85% of Insured Joining State Quake Coverage Plan

First reports from insurance companies collecting the surcharge on homeowner policies for the state’s new earthquake insurance program indicate that about 85% of customers are paying the charge, a state official said.

Richard Holden, an aide to Insurance Commissioner John Garamendi, said the rate of payment should lead to collection of about $266 million in the new fund this year. The money will be put into short-term investments and will be available to pay structural quake damages incurred by homeowners.

Under the program, the first such system in the nation, homeowners can recover earthquake damages up to $15,000 after paying a $1,000 deductible on homes valued up to $200,000. The deductible grows to a maximum of $2,500 for more expensive homes.

Losses in excess of $15,000 are only covered by standard earthquake insurance policies homeowners may buy from private companies.

The surcharge on homeowners varies from $12 to $60, depending on an area’s vulnerability to earthquakes. In most of Los Angeles and Orange counties the charge is $60, but in San Diego it is usually $33.

Holden noted that damage payouts are contingent on having enough money in the fund. Presently, 18 days into the program, there is enough money to pay full damages to only about 830 homeowners. The figure increases daily as more policyholders send in the surcharge.

The state Insurance Department has prepared a two-page explanation of the earthquake coverage program for consumers. It warns of the likelihood that not all damages would be covered if a major quake hits in the early years of the program.

The warning states: “Based on estimates of projected earthquake losses . . . prorated payments (of less than the maximum) are likely if any major losses occur in the early years. . . . Thus, homeowners should not make personal financial decisions based on an expectation of receiving full payments.”

All homeowners in California are automatically enrolled in the program until they receive a renewal of their homeowner insurance and are asked to pay the surcharge. They will be dropped if they do not pay the surcharge at their renewal.

Garamendi, Holden and outside experts have expressed concern that over the years the number of damaging quakes may leave the program insolvent.

In a recent article, UCLA professor Elliott Mittler agreed that the state’s ability to cover damages could be swamped by a devastating quake. “The state still will have a massive unfunded liability following large or catastrophic earthquakes,” he wrote.

Mittler, a policy expert on natural hazards, said in an interview he felt that the state program would be viable if it required a higher deductible before paying damages. This would allow more damages to be covered, he said.

Based on earthquake history, he said the state could pay damages up to $100,000 after a 5% deductible--$5,000 on each $100,000 of a home’s value--while charging an average surcharge of $75.

Holden said that Garamendi has adopted some of Mittler’s arguments in pressing the Legislature to refashion the program into one that would stand a better chance of being viable in the long run.

Meanwhile, Holden said, he and his staff are watching earthquake reports daily, but the largest quake to strike in the state in a populated area since Jan. 1 has been one of 3.5 magnitude near Coalinga. It caused no damage.