Quake Insurance Plan Needs a Good Shake-Up

Aproposal to create a state-run earthquake insurance agency has stalled in the Senate for lack of the required two-thirds majority, and that’s good. This bill needs retooling to give consumers a break. Consultations on the controversial California Earthquake Authority are expected to resume this week.

The CEA is being sold as the solution to the crisis in homeowner and earthquake insurance availability. Under the plan, the state would create the authority to provide earthquake insurance and the program would be funded by insurance companies and private investors. The basic policy would be comparable to the no-frills earthquake policy that private insurers can offer now: 15% deductible, no coverage for pools and fences and limits on home contents coverage and living expenses.

Sounds simple, but in the event of a big quake or a series of small ones, the CEA could lack the money to pay claims. Policyholders--even those whose homes were undamaged by a quake--might have to pay a 20% surcharge on their premiums indefinitely if the authority had to rebuild its fund to pay claims.

In short, the authority as now proposed shifts risk from insurers to homeowners, who would be paying a higher deductible, getting less coverage and assuming additional liability. No wonder insurance companies like the CEA plan and consumer groups have big reservations. More evenhanded protection of insurers and consumers is needed.

No one argues against limiting the exposure of insurance companies to earthquake risk. They incurred losses estimated at $8.5 billion for residential damage resulting from the 1994 Northridge earthquake. The Legislature took an important step to limit that exposure last year when it allowed insurance companies to offer the no-frills earthquake policies. This move alone is expected to cut insurers’ risk by half. But the companies have been slow to offer no-frills, and homeowners have been reluctant to buy the policies because the companies insist that buyers insure for the full value of their dwellings, which was not a requirement in the past.

Senate President Pro Tem Bill Lockyer (D-Hayward) is insisting on CEA amendments that would, among other things, put the interests of policyholders above those of investors in the authority, equalize rates across the state and allow policyholders to drop their policies if the CEA ever invoked the 20% surcharge.

As the bill and amendments are taken up next week, the issue of capitalization--providing the CEA the funds to pay off losses--will need special attention. Under the proposal, insurance companies would pay $5 billion to the authority. They should pay double that amount to better capitalize the authority. That is a fair trade-off considering that the CEA would grant their wish to be taken out of the earthquake business altogether, except for selling the policies.

About 40% of California homeowners now have earthquake insurance, up from about a third before the Northridge earthquake. The ideal solution would be for Washington to enact a national disaster insurance program. Until that happens, homeowners need an alternative. A CEA that better balances the interests of consumers and insurers would hold promise.