State’s Experiment in Quake Insurance Is a Hard Sell

California is a land of excellent climate, tremendous material wealth and unlimited opportunity. But it is also a land of risk, particularly of catastrophic earthquakes. And the costs of ignoring risks can be considerable.

I bring this up because the state government’s experiment with earthquake insurance, the California Earthquake Authority, is having a tough time.

Sales of quake policies are down, the participating companies selling them for the CEA are too often failing to push them, and the net result is that when the next big quake strikes, California’s recovery will depend more than ever on U.S. government loans or handouts.

Some of the decline in sales has to do with the tendency, during intervals between destructive quakes, for people to forget the danger. The longer the interval between damaging quakes, the more denial sets in.

So, it comes as no surprise that the number of California homeowners carrying earthquake insurance has slipped from 30% just after the 1994 Northridge quake to 17% today.

Of 5.6 million home and condo owners insured by the 14 companies participating in the CEA, about 940,000 now have quake insurance. The proportion drops with companies not in the authority.

It’s an expensive item, sure. That has something to do too with fewer people buying coverage.

After Northridge, quake insurance prices went up and coverage went down under a scheme approved by legislators after industry lobbying.

Greg Butler, the first director of the authority, once estimated that on a $200,000 house with $100,000 in quake damage, insurance paid an average of $77,619 for Northridge-related claims. That same homeowner would receive only $43,167 on a claim under a policy issued by a CEA participant.

CEA officials are about to introduce new coverage--for a price. They will expand the maximum contents coverage from $5,000 to $100,000, increase living expenses from $1,500 to $15,000, and they will allow deductibles to be cut from 15% to 10%.

This, however, will not start until the companies in the CEA revamp their computer systems to allow the sales, a lengthy process.

It is strange that the big companies, which lobbied so hard for the CEA as a means of lowering their exposure to earthquake losses, do not feel more obligation to push sales of CEA coverage.

Recently, I received a call from Gretchen Wiechman of Pasadena saying that the Auto Club was refusing to sell her a condo loss assessment policy that the CEA said six months ago would be available from all its participants.

When damaging quakes occur, condo associations cannot commence repairs until they assess their members for uncovered common damage. Loss assessment policies help the individual condo owners pay these costs.

The authority said that as long as a condo owner had a fire and theft policy, its participating companies would sell the loss assessment coverage alone, without requiring other quake coverage.

But it has taken a long time for many agents to implement this.

Within days of Wiechman’s complaint, the spokesman for the CEA, Mark Leonard, gave me four separate explanations of what was happening.

First, Leonard said, the Auto Club wasn’t selling this particular loss assessment coverage because it had a computer system problem that had lasted for months.

Then, when I expressed incredulity, he said that he had been told the Auto Club would sell it manually, without computers.

But when Auto Club spokeswoman Carol Thorp said it had only sold one--that’s right, one--such policy manually, Leonard opined that the CEA couldn’t force its participants to sell the coverage.

Finally, Leonard said authority officials had discussed the matter with the Auto Club and it would soon begin regular manual sales.

Thorp confirmed this, although she insisted that nothing in the law establishing the CEA required the sale of loss assessment coverage on a stand-alone basis. Still, she said, manual sales will begin June 1.

Of course, the law doesn’t name each and every type of coverage to be sold. That’s left to CEA administrative rules.

Milo Pearson, the authority’s chief operating officer, said that as of May 3, it had 105,181 condo quake policies on its rolls, and 4,021 of these were loss assessments sold alone.

Of these, State Farm had sold about two-thirds, 2,841 policies; Allstate 534; USAA 316; Farmers 257; a few others a scattering; and five CEA participants--the Auto Club, Prudential, Guidant, Mercury and Golden Eagle--none.

The Auto Club’s Thorp was disturbed at the figure. “We’ve sold one,” she kept insisting.

David Knowles, the authority’s CEO, is concerned that Californians’ denial of the quake danger is a serious obstacle to the CEA’s success.

“We have contracted with a marketer, Edelman International, to find out what will motivate consumers to take action to protect themselves,” he said.

There are two private marketers of quake insurance in the state, Pacific Select and GeoVera, which in some cases offer better deals than the CEA, but their capacity remains small.

This seems evident: When the next big earthquake strikes in an urban area, there is going to be popular shock at the financial needs the uninsured majority will have.

In the Northridge quake, about half the approximately $25 billion in relief came from private insurers and about half from the U.S. government. But in the next quake--with the private insurers mostly out of it--the burden is going to fall mainly on the government.

That assumes it will be willing to meet it. But with concern rising in Congress about funds going to the two most disaster-prone states, California and Florida, it’s not a sure thing that the government will fully produce.

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