Quake Insurance: This Answer Is No Answer

Sacramento’s answer to the availability crisis in homeowner and earthquake insurance is not the best the Legislature can do. The pending bill to create the California Earthquake Authority contains significant downsides for consumers.

More and more California homeowners are finding it difficult to buy both regular and earthquake insurance because the companies that provide 95% of homeowner coverage in the state have stopped selling new policies. The companies are no longer writing new ones because of the state law that requires them to offer earthquake coverage when they sell homeowner insurance. Insurance companies, which had to pay out $8.5 billion for residential losses after the Northridge earthquake, have been lobbying hard to reduce their exposure.

The Legislature last year allowed insurance companies to offer minimum, no-frills earthquake policies, which insurers themselves said would drastically reduce their risk. That made sense, but insurers have been slow to offer the no-frills policies.

Most insurers really don’t want to offer earthquake insurance at all. So they have been the big backers of Insurance Commissioner Chuck Quackenbush’s plan to create the California Earthquake Authority, a state agency that would provide earthquake insurance.

Under the current legislation, the CEA would offer reduced earthquake insurance--similar to no-frills policies--but it would forewarn buyers that the coverage is less. Deductibles would rise to 15% from the current 5% or 10%, coverage for contents and living expenses would be down sharply and swimming pools and landscaping would not be covered. Buyers would be told that the CEA could run out of funds in the event of a big quake or a series of smaller ones and thus be unable to pay claims. Policyholders also would have to pay a 20% premium surcharge indefinitely if the CEA needed to rebuild its fund to pay claims. The surcharge would apply to policyholders statewide, even those not affected by an earthquake. There’s also a question of whether insurers would eventually be freed of the requirement to sell earthquake insurance.

In short, the CEA plan dumps more risk and burden on homeowners in order to free insurance companies. Providing cost-efficient quake insurance poses a dilemma, but an alternative to better balance the risks is needed.

The ideal solution would be if Washington enacted a national disaster insurance program; already there are federal insurance programs for floods and crop failures. Meanwhile, it is Sacramento’s responsibility to protect the interests of both homeowners and insurers, and the current proposal doesn’t even come close to looking after consumers’ needs.