Quake insurance too costly for most

After Sonoma County residents woke up to the earth shaking in the early morning of Aug. 24, a few considered taking another look at earthquake insurance.

“We had three or four calls after the Napa Quake,” said Petaluma insurance broker Larry Tencer. “I wrote one new policy.”

Such a modest response to a potentially devastating event must have its reasons, and as with most things, it often comes down to money: Earthquake insurance is expensive, and the deductibles are high.

Still, yet another reason to consider earthquake insurance came last week, when the U.S. Geological Survey released a study warning that the Rodgers Creek Fault, which runs north-south through Sonoma County just a few miles east of Petaluma, has accumulated enough energy to produce a devastating 7.1-magnitude earthquake at any time.

The study, co-authored with San Francisco State University researchers, concludes that the fault is “locked” - meaning pent-up energy is unable to escape - and has not seen a major incident since 1969.

It’s not just after such reminders that people look into getting earthquake insurance. Insurance companies are required by law to inform new homeowners that their regular homeowner policy does not cover earthquakes, and that earthquake insurance is available.

That requirement was put into effect 30 years ago, in 1984, to settle the legal confusion among insurers about whether or not a regular homeowner policy covered earthquakes. For a decade thereafter, insurance earthquake coverage was “a very rich policy, and very inexpensive,” in Glenn Pomeroy’s words. “It was a bad day in January when that all changed” - Jan. 17, 1994, when a 6.7-magnitude quake shook Northridge, California, in the San Fernando Valley.

Since 2008, Pomeroy has been CEO of the California Earthquake Authority, the state’s publicly managed, privately funded “risk-bearing entity” for earthquake insurance. It’s the only such agency in the country, created in the wake of that bad day in January. The Northridge earthquake caused $40 billion in property damage, half of that to residential property, and half of that again - $10 billion - to homes covered by earthquake insurance.

“It was far beyond what they ever projected, and wiped out all the premiums that had been collected,” said Pomeroy. “It changed the landscape.”

The insurance companies asked the state Legislature to relieve them of the obligation to provide, even as an option, earthquake coverage. The legislature refused to do so, but a compromise was reached creating a risk-bearing body to lift the weight of earthquake coverage from the insurance companies. That became the California Earthquake Authority (CEA) in 1996, stable enough to take care of the devastation from a once-every-450-years earthquake event for those who are insured.

Presently, the CEA handles about three-fourths of all homes covered by earthquake insurance in California, through a constellation of member insurance companies such as Liberty Mutual, AAA, Allstate, State Farm and many others. The other 25 percent are covered by non-member insurance companies, usually the larger insurance corporations such as Hartford, Fireman’s Fund or Travelers.

But only about 10 percent of homes in the state are covered by earthquake insurance at all, and in some areas it’s even lower. The reasons are straightforward, according to Larry Tencer: “Cost, and the high deductible.” Tencer, who has been an insurance broker in Petaluma since 1976, estimates that between 8 and 10 percent of his residential policies have earthquake coverage. For most, though, it’s a hard expenditure to justify.

“On the east side of Petaluma, it can be double the cost of the homeowner’s policy,” he said. Not just equal to the cost of homeowner’s insurance, he clarified, but twice as much as homeowner’s insurance by itself. The age of the home and building standards are only part of the reason the policies cost so much.

In fact, the big difference is in the soil: “Adobe liquefies in a prolonged quake. That’s why anything on the east side of 101 is more expensive than on the west side.”

The CEA tries to minimize the possibility of such high deductibles, pointing out that reductions are available for several earthquake damage prevention measures, such as walls that are bolted and tied to the foundation, and braced with plywood or equivalent materials (known as “cripple walls”). Homeowners are encouraged to use the CEA’s own premium calculator on their website, californiarocks.com.

“Your home can be severely damaged in an earthquake, and we must by law charge enough to cover the risk,” said Pomeroy.

Then there’s that high deductible. Instead of a fixed dollar amount, like $500 per incident on your car insurance, earthquake insurance usually carries a 10 or 15 percent deductible before it kicks in. So damage to a $500,000 home that totals less than $75,000 brings no reimbursement from the insurance policy for repairs: You’re stuck with them, and your homeowners insurance won’t cover them.

“I tell my clients, if the home is paid off, or you have very little left on the mortgage,” said Tencer, “if you don’t have earthquake insurance you’re the one who’s going to lose everything. As opposed to someone who still owes 90 percent - they could walk away from it.”

Why so many people refuse earthquake insurance is a question Pomeroy and his associates at CEA ponder daily, he told the Argus-Courier in a telephone interview. “Earthquakes don’t happen very often, so people tend to forget,” he said. “Even when you have disasters that occur more regularly, it’s human nature for people to say, ‘Well, yeah, but it’s not going to happen to me.’”

Some people, too, find a vague hope in the belief that the state or federal government can provide disaster relief funds, which they can. But at best it’s support, and emergency relief, not a complete reconstruction of your lost home.

“There’s some confusion that the federal government is going to come charging in and make everybody whole by giving out federal money,” said Pomeroy. “We know that doesn’t happen.”

Pomeroy stresses that CEA is working to provide all consumers with more options and greater education on earthquake insurance. They’ve implemented more levels of deductibles to vary the premium, and hope to extend the range from 5 percent deductible (the most expensive premium) to up to 25 percent deductible (the least expensive) by 5 percent stages.

They’ve also recently included a “choice” package, where in addition to insurance for the full replacement of the home, you can get much less expensive coverage for your personal property, with more realistic deductibles.

Still, that 10 percent covered by earthquake insurance is a number the CEA would like to see much higher. “One out of 10, in my opinion, is troubling in an area that’s exposed to earthquake damage,” said Pomeroy.

For Petaluma area residents, squeezed between the Rogers Creek Fault to the east and the San Andreas Fault just offshore to the west, their homes possibly resting on adobe soil, the potential for an earthquake catastrophe is ever-present.

“There is no knocking on wood,” said Pomeroy firmly. “Scientists do all the geological probability analysis they can do, and tell us there’s a 99.7 percent probability of a 6.7 or greater earthquake sometime in the next 30 years. That’s 20 times more powerful than a 6.0, like the Napa earthquake.

“They say, just count on it folks, it’s gonna happen.”

(Contact Christian Kallen at argus@arguscourier.com)