Shaken, Not Stirred…to Action

It used to be that earthquake insurance in California had to be offered by the same company that underwrote one’s regular homeowners policy.  Then in 1994, the devastating Northridge earthquake literally shook up the entire industry, and subsequently many insurance companies simply refused to write either type of policy.  Out of necessity, a new entity was created by state law in 1996 called the California Earthquake Authority (CEA), a “not-for-profit, privately funded, publicly managed organization that provides residential earthquake insurance and encourages Californians to reduce their risk of earthquake losses.”  The CEA became the primary way to buy earthquake coverage for homeowners who still wanted it, though it has never been too popular because it is expensive (both premiums and deductibles), limited (in coverage), and restrictive (only offered for sale every other year).  But recent improvements to the CEA program might be cause for a second look.

While some private policies still exist in the state, about 75% of all earthquake insurance is now provided by the CEA; and yet, only about 15% of California homeowners currently have any kind of earthquake coverage.  Indeed, many homeowners may falsely believe that they have earthquake insurance because they have a homeowners policy; but earthquake coverage is separate and distinct. The main objection has long been the “one size fits all” deductible, which for years was a single 15% amount.  In a state known for high home values, this can mean very high out-of-pocket commitments.  But the CEA now offers a range of deductible choices — from 5% up to 25% — so homeowners have more flexibility to suit their financial circumstances and risk mitigation preferences.  The policies also had relatively low limits on personal property and stingy “loss of use” assistance (for lodging needed during reconstruction), but modest improvements have been made.  Premiums remain high because liabilities linger — and damages from Northridge alone were estimated at up to $20 billion plus additional economic losses — but at least now there is some greater ability to adjust coverage and cost. 

Regardless of provider — CEA or private — all earthquake insurance needs to be coordinated with the same company that underwrites the homeowners policy; and thus this relationship should help with overall risk management assessment and suitability of coverages (especially on higher-end homes).  Of course, many homeowners may still simply “self-insure” against this particular peril, because unlike certain exposures that require insurance — like auto and mortgaged homes — earthquake coverage is strictly optional.  And yet, the decision to carry it (or not) should always be deliberate.

Location and condition also impact pricing, including the home’s age and whether it is built on landfill or susceptible to liquefaction.  Typically, one-story wood frame houses — bolted to their foundations — are cheaper to insure.  Indeed, regardless of insurance considerations, homeowners should retrofit as much as possible and secure furniture and breakable items to help protect against property damage.  In California, all sorts of natural hazards exist that imperil homes, but sensible precautions can help.  The entire state is one big seismic area riddled by fault lines, so unlike avoiding flood plains or steep slopes susceptible to mudslides, it is practically impossible to live in California without accepting some degree of earthquake risk.  The difficult and ongoing task is weighing personal financial resources against such inherent risk, while also taking into consideration that home type and location plus the cost and breadth of coverage available in today’s earthquake insurance marketplace.

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