Who Will Pay the Bill When the Big One Strikes L.A.?

Even before the recent Turkish earthquake, EQE International, a leader in analysis of catastrophic risk, estimated that a magnitude 7.5 quake in the Los Angeles Basin could cause up to $250 billion in damage.

The firm added that a temblor equivalent to the 1906 San Francisco quake could wreak $200 billion in property losses in the Bay Area.

Heresh Shah, a founder and director of another important firm in this field, RMS, says, “Our numbers are similar.”

But who would pay for damage so vast that its cost would be at least five times the $40-billion loss inflicted by the Northridge quake?

In rough numbers, the insurance industry provided $12.5 billion in Northridge relief, the government about the same, and the other $15 billion came from quake victims.

In a $250-billion L.A. Basin quake, there would be a demand for $210 billion more. No one seems to be sure where it would come from.

In key categories, in fact, we do not have the relief resources of five years ago. The insurance companies have reduced their commitment and the federal government has begun trying to cut its costs.

In 1994, according to David Knowles, CEO of the California Earthquake Authority, about 30% of California homeowners carried quake insurance. Today, just 17% do.

The types of coverage offered are fewer and the price usually is higher. Larger deductibles and additional exclusions mean that even for those with quake insurance, there would be a large amount they would have to pay by themselves.

An earlier CEO of the state Authority estimated that on a $200,000 house with $100,000 in quake damage, insurance paid an average of $77,619 for Northridge claims, but that same homeowner would receive only $43,167 today.

If a really big quake struck tomorrow, I asked Knowles, what would happen to the 83% of homeowners who don’t have any quake insurance at all?

“That becomes really a matter of public policy, and a question for the government to answer,” he said.

“My expectation is that after a certain point, the government well runs dry. . . . There’s only so many dollars to chase any priority, including disasters.”

Not everyone agrees with him.

In Washington, lobbyist Jack Weber has campaigned for years for federal reinsurance guarantees to buttress the industry in a catastrophe. He hasn’t been successful yet, but he contends the government would have to pay for recovery, no matter what the damage.

“The fact is, someone is going to be left holding the bag for that $300,000 mortgage on a home that is destroyed,” Weber said.

“The taxpayer ultimately is on the hook, because the government can’t afford to see the banks fail, or the homeowners fail in large numbers, and they ultimately will have to take action to see that the system does not collapse.”

But, right now the tendency at the federal level is to put new restrictions on disaster relief. The Federal Emergency Management Agency has floated the idea of requiring state and local governments to insure public buildings against quakes in order to be eligible for disaster aid.

It is probably unworkable, if only because the insurance industry lacks the capacity to assume so many such risks on the required scale, and FEMA is backing down. Still, it shows the drift of bureaucratic thinking.

In Congress, meanwhile, a bill by Rep. Tillie Fowler (R-Fla.) would “streamline” disaster relief by requiring some nonprofits, universities, theaters and sports stadiums to go through the Small Business Administration for help, not directly to FEMA. It has cleared its first House committees.

UCLA and the Los Angeles Coliseum were among the institutions that went straight to FEMA to get aid after Northridge. This would put in a new bureaucratic obstacle.

Neither Peter Yanev, president of EQE, nor Shah of RMS are confident of adequate funding.

Both see serious threats to the solvency of insurance companies, saying commercial quake insurance is priced dangerously low. Both see limits on government funds.

Shah stated, “It’s scary.”

(In 200 years, Los Angeles and Orange counties have never had a quake stronger than Northridge’s 6.7. But most scientists believe several faults in the basin are capable of producing quakes of 7.5, and a “mere” 200 years of seismology is not predictive of the possible.)

On neither the federal nor state level is there a sign of the mammoth changes in law and custom required to even begin to pay the bills, if the larger quakes do strike.

Indeed, there isn’t sufficient positive movement on even small matters. The state’s Seismic Safety Commission called four years ago, for instance, for a colloquium of experts to examine what was acceptable risk in California, and recommend steps to fit the criteria.

The Wilson administration never held the meeting, and the Davis administration has allowed the 17-member commission to slip to eight. No new appointments appear imminent. Its annual budget is less than $1 million.

Caltech, the U.S. Geological Survey and the state Division of Mines and Geology had to struggle to find private contributions to fund $1.5 million of the $20 million it cost to build a TriNet system of 600 seismic stations in Southern California.

At the moment, they have secured only $3 million of the $5 million needed annually to maintain the system when it is fully operational in 2001. A like amount is required for Northern California. They have yet to find a member of Congress willing to carry the legislation.

The TriNet system may be vital in a big quake. Among other things, it will allow rapid drawing of shake maps to show areas requiring quick emergency response.

This column can’t include everything. It hasn’t dealt with retrofitting or safer building codes, or their enforcement. But even if we do these things, there are still questions, mostly ignored, just how we’re going to pay the bill when the Big One comes.

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Ken Reich can be contacted with your accounts of true consumer adventures at (213) 237-7060 or by e-mail at ken.reich@latimes.com.