Mandatory Insurance for Quakes Proposed

Gov. George Deukmejian unveiled a bold earthquake insurance proposal Thursday that would require 90% of California homeowners to buy policies covering $15,000 in damage to their homes and personal property in a major temblor.

The program, the first of its kind in the nation, would be run jointly by private insurance companies and the state.

Insurers would collect the premiums--an average of $36 per year--as a surcharge above their normal rates, and then turn the money over to the state, which would invest it in a trust fund intended to be used solely to cover the cost of repairing earthquake damage.

Homeowners who desire more extensive coverage still would be able to buy standard earthquake insurance, which typically includes a deductible of 10% of the home’s value or the policy’s coverage limit.

The program would be mandatory in 40 of the state’s 58 counties, covering an estimated 6.2 million homes, including all those in Southern California, the Bay Area and in other earthquake-prone areas. The coverage also would apply to renters who insure the contents of their homes or apartments.

From 20% to 25% of Californians now have earthquake coverage.

At a Los Angeles news conference, Deukmejian said buying earthquake insurance is a “wise and prudent” thing for homeowners to do, but he lamented that too few Californians purchase the coverage because of the high deductibles.

He said many quake victims have found that, after paying hundreds or thousands of dollars in premiums, they got no benefits because their repair bills did not exceed the deductible. No insurance product is on the private market comparable to what Deukmejian is proposing.

“It is my hope that this basic mandatory coverage will encourage Californians to insure against more catastrophic losses, because the benefits from our plan can be used to cover the large deductibles which are often required under conventional earthquake coverage,” Deukmejian said.

The program is intended to pay for a homeowner’s first $15,000 in damage from a quake, less a deductible ranging from $1,000 to $2,500. But there is a catch. If a major quake hit in the first years after the program was enacted, the state might not have sufficient reserves on hand to pay for the damage. In that case, each resident would receive a smaller, pro-rated share of the pot until the money was exhausted.

The governor’s plan received a lukewarm reaction from skeptical insurance industry representatives Thursday but was embraced warmly by a pair of lawmakers, a Democrat and a Republican, who specialize in insurance issues.

Edward Levy, general manager of the Assn. of California Insurance Cos., described the proposal as “interesting.”

“There is nothing in it at the moment that would lead us to oppose it,” Levy said.

But Levy questioned whether the fund would grow as fast as the governor projected and be large enough to cover the losses in a major quake. He said he suspected that the low deductibles proposed by the governor might lead to a rash of claims from even a relatively minor earthquake, bleeding the fund of its reserves before a truly catastrophic quake hit the state.

“I think we need to know how many additional claims this would generate for what many would consider to be cosmetic damage, like cracks in walls or Sheetrock,” he said. “You get a lot of cracks in an earthquake. How you fix them can be very cheap or very expensive.”

The industry prefers a national earthquake insurance program modeled after the federal flood insurance system. Even if the Legislature enacts the governor’s plan, California insurers still would be liable for damage under private earthquake policies and court rulings obligating them in certain other circumstances. Their liability could reach $50 billion in a huge quake in an urban area. Costs of that magnitude would be expected to bankrupt some companies and cripple the industry.

Tim Hart, an analyst for the insurers association, said the industry fears that the governor’s plan might give the public a false sense of security. “We are concerned that in traveling down this road the impression is going to be created that this solves the earthquake damage claims problem,” Hart said.

But Republican state Sen. Frank Hill of Whittier, who will introduce legislation to enact the governor’s plan, described the proposal as “an aggressive step” that solves a large part of the problem even if it is not “the whole solution.”

“The basic question is what do you do when a chimney falls through the roof and you have $8,000 or $10,000 or $12,000 worth of damage?” Hill said. “History suggests that this represents the overwhelming majority of the damage.”

Democratic Assemblyman Patrick Johnston of Stockton, chairman of the Assembly Finance and Insurance Committee, described the proposal as a “very positive development” and said he could see no major flaw that would hinder its passage.

“The Administration has moved forcefully to solve a major part of the earthquake insurance problem,” said Johnston, who has been sharply critical of Deukmejian on other insurance issues. “For the vast majority of homeowners at risk in California, this proposal appears to me to be the right solution at the right time.”

Under the plan, homeowners would be assessed between $12 and $60 a year for the coverage, with the level of the premium depending on the type of structure and its proximity to an active earthquake fault. The deductibles would range from $1,000 to $2,500, based on the value of the home.

Deukmejian said the fund was designed to collect about $220 million in the first year and build to between $4 billion and $5 billion after 10 years if there were no losses.

Under that scenario, the state fund quickly would be sufficient to cope with a repeat of the Oct. 17 Bay Area quake, according to John Sullivan, deputy secretary for the state Business Transportation and Housing Agency.

Sullivan said 24,000 homes were damaged in that earthquake, with the Administration estimating that the average damage was $8,000. A repeat of that quake’s toll would cost the fund about $192 million, he said.