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Insuring a house would seem like a simple thing to do, and earthquakes would seem like the obvious thing to insure yourself against in the Bay Area. That this isn't possible is the result of several failures, both in state disaster policy and in the underlying economics of the insurance industry. Here's the basic problem:
- Comprehensive earthquake insurance is virtually unavailable in California. It is almost impossible to buy a policy that will cover the loss of both your home and your personal possessions in an earthquake.
- There is almost no way to convince insurance companies to change that. The Bay Area's unholy combination of some of the country's highest housing prices and its worst earthquake faults is a recipe for disaster in the insurance business. The risk is so high that most insurance companies won't even touch earthquake policies in California.
- Faced with that gap in the market, the state government got into the insurance business. Four years ago it created an agency called the California Earthquake Authority, which drafted its own earthquake policies to sell to homeowners. But those policies proved unappealing to potential buyers. The policies only cover damage to the physical structure of your house -- not your belongings. Plus, they are expensive, have a prohibitively high deductible, and reimburse only for total, catastrophic damage. Yet they are the only game in town.
- Not surprisingly, few people bought the policy. Only 17 percent of California homeowners have earthquake insurance. Yet policyholders will still have to spend tens or even hundreds of thousands of dollars of their own money if a quake damages their homes, because of high deductibles and critical limits on coverage. The other five-sixths of homeowners, the uninsured, will be completely out of luck. Renters who do not have supplemental earthquake coverage on their renter's insurance will also be out of luck.
- Local housing prices remain enormously high, even with the recent economic downturn, and the cost of rebuilding a damaged or destroyed home keeps climbing. The federal government, meanwhile, has indicated its impatience with disaster bailouts, and wants to move toward prevention and private insurance. So no check from Uncle Sam.
The scenario for the future, therefore, looks like this: The widely predicted quake will arrive, 150,000 homes will become uninhabitable, no one will get much insurance money for his losses, and tens of thousands will end up without homes and deep in debt. For new homeowners, their half-million-dollar houses (to use a rough regional median price) will become rubble with a mortgage. For middle- and lower-income residents who have seen long-standing family homes appreciate with the local housing market, generations of hard work -- everything -- will be gone in half a minute.
If you had to pick a single point at which California's earthquake insurance problems began, it would be Jan. 17, 1994, when a 7.0 earthquake centered in Northridge ripped across the Los Angeles area.
Damage from the quake topped $40 billion. That included the cost of fixing roads and buildings, lost wages, small-business bankruptcies, drops in revenue from industries that had to shut down factories or temporarily lost clients, and other loss of economic activity. It was the worst disaster in American history in dollar terms, according to the Federal Emergency Management Agency.
The size of the ensuing claims murdered unprepared insurers. Of the $40 billion in damage, more than half, $25 billion, resulted in some sort of payout to the victim -- a check for the ruined house, crushed car, broken dishes. Of that, about half, $12 billion or so, came from the insurance industry, according to the Western States Seismic Policy Council in Palo Alto. The rest came mostly from federal and state disaster assistance.
The shock of $12 billion paid out at once nearly bankrupted several large insurance companies. Not surprisingly, insurers soon afterward did what you'd expect them to do: They threatened to leave California and do business somewhere less dangerous, financially or seismically. They were particularly frightened by California's requirement that homeowners' policies cover earthquakes, which to insurers meant the certainty of billions more in future losses.
"After Northridge, I think the insurance companies were playing political hardball with the state, in order to get the earthquake insurance off the homeowners' policies," says UC Berkeley architecture professor Mary Comerio, an expert on disaster mitigation and author of a book on the subject, Disaster Hits Home.
Insurers had not only underestimated their exposure from an earthquake, they were also reeling from a string of other disasters, says Comerio, who undertook several studies of how victims, insurers, and the government responded to the Northridge quake. Hurricane Hugo had buzz-sawed the Carolinas, and before that Andrew had torn apart Miami. The Mississippi had drowned the Midwest, and the Loma Prieta quake had hit locally, a magnitude 7 or 7.1 monster depending on where you were standing. It had been a bad decade.
Pressing the case, neither Northridge nor Loma Prieta had actually flattened L.A. or San Francisco, in a disaster movie sort of way. As Californians have heard so often, the worst is to come. Insurers feel no need to be around for it.
For a short while in the mid-'90s, California's requirement of earthquake coverage made it look as if it might be nearly impossible to get even a basic homeowners' policy in the state, says Tupper Hull, a spokesman for the California Earthquake Authority. Several insurers in fact stopped writing homeowners' policies of any kind, while others were weighing their options. The state had a choice, Hull says: lose the earthquake coverage requirement, or watch the insurance industry pull out of the state entirely. Facing such an ultimatum, Sacramento separated seismic damage from other household disasters like fire, termites, or a Muni bus crashing into the yard.