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S HOULD YOU CARRY EARTHQUAKE INSURANCE?
The decision to carry or not carry earthquake insurance involves consideration of many factors. The answers to questions most people ask when considering earthquake insurance
can be found on this website or from links attached to this website. Questions answered in other areas of our website are:
What is the probability of a large earthquake occurring in the Bay Area?
What is the probability of damage to my home?
If I have earthquake insurance, do I need to retrofit also?
Are there any programs to help pay for a retrofit?
EARTHQUAKE INSURANCE
The insurance company that insures your home for fire is required by California law to offer you earthquake insurance. Your company will either
offer you a California Earthquake Authority (CEA) policy which is primarily funded by the government or offer you a privately funded policy. The CEA
policies are called mini-policies because they offer so little coverage. Privately funded policies generally match the CEA policies and usually offer
more comprehensive policies. Their prices are often lower than CEA policies.
The California Earthquake Authority was formed because insurance companies refused to sell fire or earthquake policies in the state of California
after suffering staggering losses in the 1994 Northridge Earthquake. They refused to sell fire policies because California law mandates that any company
offering fire insurance must also offer earthquake insurance. Insurance companies did not want to expose themselves to losses from another
earthquake, so they stopped selling fire insurance. This created a crisis for California insurance consumers, and the California Earthquake Authority was
formed to take the losses that otherwise would have gone to the private insurers. Once this was done, private insurance companies felt safe to reenter
the California market with fire insurance, but consumers were forced to buy the CEA earthquake policy from them or have no earthquake insurance at all.
Later some insurance companies began offering privately funded earthquake policies that are not linked to the CEA. These companies offer earthquake
insurance at reduced rates to those homeowners who are in low-risk areas and therefore are the least likely to suffer severe losses. These private
companies offer insurance in high-risk areas but usually at rates higher than those offered by the CEA. They thereby guarantee that they will not be exposed to high losses from a catastrophic earthquake.
The net effect of the reentry of private companies offering privately funded earthquake insurance is a loss of premiums collected by the CEA. The CEA
is also being forced to carry most of the high-risk properties. Many analysts are afraid this will cause the CEA to go bankrupt after a major earthquake hits
. This is a serious concern given the fact that over 195,000 Bay Area residences are expected to become uninhabitable when the Hayward Fault ruptures.
About CEA Policies
Earthquake insurance rates have doubled since the California Earthquake Authority was established, but consumers haven't received better coverage in
exchange. In fact, they're receiving far less. And the coverage has large gaps in it. Also, the CEA has only limited funds, so if "the Big One" hits, the CEA
could go bankrupt, leaving consumers with even more costs.
These are the gaps in the the CEA's earthquake policies:
•Every policy has a 15% deductible. This means a homeowner must pay the first 15% of the value of his home, not of the value of the damage. For
most homeowners, losing 15% of their home's value would be a catastrophic loss. For example, if a person's home is worth $200,000, he would have to
pay for $30,000 worth of damages before the insurance policy would pay a cent.
•Every policy has a $5,000 limit covering personal belongings. If a homeowner loses all his belongings in an earthquake, he'll be given only $5,000 to replace everything he owns.
•Every policy pays a maximum of $1,500 for temporary living expenses. If a family must relocate to an apartment while their home undergoes repairs, they
would be allotted only $1,500. This amount might not even cover the move-in costs of an apartment rental, especially in the Los Angeles or San Francisco Bay areas.
•Every policy covers only the house itself. The policies do not cover detached garages or other structures, pools, patios, landscaping, walkways, or fences.
•If "the Big One" hits, the CEA could run out of money to pay homeowners' claims. If that were to happen, earthquake victims could receive pro-rated
claim payments, perhaps as low as a dime for each dollar of covered damage.
Here's an example of what could happen to a homeowner with a CEA earthquake policy if his $200,000 house suffers the following damage in an earthquake:
•The walls supporting the room over the garage collapse, costing $40,000 to repair.
•His detached garage collapses, costing $30,000 to replace.
•His pool cracks, costing $10,000 to repair.
Under current CEA terms, this homeowner would be responsible for paying the 15% deductible on the house, or $30,000. Of the $40,000 worth of
damage to the house, the insurance policy would only cover the remaining $10,000. Since the policy doesn't cover the pool or garage, the homeowner
would pay for these losses himself. The homeowner would end up paying $70,000 out of his pocket, while the CEA insurance covered only $10,000 of the damages.
Alternatives to the California Earthquake Authority
The CEA is not the only game in town anymore. As the homeowner's market in California heats up, you can hear more and more grumbling about
the high prices and skimpy coverage of the CEA "mini-policies." While the biggest players in the California home insurance market are CEA members,
there are other companies out there writing homeowners insurance. Some of them even offer old-fashioned earthquake coverage, as opposed to those newfangled mini-policies.
However, there is one major difference between the CEA and the companies listed below. As long as your house doesn't have any pre-existing earthquake
damage, you will be able to get coverage from the CEA. There's no guarantee that you will get coverage from non-CEA companies, since many of them have more stringent criteria for homes that they will cover.
It would be impossible to list all the companies in California writing earthquake coverage. However, we have been able to gather the names of a
few non-CEA companies writing homeowner's policies. This list is far from complete; if you happen to know of a company not mentioned, tell us about it
. The 1998 California home insurance rate guide also lists sample rates from some of the largest companies in the state offering non-CEA coverage.
You can check on the financial strength of these companies in the Standard & Poor's financial strength ratings, although not all companies will be listed.
Companies fall into two categories. First are those writing "mini-policies," or coverage that is essentially the same as what you would get with the CEA.
Second are those writing policies more extensive in their coverage, including increased limits for contents and, in some cases, lower deductibles on
dwelling coverage and additional living expense coverage (in case your house becomes uninhabitable). We've provided short profiles of companies in the second category, including underwriting standards and contact information,
where available.
The following companies offer "mini-policies," or earthquake coverage similar to the CEA's:
Allegiance Insurance Company (Horace Mann's California operation)
American National Property & Casualty Co.
California Capital Insurance Co.
Century National Insurance Co. (800-231-5711)
Civil Service Employees Insurance Co.
Eagle West Insurance Co.
Residence Mutual Insurance Co.
Topa Insurance Co.
Travelers Property Casualty
The following companies offer more extensive earthquake coverage:
AMICA Mutual
Historically described as a preferred risk company, AMICA's underwriting guidelines have been rather stringent, and the best way to buy a policy was by
getting a current policyholder to recommend you. However, Assistant Vice President Andrew Sundberg assures us that the company looks at each
application individually. And once the company has decided to write your coverage, it will write full earthquake insurance for you. For more information, Californians can call (800) 24-AMICA.
Calfarm Insurance Company
Full earthquake coverage comes with a standard 15% deductible. In "non-seismically active areas," the company will go as low as 10 %, but for higher
rates. You can also choose a higher deductible and pay lower premiums. CalFarm sells through both exclusive and independent agents, so if you can't
find them in the phone book, you should be able to get a quote from an independent agent.
Chubb Group
Chubb is more active in certain areas of California than in others, but it is writing its own earthquake coverage and not the mini-policy. Chubb sells through independent agents.
Clarendon Group
Clarendon bucked the trend of the rest of the industry; after the Northridge quake, they started writing new business. Their homeowners´ policies offer
the same limits for earthquake coverage as for the regular dwelling coverage. Clarendon also plans to offer mini-policies for tenants and condo owners, but
still awaits approval from the California Department of Insurance. Homeowners can contact Insurance Express at (800) 366-3200, x7063 for a quote.
Five Star Insurance Company
The bread and butter of Five Star's business is the traditional, middle American homeowners´ market: homes worth between $100,000 and $400
,000. Full earthquake coverage is available, but not for cheap, and there is a 15 % deductible on the dwelling. The company sells in all but about six ZIP
codes in California (places where it already has too many policies), through independent agents or direct to consumers. If you're interested in buying direct, call Nancy Bever at (800) 327-5818.
Geovera Insurance Company
A subsidiary of U.S.F.&G. Specialty Insurance Company, Geovera offers two types of stand-alone earthquake policies. The comprehensive policy has
a 10% deductible and will cover 100% of the dwelling and contents. It also offers additional living expense coverage, debris removal, and coverage for
building code upgrades. The standard policy has a 15% deductible. Each policy is underwritten on an individual basis. For more information about Geovera, you can call their toll-free number at (800) 324-6020.
The Hartford
If you buy home insurance from the Hartford through an independent agent, you'll have to settle for a mini-policy.- But if you're a member of the AARP,
you might be able to get coverage similar to the old-fashioned earthquake endorsement. -The difference? A steep 15 % deductible on the dwelling coverage.
Pacific Select
This is a brand new company based in Walnut Creek, Calif. Pacific Select is so new that none of the major ratings services have graced it with a claims
paying ability rating. But it does say something that the company made it through the California Department of Insurance's rather stringent licensing
procedure. It offers five different types of policies, including comprehensive earthquake coverage and supplemental (or wraparound) coverage for those
who already have mini-policies. Interested consumers can check them out on the web at www.pacificselect.com or call them toll-free at (800) 774-1012.
The California State Department of Insurance
(800) 927-4357
http://www.insurance.ca.gov/docs/Idsearch.htm
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