Epitaph for Quake Relief Program: Noble but Costly

The severely underfinanced earthquake recovery program for California homeowners is about to be abolished as a noble government initiative that seems to have promised more than it can deliver.

Gov. Pete Wilson, who supports abolition of the measure, is expected soon to sign controversial legislation that will take the state out of the residential earthquake relief business on Jan. 1.

But the homeowners who have financed the state’s first venture into prepaid disaster relief with annual surcharges on their insurance premiums stand to receive far less than a dollar-for-dollar rebate when the program is eliminated.

The relief fund currently contains only about $4 million, faces substantial close-down costs and could be wiped out by claims resulting from even modest earthquake activity.

“You might get a little something back,” said Gene Erbin, an Assembly consultant who helped shepherd the repeal bill through the Legislature. “But if there was a qualifying seismic event, I think it is unlikely you will get anything back.”

So far in its eight months of full operation, the program has paid or plans to pay claims totaling $55.5 million from the recent Desert Hot Springs, Petrolia and Landers-Big Bear quakes, the Department of Insurance said.

During the same period, administrative costs, including repayment of a loan to start the program, have totaled $41 million, the department reported.

Even as homeowners pay the $12 to $60 surcharge during the next 3 1/2 months as the program winds down, officials of the Department of Insurance and others agree it is virtually certain that dollar-for-dollar rebates are out of the question. At this point, no one agrees on what the final balance will be.

“There is still money coming in, although we cannot predict how much,” said department spokesman Kenneth Burt. “We expect there will be a decreasing rate of participation (because) the program is going out of existence.”

California homeowners are required by law to pay the surcharge and must continue to do so through Dec. 31. However, there is no mechanism for enforcing the requirement and no penalty for failure to pay the extra charge.

Until the program is repealed, homeowners who pay the surcharge will continue to be covered to the extent that that there is cash in the relief fund, Department of Insurance officials said.

The repeal legislation, carried by Assemblyman Phillip Isenberg (D-Sacramento), does not anticipate dollar-for-dollar rebates. It provides that refunds be issued on a pro rata basis as claims are paid and the potentially substantial shutdown costs are met.

The costs of eliminating the program depend chiefly on claims resulting from earthquakes that may occur between now and Jan. 1, as well as on reaching a settlement with Computer Sciences Corp. of El Segundo, the state’s contractor for processing the surcharges. The company contends that its contractual rights for payment are being violated by the program’s termination.

If no more claims were filed, shutdown costs might be a low as $6 million, according to one estimate. On the high end, the costs could reach $50 million.

The state’s pioneering venture into creating a program to help homeowners recover from earthquake damage was launched by Gov. George Deukmejian and the Legislature in the wake of the 1989 Loma Prieta earthquake that struck the Bay Area.

At the time, members of the Senate and Assembly competed fiercely for authorship of the California Residential Earthquake Recovery Act. The politically popular proposal was intended to help homeowners cover the first $15,000 worth of damage, which typically is not covered by private policies.

Proponents of the legislation praised it as an innovative method of providing earthquake relief for middle-class California homeowners whose residences were badly damaged or destroyed and who needed financial aid to meet their insurance deductible.

Then as now, advocates such as Sen. Frank Hill (R-Whittier) maintained that the program was never intended to compensate victims for a catastrophic seismic event such as the long-feared major quake on the San Andreas Fault in Southern California. They said it was aimed chiefly at providing relief in less serious, but relatively common, California earthquakes.

When the bill was whipping through the Legislature three years ago, the few vocal opponents warned that payouts potentially could far outstrip the estimated $313 million a year that homeowners would pay into the fund. They warned that the program represented a huge, unfunded potential liability to the general taxpayer.

Isenberg, who led the repeal effort, has warned that although the program was well intentioned, it held out false expectations that the surcharges would be sufficient to cover homeowner claims.

He argued that the liability for the state to pay unmet claims would fall to the strapped state general fund and become a burden to taxpayers.

Isenberg contended that if the recovery fund indeed became bankrupt and could pay no claims, homeowners who were expecting relief from what they had been told was an earthquake insurance program would angrily turn to the Legislature with their demands.

Then the Legislature and governor would be forced to bail them out, conceivably with billions of dollars in revenues provided by general taxpayers, he reasoned.

“There would be enormous pressure to make people whole,” said consultant Erbin. “We can’t say, ‘We, the state, compel you to pay, but we are not equally obligated to pay (you back).’ ”