Quake Authority Begins Offering Insurance Policy

State earthquake insurance became a reality Monday, as the new California Earthquake Authority began offering a bare-bones policy through participating private insurance companies.

Just how limited the new policies will be, compared to most private earthquake insurance policies offered before the 1994 Northridge earthquake, was made clear in an example provided by the authority’s chief executive, Greg Butler.

Butler cited a $200,000 house with $100,000 in earthquake damage as an example.

He said that following the average pattern of structural and contents losses incurred in the Northridge quake, the owner of such a home would have received $77,619 in damage payouts from his or her private insurer.

But if the same quake were to occur today, and cause the same amount of damage, the payout from the state policy would be only $43,167, Butler said.

The striking drop is a result of higher deductibles and fewer items such as swimming pools, garages and landscaping covered under the state policy. Unless the government comes to their assistance, Butler said, future quake victims will have to bear much more of their losses themselves, even if they are insured.

“I think the federal government will be here after a quake, whether we have the California Earthquake Authority or not,” he said Monday.

He said that 67% of the average Northridge residential damage costs pertained to the residential structures, 7% to structures such as unattached garages, fences and pools, 24% to contents and 2% to defray extra living expenses.

Under the mini-policy authorized by the Legislature in 1995 and incorporated in the new state quake policy, the deductible has gone from 10% to 15%; unattached garages, pools and fences are not covered; contents coverage is limited to $5,000, and living expenses are limited to $1,500.

So a homeowner having $100,000 in damage today would not get reimbursed for those items no longer covered. This amounts to the $7,142 he or she would have gotten before for damage to pools, garages and similar structures. In addition, the homeowner would get $5,000 instead of $23,809 for contents, $1,500 instead of $2,380 for living expenses and $36,667 for dwelling damage instead of $46,667, Butler said.

But since the Northridge quake, the price of private insurance has shot up, in most cases to double or more what was paid before.

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Butler made the point Monday that when private quake policies are renewed and placed under the quake authority, recent premium increases may actually be rolled back.

He cited CNA and Farmers as insurers that have charged high premiums to their policyholders, so high that when the policies are rolled over to the quake authority, the price charged is apt to come down, although not to pre-Northridge levels.

On the other hand, Butler said, State Farm, the state’s largest seller of homeowners policies, has been charging lower than usual rates, so its policyholders are apt to find their premiums going up.

Although the private sellers will collect premiums and adjust claims for the authority, the price structure for the state policies will not vary by company.

It will all be phased in over the next year, as policy renewals come due. No one except new buyers will be insured by the authority until he or she is renewed. If a damaging quake should occur before then, his or her insurer will be liable.

So on Monday, the earthquake authority was insuring only a few thousand people. Day by day, as policy renewals are made, this number will increase.

Insurers selling 71.6% of the total quake insurance market have decided to participate in the authority, and the rest will be obligated under state law to continue offering earthquake insurance along with homeowners policies.

A few of the nonparticipants may seek to undercut the quake authority price, Butler acknowledged, but he said he does not think many will.

The prices will vary sharply across the state, depending on calculations of quake risk, age and type of home. There are 19 rating territories throughout the state. The prices in most of the San Francisco Bay Area, for instance, will be more than four times those in Sacramento and nearly twice those in most of Los Angeles.

When the Legislature was considering whether to authorize the authority, it was described as a $10.5-billion agency. However, since only 71.6% of the market will be represented in it, for the time being, Butler said, it will be a $7.45-billion agency.

This means that the reinsurance the authority will buy to protect itself against catastrophic damages will be cut back as well. For instance, investor Warren Buffett will now sell the authority only about $1 billion in reinsurance rather than $1.5 billion, and the $590 million, four-year premium will be scaled back proportionally.

California’s new state quake insurance marks an important departure in public disaster coverage and will be watched closely elsewhere in the nation.

Its proponents, led by state Insurance Commissioner Chuck Quackenbush, say the new coverage is accurately priced, considering what is known about quake risks, while before the Northridge temblor, quake insurance was underpriced.

Its opponents, led by Consumers Union, say the insurance is unfairly priced and have called for public hearings on the rate structure.

Northridge damage payouts by private insurers exceeded by far all the premiums they had ever collected for quake insurance, leading the industry to demand a rollback in its exposure. It was this pressure that led to the authorization of the quake authority.

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New Earthquake Insurance

California began offering earthquake insurance Monday through participating companies.

COVERED

Structural damage to main dwelling, with a 15% deductible; $5,000 only in contents; $1,500 in extra living expense.

NOT COVERED

Swimming pools

Unattached garages

Fences

Driveways

Outbuildings

Landscaping

Chimneys considered unsafe

Fire damage (covered under homeowner policy)

HOW MUCH?

The price of insurance through the new California Earthquake Authority varies according to your home’s location, age and type of building. Annual rates shown here are for a $200,000, wood-frame house built after 1979.

San Francisco: $900

Most of San Fernando Valley: $780

Most of the rest of Los Angeles: $540

Some Westside neighborhoods: $340

Palmdale: $300

Sacramento: $200