Got Earthquake Insurance? Most California Homeowners Don't

When it comes to California earthquakes two things are certain: the really big one probably has yet to occur and when it does only a small percentage of homeowners will have insurance to cover the damage.

That’s the message being broadcast by the California Earthquake Authority (CEA), a not-for-profit, privately funded, publicly-managed agency which has become one of the world’s largest providers of residential earthquake insurance.

Today CEA has slightly over one million residential policyholders, providing coverage to single-family homes, condominiums, mobile homes and renters, accounting for two-thirds of the earthquake insurance policies sold in the state. Another half million policies are provided by insurance companies not affiliated with CEA.

Those numbers may increase in the wake of the two large July temblors in the Ridgecrest area of Kern County.

Glenn Pomeroy, the Authority’s CEO, says the 6.4 and 7.1 magnitude quakes were just another wake-up call for uninsured homeowners and this time many seem to be paying attention.

“We saw a dramatic increase in visits to our website and calls to our Information Desk in the days following the earthquakes in Ridgecrest,” Pomeroy told Patch. “Large, damaging earthquakes don’t happen very often, but when they do they’re a reminder to us all that they can happen at any time, and anywhere, and that we need to be prepared.”

During the few days immediately following the Ridgecrest quakes, CEA recorded about 10 times as much website traffic as it typically would, Pomeroy said. Although the volume slowed down, the number of visitors to CEA’s website during the week of July 19 to 25 was still nearly double the number of visitors CEA typically sees in an average week.

But Pomeroy says there are still many homeowners who don’t realize regular home insurance required by mortgage and other lenders doesn’t cover earthquake damage.

“The federal government will not be coming in to help everyone rebuild their homes when the big one happens. It’s important to recognize that,” he said.

Millions Are Unprotected

According to the most recent data compiled by state insurance regulators, there are still 12 million residential policyholders eligible for CEA coverage who don’t have it. Although the number of CEA policies has been growing, the Authority is only providing coverage to just 11.2% of the state’s total residential market.

With more than 15,000 known faults in California and the bulk of the state’s population living within 30 miles of an active fault, CEA says the potential for cataclysmic damage will remain a permanent menace for anybody living in the state.

Since 2010 there have been three magnitude 6.0 or greater earthquakes in California (and one in Mexico impacting California) that have resulted in deaths, injuries and damage exceeding $1 billion, according to federal earthquake statistics. The 2014 American Canyon quake in Napa County killed one person and injured more than 200 with damage exceeding $700 million. Damage from the two Kern County quakes last month is still being assessed, but initial estimates are at least $100 million.

Jolted Into Action

Ironically, it was the 6.7 Northridge earthquake that rocked Southern California’s San Fernando Valley 25 years ago causing an estimated $20 billion in residential damage that jolted the state legislature into action.

Although state law has required private insurance companies to offer earthquake coverage since 1984, in the aftermath of Northridge, most of the major for-profit insurers – who dislike paying claims that erode their profits – pulled out of the California residential market. At one point the state insurance department reported that 95 percent of these companies had either severely restricted the sales of new homeowner policies or stopped selling them altogether.

State lawmakers responded by creating CEA, which began operations in late 1996 and within a year 79 of the 82 insurance companies who pulled back after Northridge returned to the market, providing earthquake coverage in partnership with CEA.

In structuring the Authority, lawmakers dictated minimum policy parameters for earthquake insurance offered by residential insurers – something known as a “mini-policy” limited to earthquake damage to residential structures and the contents. Damage resulting from fire or explosion caused by an earthquake is covered by a homeowner’s regular insurance policy.

CEA policies are sold exclusively through 24 private insurance companies who have signed participation agreements with CEA and made initial contributions to its pool of funds available for paying claims. Each year these companies forward a portion of policyholder premiums to CEA for addition to its claims-paying reserves.

Currently CEA has $17.5 billion available for paying earthquake damage claims, including $8.3 billion from re-insurance, a common practice within the insurance industry, where CEA purchases policies from other insurance companies to spread its risk, which could be substantial in the event of a catastrophic quake.

Last year the “total exposure” for CEA and other companies providing earthquake insurance in California was $710.3 billion with CEA policies accounting for $474 billion. This compares with $3.7 trillion in residential exposure covered by policies in the state without earthquake coverage.

However, total exposure is merely a measure of what CEA and other insurers would actually have to pay in the unlikely event every policyholder would submit a claim for the full value of their coverage, something called a “complete loss scenario” in industry parlance.

Sarah Sol, a CEA spokesperson told Patch in the event of a massive quake, the Authority would probably end up paying its policyholders for damage to their property covered by the CEA policy, but what CEA paid out would would be just a small portion of the total overall damage. An earthquake causing billions in damage would not cost the CEA anywhere near that amount.

For example, Sol said $30 billion in damage to a community would represent only a small loss to CEA depending on the community and the number of CEA earthquake insurance policies held by residents. “It would likely represent a loss to CEA of no more than a few billion dollars,” she said.

Most of the loss, Sol explained, would consist of damage to city and state infrastructure, commercial buildings and homes not covered by earthquake insurance.

Sol said CEA’s current financial ability to pay claims “is more than enough to pay for a one-in-400 year event, and far more than enough to pay claims that would arise out of a reoccurrence of events such as the 1906 San Francisco, 1989 Loma Prieta or 1994 Northridge earthquake.” Such an earthquake, she said, “would likely represent an economic loss to California of around $250 billion” and would be something never seen in California’s recorded history.

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Since 1998 CEA has paid $8.2 million on 479 loss claims, not counting the Kern County quakes in July. So far those temblors have resulted in some 200 claims from the CEA’s estimated 2,000 policyholders in the area.

CEA’s two largest payouts have been $3.5 million on 195 claims for the 2014 Napa County quake and $2.7 million on 86 claims for the 6.4 San Simeon quake in 2003. Additionally CEA has paid a total of $718,000 to participating insurers for handling those claims.

How It Works

Homeowners with CEA earthquake policies never deal directly with the Authority. CEA was established with the intent of eliminating the need to employ its own insurance agents and adjusters. Instead, CEA policies are sold by a network of local agents from 24 private insurance companies who have partnered with the Authority.

When the policy is sold the participating company collects the premium, deducts its sales commission and operating costs and remits the remainder to CEA where it goes into the pool of funds available to pay claims or used to purchase re-insurance policies.

In the event of an earthquake, damage claims are submitted to the participating insurance company which acts as CEA’s agent for determining the extent of damage and whether it’s covered. In most cases the participating company actually writes the check to policyholders and is reimbursed by CEA.

In 2016 CEA made changes in its insurance, increasing policy offerings to include a variety of options and deductibles ranging from 5% to 25% with annual premiums based upon type of coverage and deductible amount. Options include coverage for damage to personal property, living expenses if the home is uninhabitable and damage to exterior masonry.

These enhancements are believed to have prompted an increase in the number of policies sold last year, despite the fact growing numbers of insurance companies are not renewing residential insurance in wildfire areas.

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Here’s what a homeowner could expect from earthquake insurance: If, for example, their residence was covered by a basic policy of $500,000 with a 25% deductible and the home suffered earthquake damage of $200,000, after subtracting the $125,000 deductible based upon the total amount of coverage, the homeowner would receive a check for $75,000. Other, optional coverage, would increase the amount paid out.

The exact number of earthquake policies sold by a particular insurance company is considered proprietary information and not disclosed by the CEA. However, four companies – State Farm (33.3%), USAA (13.2%), Farmers (13.1%) and Allstate (9.3%) – sold the lion’s share of CEA policies in 2018.

Preparing For The Worst

Of course CEA would hope a policyholder’s residence doesn’t slip off its foundation or collapse during a seismic event. To that end CEA has implemented programs designed to help homeowners reduce potential damage during an earthquake. One of those, the “Brace + Bolt” program, provides financial incentives to homeowners who seismically retrofit their residential structures. Available in select areas, homeowners who apply are eligible for outright grants of $3,000 to help pay for the necessary upgrades.

Since the CEA-funded program was launched in 2013, the Authority says 7,566 retrofits have been completed – with 3,267 of those in 2018. This year grants will be made to 3,500 eligible policyholders who apply on a first-come, first-served basis. Since the application period opened CEA says it has received 650 applications. In addition, 2,000 retrofit grants available to eligible homeowners in the state who registered late last year and expected to be completed in 2019 and 2020.

CEA estimates there are more than one million houses in areas of high seismic risk that are most prone to earthquake damage -- generally those constructed before 1980 when statewide building codes were imposed. Residential structures with raised foundations or lacking crawlspace bracing are those most at risk.