California Quake Insurance: Problem Won’t Just Go Away

Thursday morning’s little jolt--a 3.6 near downtown Los Angeles--was a wakeup call in more than one way. Insurance, for instance. Since the 1994 Northridge earthquake, California insurance companies, which are required to offer earthquake insurance when they sell a homeowner’s policy, have been ridden with anxiety over the prospect of being wiped out in another major earthquake. To reduce their risk exposure, some have cut back on policies; others have pulled out of the homeowner policy business altogether.

To address the problem, state officials extended the so-called Fair Plan as an insurer of last resort for those homeowners unable to buy home and earthquake coverage from private insurers. But state Insurance Commissioner Chuck Quackenbush said this week that starting next Friday the Fair Plan will no longer write such policies. Quackenbush said he was acting to protect the plan from excessive risk.

Existing policyholders will not be affected, and the sales ban does not apply to brush-fire areas and poor neighborhoods where private insurance is unavailable. Quackenbush’s solution to the overall problem is to create a privately financed California Earthquake Authority to relieve insurance companies from having to offer earthquake coverage. A legislative conference committee in Sacramento is examining the idea.

To provide some relief in the meantime, the Legislature last year reduced the required minimum earthquake coverage for homeowners to a basic no-frills package. Since the new law took effect Jan. 1, the Insurance Department has approved 41 of the 60 applications to offer the pared-down policy. But insurers have been slow to market it, even though, they say, the no-frills would cut their risk exposure by half. It’s widely perceived that the private companies hope they can get off the hook if the Earthquake Authority is created. The commissioner has no authority to force them to sell the new policy. But he could and should publicly nudge them.