Millions of California homeowners will receive certified letters this year asking them to buy earthquake insurance, the result of a new law requiring insurance companies operating in the state to offer such coverage.
The vast majority will refuse the insurance, say insurance experts, often because they believe that the plans are too expensive. Others figure that their homes will not be severely damaged by minor temblors, and that the federal government will bail them out if the Big One comes.
Some of these homeowners could be making a risky mistake, earthquake experts say.
Although homeowners living outside of prime quake areas or with well-built homes generally don't need coverage, those living in earthquake-prone areas or in poorly constructed homes should give earthquake insurance more serious thought, these experts say. These homeowners often base their decision to reject earthquake coverage on lack of information or misconceptions, they say.
Among these misconceptions:
- Earthquake insurance is uniformly expensive. In fact, while plans offered by most major carriers require annual premiums as high as $200, with deductibles as high as $10,000 for a $100,000 home, lower cost plans are expected to be available at least by year-end from independent insurance brokers. It might be worthwhile to wait and then shop around.
- Homeowners will be able to collect for earthquake damage even without earthquake insurance. That happened after the May, 1983, quake in Coalinga, when about $10 million was paid to homeowners even though very few had earthquake insurance. In fact, the new state law mandating insurance firms to offer quake coverage has greatly diminished homeowners' chances of such a windfall.
- The federal government will bail out homeowners in case of a major catastrophe. In fact, disaster aid has been cut back in recent years. Under current federal and state disaster-aid programs, the highest grant any individual homeowner can receive is $5,000.
"Anybody assuming that the government will rebuild their home and restore to its original condition is really operating under an illusion," says James D. Goltz, planning officer for the Van Nuys-based Southern California Earthquake Preparedness Project, a branch of the state Office of Emergency Services.
In addition, homeowners often mistakenly assume that their homes are safe from earthquake damage. These homeowners might do well to perform some quick inspections to make sure, such as finding out whether the house is bolted to the foundation, the experts advise. Many of the homes in Coalinga were not, and as a result they slid off their foundations.
"If you determine your risk of earthquake damage is very high, insurance may be the only alternative," says David Strykowski, president of Earthquake Building Inspection Service, a San Francisco-based firm that inspects homes to determine their susceptibility to earthquake damage.
On the other hand, he says, "if your determine the risk is low, then it probably is not worth it."
In recent years, California homeowners have been increasing their earthquake coverage, possibly due in part to publicity about recent quakes in Coalinga, the city of Morgan Hill near San Jose, and the Imperial Valley.
The dollar amount of earthquake liabilities written by insurance companies increased by 30% in the high-risk Los Angeles and San Francisco areas between 1982 and 1983, according to the California Department of Insurance.
Effect of New Law
However, the overall percentage of California homeowners with earthquake insurance still remains low, at about 5% statewide and possibly as high as 7% in the Los Angeles and San Francisco areas as of the end of 1984, says David Simmons, Western regional representative of the Insurance Information Institute.
The new state law may change that. The law, which went into effect this year, has resulted in insurance firms sending hundreds of thousands of mailers to policy holders. Because the law requires proof of mailing, insurance firms sent these letters by registered mail, causing some long lines--and anger--among consumers at post offices.
Industry officials expect that the mailings will double the percentage of homeowners with earthquake coverage. But that will still leave about nine out of 10 without quake policies.
The main reason for the resistance is the high cost and high deductibles. Before this year, major insurance firms typically charged premiums of about $2.15 per $1,000 of coverage, with deductibles of 5% of the home's value.
However, some firms this year have increased the deductibles. For example, Allstate Insurance Co., the state's largest provider of earthquake insurance, increased its deductible to 10% from 5%, meaning a $10,000 deductible instead of $5,000 on a $100,000 home. In exchange, it lowered its premium by about 25% to $1.50 for each $1,000 of coverage.