Rubble With a Mortgage

What could be worse than a devasting earthquake in the Bay Area? The day after, when we all realize that no one is covered by insurance.

To fill the resulting void in quake insurance, the CEA was created in 1996. The authority's basic job was to draft, market, and sell a new, publicly backed earthquake insurance policy.

"There are two things that didn't exist four years ago," Hull says. "There is an earthquake policy that you can get, and there is a vast array of homeowners' insurance. You couldn't get homeowners' insurance in California because of this earthquake issue."

Fair enough.

UC Berkeley architecture professor Mary Comerio, an expert on disaster 
mitigation, has suggested requiring that earthquake insurance be part of 
a mortgage.
Paul Trapani
UC Berkeley architecture professor Mary Comerio, an expert on disaster mitigation, has suggested requiring that earthquake insurance be part of a mortgage.

The problem was, the CEA came up with a terrible product, and 96 percent of all policies statewide now use its basic structure and language: Its deductible is a flat 15 percent, meaning your house has to incur damage up to 15 percent of its value before you see any reimbursement. The number was high and proved an enormous disincentive to prospective policyholders. Nor did the policy cover much. It was limited to your house's walls, roof, and foundation. Everything else was the homeowner's responsibility. Particularly for middle- and lower-income homeowners, already straining to stay in the local housing market, the added burden was impossible. So few bought in, and today only one out of six homeowners carries the insurance.

Even those who have policies still have to worry. What a CEA policy means to the owner of a house now worth $300,000, for example, is this: You pay $1,000 to $2,000 a year, roughly double the regular homeowners' insurance bill, for supplemental earthquake insurance. You do this for 10 or 15 years, and then an earthquake comes. Let's say your house is still worth $300,000 by then. For you to get anything for those years of payments, your house will have to incur 15 percent of its total value in damage, or about $45,000. That damage must be to the "physical structure" of the house, says Hull, because the CEA policy does not cover what it calls "contents": your stuff. So only if your house is gravely damaged will you get some money to repair it, usually capped at $350,000. That will cover your $300,000 home, though it's at least $100,000 less than the average price of a Bay Area house today. Additions you may have made to your house, like a deck or a driveway, are also your responsibility and are not covered under the CEA plan.

"You may have to borrow some additional money," Hull allows.

Most rental properties are not covered under earthquake policies, because they are considered commercial buildings under state law. Renters basically have to hope their landlords have paid extra for earthquake insurance. Even then, you'll have to pay to replace your possessions. And if the rental is damaged enough to be unlivable but not enough that the landlord can collect on insurance, says Hull, you'll probably have to find another place to live.

Though the house and the rental above are hypothetical, the situation isn't conjecture. In Northridge, according to Comerio's research, the average repair bill for Angelenos with structural damage to their homes was $40,000. A $300,000 house insured by the CEA, requiring a $45,000 deductible, wouldn't qualify for reimbursements in a similar disaster here. And $40,000 in damage is barely half the required deductible on the average half-million-dollar Bay Area home. If Northridge's victims in 1994 had been saddled with the 15 percent deductible in virtually all state earthquake policies today, only about half as many people would have received insurance checks. (Of course, the fact that those people made claims, and received payments, is why private insurers stopped writing policies in the first place.)

A similar scenario played out following the recent 7.0 shake in Seattle, where earthquake deductibles are about as high as California's. Washington state statistics provided by the Western States Seismic Policy Council show that 2,200 homeowners filed insurance claims in the weeks following Seattle's quake. Of those, only 30, a scant 1.3 percent, exceeded their deductible and received a payment from their insurer. It's important to note, however, that the Seattle quake occurred very deep in the earth, compared to the expected quake in the Bay Area, and caused far less damage than a similar magnitude earthquake would here, Hull says.

"It is clear, and no one disputes, that earthquake insurance is a catastrophic insurance policy," Hull says. "If there is an earthquake that does not cause a homeowner catastrophic, devastating damage, there is no question there will be a relatively low number of deductibles pierced."

But what is catastrophic? If we use Northridge as a guide, the vast majority of Bay Area homeowners would not qualify to receive anything after a quake and would still have nowhere to live. They would nevertheless have to find the $40,000 to make repairs -- another bank loan, dwindling federal disaster assistance -- plus continue to pay the mortgage on their unlivable houses. ("Forty thousand bucks is a lot of dough," Hull agrees.) Only with those responsibilities covered could they begin replacing furniture buried under broken glass, dishwashers pulled from the wall, clothes soaked from broken pipes, lamps toppled off tables, blistered paint, broken tile, crushed stereos, shattered mirrors, computers, cars, and so forth.

In creating the California Earthquake Authority, the state had hoped to lure private companies back to provide supplemental insurance, which would ease the homeowner's burden and create competition, Hull says. It didn't happen, and he is not optimistic. "There has not been yet the sort of variety of additional products the Legislature had hoped would be forthcoming. [Insurance companies] don't consider earthquake damage insurable."

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