How the New Insurance Will Work for Homeowners

Q & A with Insurance Commissioner Chuck Quackenbush on the California Earthquake Authority, signed into law Friday by Gov. Pete Wilson.

Question: What is the California Earthquake Authority?

Answer: The CEA is a privately financed, publicly managed state agency that will provide insurance coverage for earthquake damage to residential property owners, mobile-home owners and renters.

Q: How is the CEA financed?

A: Through six sources: premiums paid by those who purchase earthquake coverage, cash from participating insurance companies, commitments [contingent on a damaging earthquake occurring] from participating insurers, reinsurance, debt authority and capital from private investors.

Q: What coverage will be provided by the policy offered through the CEA?

A: In its first year of operation, the CEA will offer a policy that provides the same coverage [the “mini--policy”] the Legislature authorized last year. The policy will pay for structural damage to the dwelling, but not for damage to pools, patios, fences, driveways and detached garages. The CEA policy will also pay up to $5,000 to repair or replace personal effects and $1,500 for living expenses while your home is being repaired. Claims are subject to a deductible of 15% of the amount of coverage on your home. If the CEA meets certain financial targets, coverage for additional living expenses increases to $2,500 in the second year and $3,000 in the third year.

Q: Will I be able to buy more coverage?

A: The legislation only allows the CEA to offer the coverage described above. . . . Although most insurance companies have switched to the new policy, some companies that do not participate in the CEA may sell a policy with more coverage.

Q: If my homeowners insurance company does not participate in the CEA, will I still be able to buy earthquake insurance?

A: Companies that sell homeowners insurance are still required to offer earthquake coverage to their customers. Companies that participate in the CEA will offer earthquake coverage through the CEA, while those that don’t will underwrite earthquake insurance through their own companies.

Q: Will I have to go to a state office to buy earthquake coverage?

A: No. When the CEA becomes operational, existing earthquake policyholders who are insured with participating companies will have their earthquake policies renewed into the CEA. . . . Consumers who do not now have earthquake coverage may purchase it through the CEA when they renew or purchase homeowners policies from participating companies.

Q: How much will the earthquake policy cost?

A: The rating plan approved by the CEA advisory panel has a statewide average rate of $3.29 for every $1,000 of coverage, with homeowners in low-risk areas paying less and those in high-risk areas paying more. Wood frame houses and those with earthquake retrofitting will pay less than those who live in masonry houses.

Q: How will CEA rates compare to those charged by private insurers?

A: Rates for the same home may vary widely, and it pays to shop around for both homeowners and earthquake insurance.

Q: What coverage will be offered through the CEA for condominium owners?

A: Individual condominium owners may purchase a policy through the CEA to cover their personal contents, living expenses if they are displaced after an earthquake, and improvements. In addition, the CEA will offer loss assessment coverage to help condo owners pay their share of any [condominium] association earthquake loss.

Q: How would the CEA pay its claims if a huge earthquake exhausted its resources?

A: While it is possible that an earthquake could cause enough damage to bankrupt the CEA, the probability of this occurring in any given year is less than 1%. In its first year of operation, the CEA will have enough resources to pay all claims from an earthquake more than twice as destructive as the Northridge earthquake. . . . Disclosure language on the face of the CEA policy will advise consumers that in the event a major catastrophe causes damage in excess of the CEA’s resources, claims may be paid on a pro--rata basis [each claimant receiving a standard percentage of his allowable claim].

Q: What’s this policyholder assessment I’ve heard about?

A: If an earthquake or earthquakes produce more claims than available resources can handle, the state treasurer is authorized [to provide] up to $1 billion, which will be repaid through assessments on CEA policyholders. . . . This assessment could be as much as 20% of the earthquake premium.

Q: Are general taxpayers funds at risk if a major earthquake or series of quakes bankrupt the CEA?

A: No, [according to] specific language in the CEA legislation.

Q: When will the CEA become operational?

A: At this time, it is expected that the CEA will be prepared to sell policies by Dec. 1.