Flirting With Disaster

Scott and Lea Newton say they never could have afforded the Northridge neighborhood they moved into three years ago had it not been for the 1994 earthquake.

They bought a 4,000-square-foot home for less than half what neighboring houses had been worth before the temblor arrived to crack foundations, shatter ceilings and tilt swimming pools.

Even though the Newtons have spent $80,000 repairing the evidence of that disaster, they have no insurance to cover them if a quake hits again.

“I would like to have earthquake insurance, but at $3,000 a year, I’m willing to go bare,” Lea Newton said. “What are the chances of an earthquake that big hitting here again?”

The Newtons have plenty of company. More than three out of four California homeowners don’t have earthquake insurance. Those who do usually have sharply less coverage and often pay much higher premiums than was the case a few years ago.

The $12.5 billion in insured claims from Northridge helped lead to the creation of the California Earthquake Authority, a state-run insurance pool that provides bare-bones policies to most consumers who have earthquake coverage.

But people who don’t have earthquake insurance actually may be making a rational decision, contends Tim Kochis, an Oakland financial planner and former president of the Institute of Certified Financial Planners.

Statistically speaking, the risk of an earthquake destroying any single home is slim, Kochis said.

“The chance is so low, and the premiums are so high, that from a purely cost-benefit standpoint it’s not a particularly good trade-off,” Kochis said.

Even if a quake does strike, a home is unlikely to sustain enough damage that the homeowner could make a claim, he said.

Deductibles for the new coverage have been raised from the 10% that was typical before Northridge to 15%, meaning the owner of a home insured for $250,000 would have to pay $37,500 out of pocket before the insurance kicked in.

Contents coverage has been reduced from 50% of the home’s value, the previous standard, to a maximum of $5,000. Pools, patios, sheds, fences and other structures outside the home are no longer covered, and expenses for living elsewhere while the home is being fixed are now capped at $1,500.

Even homeowners who are willing to pay more for coverage sometimes have trouble finding it.

Two companies, GeoVera and Pacific Select, began writing more extensive policies in the last year, offering lower deductibles, more contents coverage and higher living-expense limits. But the extended policies are not available in all areas or for all houses. Pacific Select, for example, won’t cover homes on steep slopes, brick masonry homes or homes built before 1955 that haven’t been earthquake retrofitted.

Financial planners recommend homeowners boost their savings and increase their credit lines so they have ready access to cash to pay for earthquake repairs, regardless of whether they have insurance. Low-cost government loans are also often available to help earthquake victims relocate or rebuild.

Finally, homeowners should consider whether they feel comfortable facing the slim but very real risk that an earthquake could level their home and their finances.

“You also have to consider the emotional impact of being self-insured,” said Kochis, who said he pays $3,500 a year for earthquake insurance despite his own misgivings. “It buys some peace of mind for my wife.”

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No Guarantee

Insurance companies have phased out guaranteed-replacement-cost coverage, which paid the full cost of rebuilding a home even if that exceeded the basic coverage amount. Now if a home is destroyed, the maximum coverage is generally 120% to 150% of the insured value--which, for many Californians, is far less than the cost to rebuild, as illustrated in the example below:

1. Home now worth $250,000, insured for $200,000.

2. Ten years later, inflation rider has increased the insurance amount to $297,000.

3. Disaster strikes.

4. Cost to rebuild entire house: $407,000.

5. Insurance company pays $356,400--120% of the home’s insured value--and homeowner pays $50,600. (Under the old guaranteed-replacement coverage, the owner would have paid nothing and the insurer would have picked up the full bill.)

Unless the homeowner wants to share the risk, the solution is to increase the insured amount to cover the full cost of replacement.