.

Effect of New Law

However, the overall percentage of California homeowners with earthquake insurance still remains low, at about 5% statewide and possibly as high as 7% in the Los Angeles and San Francisco areas as of the end of 1984, says David Simmons, Western regional representative of the Insurance Information Institute.

The new state law may change that. The law, which went into effect this year, has resulted in insurance firms sending hundreds of thousands of mailers to policy holders. Because the law requires proof of mailing, insurance firms sent these letters by registered mail, causing some long lines--and anger--among consumers at post offices.

Industry officials expect that the mailings will double the percentage of homeowners with earthquake coverage. But that will still leave about nine out of 10 without quake policies.

The main reason for the resistance is the high cost and high deductibles. Before this year, major insurance firms typically charged premiums of about $2.15 per $1,000 of coverage, with deductibles of 5% of the home’s value.

However, some firms this year have increased the deductibles. For example, Allstate Insurance Co., the state’s largest provider of earthquake insurance, increased its deductible to 10% from 5%, meaning a $10,000 deductible instead of $5,000 on a $100,000 home. In exchange, it lowered its premium by about 25% to $1.50 for each $1,000 of coverage.

These policies with 10% deductibles can be very unattractive for homeowners with well-built, wood-frame homes, because even in strong earthquakes, damage to these homes is often well below 10% of the value of the home.

For example, in the San Fernando quake, which registered 6.4 on the Richter scale, only 25% of the 12,000 wood-frame homes in the most heavily shaken area sustained damage greater than 5%. The cost of repairs on all 12,000 homes averaged 6.6%.

“Insurance companies are not particularly anxious to make earthquake insurance particularly attractive to potential buyers,” says Goltz of the Southern California Earthquake Preparedness Project.

Much of the reason for the high rates, he notes, is concern about the industry’s capacity to make payments in the event of a catastrophic quake similar to the 1906 San Francisco disaster, which would have registered 8.25 on the yet-to-be-invented Richter scale. A quake of that magnitude striking Los Angeles and Orange counties could pose a potential loss of $5.4 billion to insurance firms, the state Department of Insurance estimates.

But lower rates and deductibles might be available as early as this June from member firms of the Western Assn. of Insurance Brokers. This trade group, which represents about 700 independent insurance brokerage firms, began offering special earthquake insurance policies three years ago with premiums as low as $1.00 per $1,000 of coverage, up to $250,000. The deductibles were a flat $1,000, regardless of the value of the house.

All Signed Up

The association is able to offer this lower rate because its risk is spread out in so many geographic areas of the state, says Michael S. Cabot, executive director of the group. “We’re spread out from San Diego to Ukiah, so the chance of everything going down at once is so slim it’s not credible,” he says, adding that “the Coalinga quake didn’t hurt us at all.”

The trade group now is unable to provide earthquake coverage, because all earthquake reinsurers--those firms and individuals that actually provide the insurance and assume the risks--have been signed up by the major insurance companies. However, the group hopes to resume offering lower-cost plans as early as June or July, because many major insurance firms aren’t selling as many policies as they had expected, says Cabot.

Unfortunately, those policies to be offered later this year will be a bit more expensive than the earlier ones, with rates likely to rise to around $1.40 per $1,000 of coverage, with the flat deductible possibly rising to as high as $5,000, Cabot says.

But that $5,000 deductible is still far more attractive than those offered by major carriers, particularly for homes with values far above $100,000.

Another reason for considering earthquake insurance is cutbacks in federal disaster-relief aid.

The Small Business Administration, which provides low-interest loans for earthquake victims, no longer forgives some part of its loans as it did before the mid-1970s, says Robert L. Belloni, the SBA’s Western regional disaster director in Sacramento. In the 1971 San Fernando disaster, for example, consumers did not have to repay the first $2,500 of their loans.

The SBA still gives loans, at 4% for homeowners with problems in obtaining credit from banks and other conventional lenders, and 8% for others. And the Federal Emergency Management Agency provides immediate aid in the form of temporary or emergency home repairs or temporary housing.

Can’t Count on It

Grants of up to $5,000 are available from the Individual Family Grant Program of the state Department of Social Services. But these grants are available only if the President declares the region a federal disaster area, a development that cannot be guaranteed.

When it comes to federal and state disaster aid, “you just don’t know what’s going to happen,” says Bob Hunter, president of the National Insurance Consumer Organization, a consumer group. “I wouldn’t count on it (aid).”

Hunter and other experts say homeowners should carefully consider three factors--proximity to earthquake prone areas, sturdiness of their home and value of their belongings--before deciding whether to buy or refuse quake insurance.

As for location, homes near fault lines, on filled or in swampy areas generally are most prone to damage. One way that homeowners can find out the riskiness of their location is by calling staff geologists at the state Division of Mines and Geology. (In Los Angeles, the number is 620-3560). The division also has maps and other materials, some of it for free, staff geologist Ed Kiessling says.

The second factor, sturdiness, depends greatly on whether the home is properly bolted to its foundation. Homes built before 1940, including many homes in Coalinga, generally were not bolted, earthquake consultant Strykowski says. The cost of bolting would range from about $500 for a do-it-yourselfer to $3,000 for complicated jobs requiring a contractor, Strykowski says.

Homeowners also should determine if their homes have adequate sheathing and other reinforcement on so-called cripple walls, which are the walls between the foundation and the first floor, Strykowski says.

More Damage-Prone

Split-level or two-story homes are more prone to quake damage, he notes. So are brick or stone homes, which should be reinforced with steel to make them sturdier.

Also damage-prone are sidewalks, driveways, patios, chimneys, swimming pools, ornamental brick fences and brick veneer. However, homeowners should check to see if these structures are covered by their insurance company, because many firms exclude these items from quake coverage.

The third factor involves such interior belongings as china, glassware and other fragile items. About half of $6 million in damage in the April, 1984, quake in the posh community of Morgan Hill, south of San Jose, was due to broken belongings inside homes, Strykowski says.

Another source of damage, and potential fire, is from loose water heaters, which could rip loose in a quake and break their connecting gas lines. Homeowners can reduce their risks by securing to walls any cabinets that contain fragile items and water heaters.

Structural engineers, contractors or earthquake consulting firms generally can inspect a home to determine its earthquake risk. However, such inspections are not cheap, with typical charges running at least $50 for an hour-long inspection.