Don’t Get Shook Up by Earthquake Insurance

Q: I have earthquake insurance. Now my insurance company has sent a notice with my annual premium explaining that an extra $60 charge was added to my bill for the California Residential Earthquake Recovery Act.

I don’t understand what this program is and whether I need to belong to it since I already have earthquake insurance.

Can you sort all this out for me? --M.Q.

A: The California Residential Earthquake Recovery Act, which became effective in January, requires all homeowners to participate in a quasi-insurance program that would cover up to a maximum of $15,000 in damages in the event of a moderate or greater earthquake. Mandatory contributions, based on the age, construction type and location of the home, range between $12 and $60. For homeowners already carrying earthquake insurance, this program would defray a portion of their policies’ deductible provisions which usually run about 10% of their total earthquake insurance policy coverage.

Before delving too deeply into the minutiae of the law, you should know that it is likely to be repealed within the next several months. A bill to kill the program is awaiting final approval by the Legislature, and Gov. Pete Wilson is expected to sign it when it reaches his desk.

Although passed with the best of intentions, the earthquake insurance program has united even traditional foes in calling for its repeal. The insurance industry, state Insurance Commissioner John Garamendi, consumer advocate groups and a significant percentage of the Legislature believe the program should be scrapped.

“It is a fatally flawed program,” says Kenneth Burt, a spokesman for the program. “It cannot do what it sets out to do.”

Perhaps the single largest flaw in the program is that while the law creating it made homeowner participation mandatory, there are no enforcement provisions or penalties for failure to pay into the fund.

So far, Burt reports, about 38,000 California homeowners--less than 1% of the total eligible--have joined the fund. Their contributions: a paltry $2 million.

If an earthquake were to hit now, you can bet that $2 million won’t go very far toward helping homeowners cope with their losses. Even if the next devastating quake is another decade off, the fund won’t have grown sufficiently--either through contributions or its own earnings--to be of much good, Burt says.

If the law is repealed, as widely expected in Sacramento, homeowners who had already paid into the fund will receive their money back within 60 days, minus a $1 administrative fee that was charged by insurance companies.

Should you pay into the fund now while the program’s future is uncertain? The law says you should, and then wait for a refund if the program is disbanded. But only you can decide what’s right for you.

Handling Annuity From Ailing Firm

Q: I was recently laid off from my job at a company that is doing poorly. I am covered by the company’s pension plan, which says that I will get an annuity payment of $1,850 beginning in 2021. I don’t think this company is going to be around then and want to get my pension money now and put it into my Individual Retirement Account. The company turned me down. What are my rights? --K.G.

A: You are absolutely entitled to receive exactly what the company has guaranteed: an annual payment of $1,850 beginning in 29 years.

Whether you can take lump sum distribution of your share of the pension fund now, based on its current value, should be spelled out in the terms of the company’s pension plan, a document you should be able to get from your former employee benefits department. Pension plans offering an annuity do not have to allow you to get a lump sum distribution upon termination from the company, and our experts doubt that your plan will make this allowance. If this is the case, you have no recourse.

However, before you begin worrying about the safety of your $155 monthly annual payment that doesn’t begin for 29 more years, let me offer some words of consolation. The payment that you will receive will be made either through a trust fund established by your former employer or from an actual annuity policy the trust purchased for the employees from an insurance company.

In either case, the declining fortunes of your former employer should not affect your annuity payment unless--and this is a big unless--the trust fund is insolvent when your turn comes up.

The United States has laws designed to ensure that a pension fund has enough money to cover its obligations. And companies are prevented by law from tapping into their employees’ pension fund to stay afloat during tough times. However, if a pension trust fund is poorly invested, it is entirely possible that it will not be able to satisfy all of its obligations.

This is where the federal Pension Benefit Guaranty Corp. comes in. This program guarantees a minimum level of benefits to eligible workers whose pension trust funds are insolvent.

To determine how well funded your trust fund is, ask your former employer for a copy of the latest “summary annual report” for your pension fund. This document lists the fund’s assets and liabilities as of a particular date. Although it will be next to impossible for you to predict how the fund will perform over the next 29 years, looking at these reports over the next three decades should give you a good idea of which way the trust’s fortunes are turning and how you’re likely to fare when it’s your turn to begin drawing benefits.