Seeking a Fair Shake in Quake Insurance

Thousands of Californians with earthquake insurance are eligible for refunds of hundreds of dollars linked to lower rates, but few have been told how to get them.

On July 1, the California Earthquake Authority cut rates an average of 22.1% for about 85% of its 753,000 policyholders around the state. But the agency did not mention that consumers are entitled to cash out the balance of their current policies with no penalty to take advantage of the better deals.

As a result, many earthquake policyholders are paying too much for their current coverage.

“It would have been nice to know that,” said Karen Brown, a real estate loan officer in the Leona Valley near Palmdale.

Since cutting rates, the Earthquake Authority has made information about refunds available to only “a couple of consumers” and “the occasional agent” who asked, said Nancy Kincaid, director of communications and public policy.

The agents for the 19 insurance companies that sell state earthquake policies -- and earn a 10% commission on each sale -- have been just as quiet about potential refunds.

“I’m stunned about this, to tell you the truth,” said Elizabeth Imholz, West Coast director of Consumers Union, publisher of Consumer Reports. In fact, Imholz said, she planned to ask her own insurance agent about how to file for a refund.

“Consumers in California are having a hard enough time making ends meet, with high energy prices, healthcare,” she said. “If they can get a rebate on earthquake insurance, they absolutely should be notified of that.”

Insurance Commissioner John Garamendi urged consumers to be cautious in pursuing refunds, saying it was not necessarily the right strategy for everyone. This is not “an automatic ATM machine,” he said.

Canceling and rewriting an earthquake policy may result in a “useful and significant refund -- but it may not,” he said. It may depend on how a home was built, its location or its subterranean geology as well as the details of the individual’s homeowner policy.

The commissioner urged policyholders to contact their insurance agency and compare overall prices before taking action. He said consumers with questions should contact his office at (800) 927-HELP.

Neither the authority nor the insurance agents are obligated to inform consumers of the potential refunds.

Agents ought to be helping their customers, but it’s unrealistic to expect them to do so unless required by law, said Amy Bach, executive director of United Policyholders, a consumer advocacy organization.

“They have no incentive to contact nor do they have a legal duty,” she said. “The reality is they are a reluctant seller in the first place. They only sell earthquake insurance because they have to.”

The Earthquake Authority reduced rates in July based on new soil maps showing that most areas of the state were more seismically stable than previously thought. At the same time, it raised rates for about 15% of the authority’s customers, including those in desert areas near Palm Springs and on the North Coast near Eureka.

To find out whether they are entitled to reduced rates and policy refunds, purchasers should contact the agent who sold them their homeowner and earthquake policies.

Individual savings could range from as low as $50 to close to $500, depending on when a policy was purchased, where a home is located, the type of construction and local seismic risks.

For instance, a policyholder living in a high-value home paying a $2,200 premium could enjoy substantial savings, especially if the insurance was purchased in June, just before the new rates took effect. The owner could get an eight-month refund on his or her policy, worth more than $1,400. The homeowner then could buy a new policy at the 22% lower annual rate of $1,716.

Annual earthquake premiums, which are based on the risk of damage from a temblor, average $700. But they can range from $258 in Sacramento to $2,200 for multimillion-dollar homes in the Bay Area.

As a public agency, said Consumers Union’s Imholz, the Earthquake Authority has a special duty to tell its policyholders about potential refunds, especially in quake-prone parts of the state where premiums run into the thousands of dollars.

Kincaid of the Earthquake Authority confirmed that homeowners have the legal right to cancel an existing policy and replace it with a lower-cost contract.

“Companies have asked, ‘Does the CEA allow a cancel and rewrite of the policy?’ ” she said. “Absolutely, we allow that.”

The authority leaves it to agents and brokers of the companies that sell Earthquake Authority coverage to tell customers about possible refunds, if they choose to do so, Kincaid said.

In contrast to the California Earthquake Authority, the federal flood insurance program and local agencies have provided detailed information on how to cancel policies and apply for refunds.

A recent posting on the Sacramento Area Flood Control Agency website tells people whose residences are no longer in the designated flood plain to contact their homeowner insurance agent about getting refunds and buying lower-cost coverage.

By law, insurance agents must offer the state-backed policy along with traditional homeowner protection from companies such as State Farm, Farmers and Allstate.

For its part, State Farm General Insurance Co., California’s No. 1 seller of homeowner insurance, said a letter was sent by the Earthquake Authority to policyholders about the rate reduction. The letter, however, made no mention of possible refunds.

“The communication that went out left it open to proceed in any manner they choose,” State Farm spokesman Lonny Haskins said. “If they chose to look into it and cancel and renew, there’s no penalty,” he said.

Rich Halberg of Allstate Corp., the third-largest seller of homeowner coverage, said company policy discouraged “churning” by canceling and renewing policies before the original one-year term had been completed.

A spokesman for Farmers Insurance Group did not respond to requests for comment.

But not everyone in the industry is reluctant to tell earthquake insurance policyholders about potential refunds.

Coast West Insurance Agency Inc. of Agoura Hills mailed letters heralding the rate cut to local homeowners this summer. “What your insurance company and agent didn’t tell you was that beginning July 1, 2006, your California Earthquake Authority (CEA) policy is eligible for a 40% REDUCTION IN RATES,” one letter said, promising to help its recipient quickly get a refund. Calls to the agent who signed the letter, Joseph L. Luithly, were not returned.

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marc.lifsher@latimes.com