A Shaky Quake Insurance Plan

Earthquakes. The notion of the Big One slumbering beneath California soil represents just too much risk for insurance companies, so they have worked hard to shift earthquake liability to the state. In the wee hours Sunday, before the final meeting of its session closed, the Legislature cooperated with the insurers, passing a controversial bill that creates a $10.5-billion state earthquake insurance authority. This is hardly an ideal solution, but the governor is expected to sign it.

The good news is that many insurers that refused to offer new homeowner policies be- cause they were required to sell quake coverage in the same package now will resume selling basic homeowner coverage. They will be offering earthquake coverage too, but the policy will be issued by the state, not the companies, which scrambled to get out of earthquake coverage after paying out $8.5 billion for residential claims from the 1994 Northridge quake.

Homeowners, no surprise, will be spending significantly more for less coverage. Deductibles will be set at 15% of a home’s value, and garages and pools will be excluded; these severe restrictions are expected to be in all policies. The coverage is similar to the mini-policy that the Legislature approved last year, also to provide relief for insurers. Premiums for the mini-policies had been rising sharply. And insurance under the authority is expected to continue that costly trend.

Many Californians may forego the special coverage because of its cost. Times staff writer Kenneth Reich reported that owners of $200,000 homes in most of the state’s urban areas may have to pay $660 to $1,050 annually for earthquake insurance. Under the 15% deductible, these owners would have to sustain $30,000 in damage to their dwelling before receiving the first dollar from insurance claims. And policyholders could be assessed a surcharge of up to 20% on their policies if overall claims from an earthquake exceeded $6 billion.

The best solution to the problem is to spread the risks through a federal program that would provide financial relief for the panoply of disasters that strike American communities: quakes, fires, tornadoes, hurricanes. Efforts to enact a disaster program have rattled around in Congress in recent years but have never been adopted. A current bill, carried by Sens. Ted Stevens (R-Alaska) and Daniel K. Inouye (D-Hawaii), is receiving little support. The issue will be raised again in the next congressional session, possibly in the form of the federal government providing some financial backing to state disaster plans such as the California Earthquake Authority. As long as the cost is high and there is a risk that a sizable quake could wipe out the assets of the California authority, many policyholders may simply take their chances and skip quake coverage. It’s come to that.