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.

If it's a high 8 or a 9, there's nothing to plan for, because everything will crumble and we might as well have fallen into the sea. Fortunately, it probably won't be a 9. It could be an 8. If it's a low 8 or so, like the recent quake in Peru, it's survivable, but most everyone will sleep outside that night, because we will all be scared of our homes, or of what might be left of them. It probably won't be an 8 either, though. It's more likely to be somewhere in the 7s, maybe the high 6s if we're lucky. This is not a good prognosis either, as earthquakes go. Seven is still a disaster.

Chunks of the Bay Bridge are likely to be knocked out in a strong quake, even with the new retrofits. The west span is being retrofitted to withstand an 8.3, but the east span will be as brittle as ever. Until an entirely new east span is built, which won't happen soon, anything like a nearby 6 or 7 could pancake the upper sections onto the lower ones. If it's rush hour -- the 1989 Loma Prieta quake occurred at 5:04 p.m. -- hundreds or even thousands of people could be trapped and crushed, horribly.

Even if the bridge doesn't go down, parts of the transportation system could fail: Roads could buckle, and approaches and on-ramps to the bridges could crack, even if the spans themselves hold.

The 7.0 Loma Prieta quake hit the Marina hard in 1989. Despite such 
disasters, earthquake insurance remains a hard sell. Only 17 percent of 
California homeowners are covered.
Courtesy of TimePix
The 7.0 Loma Prieta quake hit the Marina hard in 1989. Despite such disasters, earthquake insurance remains a hard sell. Only 17 percent of California homeowners are covered.
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.
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.
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.

In the East Bay, six elementary schools literally sit on top of the Hayward fault, and panicking parents will begin streaming up the Berkeley hills, dodging the downed power lines, wondering who the hell's idea it was to build a school above the epicenter of an earthquake zone. As many as 20,000 people across the Bay Area will be hurt in a 7, according to scenarios drawn up by Oakland's Earthquake Engineering Research Institute; unfortunately, there will only be 10,000 hospital beds.

If you live in a building with what is called a "soft first story," meaning one of those blocky apartments built on stilts with a parking bay below, you run a slightly higher risk of damage, and will hopefully not be at home in a 7.

A slip on the Hayward fault in the 7.0 range could cause $100 billion in physical damage and loss of economic activity, according to the Governor's Office of Emergency Services.

And yet, the vast majority of us will come out of it healthy. If you do all the smart things, say the predictions -- don't sleep under a hanging mirror or put the baby crib next to a bookshelf -- you will probably avoid physical injury, as will your friends and family. So don't panic about your health.

Your house and your checkbook are a different matter entirely. Particularly if you own your home.

A study by the Association of Bay Area Governments (ABAG) predicts 150,000 homes will be rendered uninhabitable after a magnitude 7.3 earthquake along the Hayward fault in the East Bay, the fault geologists consider most likely to produce a high-magnitude shake sometime in the next 30 years. One out of seven dwellings will be uninhabitable over the entire Bay Area, the report says, with the worst losses in Alameda County, where 40 percent of multifamily housing will become uninhabitable. Regionwide, an estimated 370,000 people will be displaced from their homes, about 100,000 of whom are expected to have nowhere else to go and to need emergency shelter. San Francisco and Alameda counties are expected to generate over 80 percent of the emergency shelter population after a major local quake, with the situation less dire in San Mateo, Contra Costa, and Marin counties.

If the quake comes nearer San Francisco on the San Andreas, the other fault considered likely to wreak havoc, the region could lose a more modest, but still considerable, 45,000 homes, of which 42 percent, or about 19,000, will be in San Francisco, according to ABAG's planning.

Three months ago, earthquake experts at a meeting of the Seismological Society of America in San Francisco were told that the Bay Area "is likely to experience potentially damaging earthquakes in the next four to nine years," according to a study by the California Department of Conservation's Division of Mines and Geology.

"There has been a distinctive pattern associated with the four major earthquakes in the Bay Area since 1800. That pattern indicates the possibility of increased activity 15-20 years after the magnitude 7.0 Loma Prieta earthquake," said the report. Loma Prieta was 12 years ago, and while the state report cautions that it is not making a prediction, the strong implication is, something's coming.

But for all the earthquake studies and preparedness and retrofitting, one crisis is not being planned for: the financial disaster that will surely follow a major quake. When the fires are mostly out and the aftershocks have started coming at wider intervals, people will start calling their insurance companies. Assuming they can get through, that's when the real shudder will hit. The vast majority of homeowners in the Bay Area, and most of the renters, will suddenly realize that for all their damage -- their crushed homes, their lost belongings -- they will be reimbursed not one thin dime. Because California's system of earthquake insurance is seriously broken, and no one seems to be able or willing to fix it, despite the near certainty of a quake coming hard, and soon.


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.

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.

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."

And a bad product creates a self-fulfilling prophecy: If few people buy the CEA's policy, the CEA can't afford to broaden its coverage and make it more attractive.

"It's sort of a Catch-22. When you get some more people into the pool, maybe you could see some other things," says David Unnewehr, a policy analyst at the American Insurance Association. "I think the CEA-type public approach is always going to be the approach, just because of the enormity of the problem, the concentration of the risk. I don't think we're ever going to see a situation where the CEA is not needed anymore."

And yet even with the CEA, almost no one has insurance.

"I think it's part[ly that] they're crummy policies," says UC Berkeley's Comerio. "And in part, you know, people wouldn't buy car insurance if we didn't make them. When you get to the rational person, who's willing to do it, they take a look at the policy and say forget it. ... The policy doesn't particularly cover the things people care about."

The CEA has no plans to offer coverage for belongings, and private insurance is cost prohibitive. It remains virtually impossible in the Bay Area to insure the contents of your house against earthquake damage.

Still, the houses sell.


It's like touring the Titanic. The $600,000 home for sale half a mile from the Hayward fault is a spectacle. The dazzle distracts you from the fact that what you are standing in, though most important a fantasy of wealth and prosperity, is also a structure made of wood and bricks, built by engineers who better have known what they were doing when they poured the foundation in 1913. Such practical considerations -- is the house bolted to the foundation? -- are hard to keep in mind at first sight. It's a beautiful house, in Berkeley's bucolic Elmwood neighborhood, and it would be wonderful to live in it for a while.

But -- 600 grand. For your money you get 1,900 square feet with two parking spaces, a view of the bay, a generous deck with a barbecue corner, hardwood floors, a redone kitchen with marble countertops, tile sinks, convenient access to BART's Rockridge station, a broad living room with ample light, lovely windows with tooled frames, two working fireplaces, a few trees, an excellent garden, and three bedrooms. Still, it's no mansion, despite the price. Ten years ago it would have been another pleasant Berkeley house, maybe even an affordable one for a middle-class couple willing to sacrifice. Now it's worth a fortune, which would seem to make the nearby Hayward fault a more serious issue.

Fatima Ali, one of two real estate agents working the open house, says she gets some questions about earthquake insurance, but few, and doesn't recommend it.

"We just don't get into that, because our job is to sell houses," she says sensibly. "I don't have earthquake insurance. I was a homeowner for 17 years. So when they [home buyers] ask me, "Do I need it?' I say, "I don't have it.'"

She is sitting beside a table stacked with floor plans and listings of the property's details. She has drawn a good crowd, couples and groups, a few dozen milling from the back deck to the wide front room, twisting the dials on the very classically appointed Wedgewood stove in the kitchen, looking at the scrollwork on the baseboard trim. Ali suggests talking to her partner, Julie Nachtway. Nachtway knows more about earthquakes, says Ali.

Nachtway is in the driveway and does seem to know more about earthquakes than most people. "Of course, let me show you the disclosure form," she says. She's an enthusiastic woman representing Prudential's real estate business, Prudential California Realty. The form is called a "Statutory Natural Hazard Disclosure Statement," and is required by state law since 1991 for any home sale. Prepared by a geologist, the form tells a prospective buyer whether a house is at any unusual risk for flood, fire, and two kinds of earthquake risk: "earthquake fault," and "seismic hazard." The disclosure limits any potential liability for the Realtor or seller for future damage, says Nachtway.

But it's hard to get such information accurately. According to the form, for example, the house in Elmwood is at no unusual risk for earthquake damage despite its location. It gets a "no" checked next to "earthquake fault zone," and is marked "map not yet released by state" for the "seismic hazard" designation. On paper, the house could be in Omaha, Neb. But it isn't in Omaha, Neb. From the front door, it's a five-minute drive to the fault the U.S. Geological Survey says is going to blow its top by 2030.

(The USGS gives earthquake predictions in 30-year projections because that's how long mortgages generally are. The projections illustrate the chances of your house falling down while the bank still owns it.)

The company that surveyed the property Nachtway and Ali are selling, JCP Geologists in Fremont, works under some very narrow guidelines, it turns out, that effectively prevent the disclosure statement from accurately reflecting earthquake risk.

"The statement is for the minimum hazard required by law," says Leslie Ransbottom, one of JCP's senior geologists. To be in an "earthquake fault zone" as defined by the state, for example, you have to be basically on top of a fault, at risk of having the ground actually rupture under or very near to you.

"Typically those zones are as narrow as 1,000 feet. You could be 1,000 feet from the Hayward fault and not be in the fault zone," explains Ted Stephanos, another JCP geologist. By that measure, the devastated Marina was not in the 1991 Loma Prieta earthquake's fault zone.

Similarly, a "seismic hazard zone" refers to a site likely to suffer a landslide or liquefaction -- the earth turning to jelly -- in a quake. Most of San Francisco, minus the Marina, escapes that, and so on paper, San Francisco does not seem particularly prone to earthquake damage.

A building's propensity to shake is not required to be studied or disclosed under state law, say JCP's geologists.

"It doesn't include ground shaking," says Ransbottom. "That's true."

Isn't the ground shaking the main thing that happens in an earthquake?

"In general, yes," she says. "The shaking is the prime effect you're going to feel in an earthquake."

The Association of Bay Area Governments, notes Ransbottom, does provide this information, if you ask for it. In the end, it comes down to common sense -- houses in the Bay Area will shake. If you're thinking of buying one, it's your best guess how hard.


Nachtway, the real estate agent, herself lives in a house in the nearby hills that she says is "literally on the Hayward fault." The recent leap in housing prices puts her place at about $2.5 million if she were to sell it today. But she hasn't insured it for earthquakes.

"We had it [insurance] for a year or two, then we got rid of it because it was so expensive. A seismic engineer looked at it [the house], and because of the type of fault, we weren't at risk for injury. So we did a lot of retrofitting, everything. We bolted the structure to the foundation, did shear walls, tie-down straps. We did something a lot of people don't do and put a ball on the gas pipe so if there was a certain amount of shaking the ball would fall down and plug up the pipe [to cut off the gas and prevent an explosion]. But the insurance, we decided, didn't pay. The amount of damage we would have needed to get anything, because of the deductible, we decided to keep the money, make investments, and pay for any damage."

Nachtway heads off to give more fliers to visitors.

Jill Neilson, not buying but just checking on changes in the neighborhood, lives a few blocks away in "a big house, 3,000 square feet, three floors." She too is uninsured.

"The price is outrageous. I check every year: What's the price, what's the deductible? My partner is an accountant, so he's very good with this.

"It's $2,000 a year, a $50,000 deductible. My house was built in the 1920s, and we've done what we can. But if there was insurance, absolutely, absolutely I'd have it. But it's not realistic now."

She laughs and adjusts her sunglasses.

"I understand if there's a fire, resulting from an earthquake, you're covered."

"So start a fire?" says a friend with her.

Neilson shrugs.

"If there's a fire, say from your water heater flipping upside down, yeah. There are always a lot of mysterious fires after earthquakes," Ransbottom says later by phone.


So how do you do it, provide assurances to people that if you work hard and buy a home for your family in the Bay Area, or hold onto the family house, you won't be wiped out in 30 seconds sometime in the next 30 years? Hull suggests more tinkering with the CEA's insurance policy, and making a prayerful wish for more private insurers. Comerio suggests, a bit more concretely, requiring that insurance be part of a mortgage.

"You make it part of your lending. Add a half-percent to every mortgage and use that to pay for earthquake insurance. It's frankly only in those kinds of mechanisms that you can make it affordable, because then you spread it [the risk] over the entire population. But that's difficult. No legislator wants to put their name on it, until the day after an earthquake. And the home builders will oppose anything that adds cost."

The Legislature has made some progress, but not much.

"Some of these issues are federal," says the chair of the state Assembly's Committee on Earthquake Safety and Preparedness, Ellen Corbett (D-San Leandro). The former mayor of San Leandro, Corbett is something of an earthquake hawk in Sacramento. The state government's relatively blasé attitude toward the problem has forced her to concoct some creative tactics, she says, including passing out a map of predicted earthquake damage on the Assembly floor, color-coded by voting district. According to the map, based on information from the state Department of Conservation's Mines and Geology Division, San Francisco's 13th Assembly District has what the state statisticians call the highest "annual expected earthquake loss" in California, $297 million. The number represents, essentially, the amount of money the 13th should expect to pay for damage when an earthquake comes, averaged over a period of decades. It's a way of demonstrating different areas' relative financial exposure to earthquake damage, while accounting for the fact that damage happens randomly, and real costs could be zero one year and $20 billion the next.

The upshot of the statistic is that San Francisco and Alameda counties, even if the costs are spread over decades, will suffer deeper financial hits from a quake on average than most other parts of the state, with no mechanism in place to insure many of those probable losses.

Even so, this year, state insurance reform is a long way off, and Corbett is pushing retrofits instead. She is sponsoring a bill seeking a state tax credit and $4 million in funds for low- and middle-income people to retrofit their homes (currently, few cities offer tax incentives to perform costly retrofits of old houses; Corbett's bill is in committee). She has no specific thoughts on what incentives might be possible for providing better earthquake insurance, though she agrees it is a large problem.

So, politically, it will wait until the horse is out of the barn.

"I think that's when we're going to get policy," says Comerio. "After a devastating earthquake. Where there's lots of damage, and no one is going to have insurance. That's when we'll have it. It's pretty classic."

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