Quake Payout to Be Insurers’ 3rd Highest

Insurance companies will pay $2.5 billion in claims from the Northridge earthquake, making it the third-costliest insurance disaster in U.S. history but by far the most expensive temblor, according to the official industry estimate to be released today.

The losses are not expected to cause financial problems for the major providers of earthquake insurance in California, such as Allstate or State Farm. But some smaller companies with greater concentrations of their insurance risk in California may fail, analysts say.

Although the insurance losses are massive, it is not clear whether they will result in higher earthquake insurance rates or in changes in policies--although some previous natural disasters resulted in such moves. However, the losses have prompted a push by the insurance industry to get the federal government to assume more risk for covering earthquakes, floods and other natural disasters.

Insurers will receive “in excess of 200,000 claims” from the Jan. 17 quake, said Gary R. Kerney, executive director of Property Claims Services, a Rahway, N.J., organization that will release its estimate today. The organization surveys insurance companies to produce official catastrophe estimates.

Only Florida’s deadly Hurricane Andrew in 1992, with insured damage of $18 billion, and Hurricane Hugo in 1989, at $4.2 billion, resulted in higher dollar value of insurance payouts.

Unlike in those disasters, insurers may bear as little as a tenth of the total cost of the Northridge earthquake because so much of the destruction was to uninsured publicly owned infrastructure such as highway overpasses, water works and public buildings. Gov. Pete Wilson has estimated that total losses from the quake could be as high as $30 billion.

Moreover, a large proportion of the damage to homes will not be covered because only one-third or fewer of all homes carry earthquake insurance, and most earthquake policies carry high deductibles so that minor damage will not appear on the insurance companies’ books.

Still, the Northridge quake will be more than double the insurance costs wreaked by the Loma Prieta earthquake, which shook the San Francisco Bay Area in October, 1989, causing $960 million in insured damage.

Until Northridge, the Loma Prieta quake was the costliest temblor for the insurance industry, although in total damage it paled in comparison to the San Francisco earthquake of 1906, when there was virtually no insurance.

California’s top two insurers, State Farm and Allstate, last week estimated that they would pay out $280 million and $350 million, respectively, in claims from the Northridge quake. Both totals far surpass the companies’ claims from Loma Prieta.

Kerney, of Disaster Claims Services, said that earthquake damage is far more difficult for the industry to gauge than that of other disasters.

“In a hurricane, all buildings are subject to the same kind of wind,” he said. “But in a quake, the underlying soil conditions are a big determinant of whether a structure will be damaged.”

The disaster has prompted a renewed push for federally subsidized earthquake insurance as part of an overall natural disaster program.

Since Loma Prieta, insurers have increased deductibles and taken other steps to reduce their exposure to earthquake insurance claims.

California Insurance Commissioner John Garamendi criticized State Farm for instantly adopting an 18-county moratorium on issuance of new earthquake policies after the Northridge quake. After negotiations, State Farm peeled back the area covered by its ban to Los Angeles and four other counties.

After Hurricane Andrew, which quadrupled the worst insurance disaster in history, some companies tried to exit the Florida market for homeowners insurance but were restrained from doing so by state insurance authorities.