The Los Angeles Board of Harbor Commissioners voted Wednesday to set up an unusual insurance fund that will cover losses to the port in the event of an earthquake.
The $50-million account, believed to be the first established by a port, will eliminate the need for commercial earthquake insurance, which port officials said is becoming too expensive and is not keeping up with increasing property values.
This year, the port paid $768,103 for $25 million worth of coverage, more than double the amount it paid for the same coverage last year. The policy requires the port to pay for the first $10 million in damage.
The 7,300-acre port is estimated to be worth more than $750 million, with property values expected to exceed $1 billion in the next few years with the completion of several projects, including a new cruise terminal.
Ezunial Burts, the port's executive director, told the board that it is crucial that it have the ability to quickly rebuild damaged areas after an earthquake. He said the port's facilities would be critical to the recovery of the Los Angeles area after an earthquake.
"We need to do something to ensure that if there is a major catastrophic event, and we have some damage to our facilities, that we can put those facilities back in operation as soon as possible," Burts said. He noted that the port is particularly vulnerable to a major earthquake because landfill areas would be subject to liquefaction, a process that could return much of the harbor to a sandy marshland.
'Seismically Active Area'
A study commissioned by the Harbor Department last year concluded that the port, which straddles the Palos Verdes fault and is close to the Newport-Inglewood fault, is located in a "seismically active area" and has a 30% probability of sustaining earthquake damage in any given year.
But the study, conducted by the URS Corp. of San Francisco, said the port has just a 3% probability each year of sustaining damage above $10 million--the amount the port would have to pay under its current policy. In addition, the study said there is only a 1% probability that an earthquake would cause more than $50 million in damage--the amount of the new self-financed insurance fund.
Samuel E. Williams Jr., the port's risk manager, recommended the creation of the fund, citing a "limited market" for earthquake insurance, the long-term savings to the port in premium payments and the direct control it gives to the Harbor Department in managing an earthquake disaster.
"It gives the port great flexibility," Williams said in an interview. "Suppose we have a minor shake that undermines a few piers, and we are having a lean year. We can still afford to go out and fix it and keep commerce moving through the harbor."
In a report to the commissioners, Williams said the new fund would also protect the port if a major earthquake would leave insurance carriers unable to pay full coverage because of the volume of claims.
"The funds are readily available at the time of loss (and) there are no costly delays or disputes resulting from negotiating the claim with an insurance carrier," he wrote in the report.
The only reservation about the fund came from Commissioner Ira T. Distenfield, who works for an investment firm. He said he favored creation of the fund, but he said the port should invest the money conservatively.
"We could deplete this fund through other ways than earthquakes," Distenfield warned.
Rami Furman, the port's chief financial officer, said the port will establish a written investment policy for the fund that the commissioners can review. "Our view was that we would be extremely cautious and extremely careful," Furman told Distenfield.
The harbor commissioners will have total control of the fund, meaning they can dissolve it in the future if commercial earthquake insurance becomes more affordable or if the money is needed for something else, Williams said.
The insurance fund will be built over 10 years, with the port contributing $11.3 million this year and $2.3 million annually during the following years. Projected interest earnings on the account would bring the total to $50.1 million at the end of 10 years.
Under the plan, the port would cancel its earthquake insurance when it comes up for renewal in November and rely totally on the fund for any future damage. While the port will be vulnerable during the next decade as it builds the fund, Williams said the initial $11.3 million installment will give the port some short-term security.
Many California ports, including Long Beach, Oakland and San Diego, have no earthquake insurance, choosing instead to rely on general revenues, state and national disaster relief funds, and fire and property insurance should they be hit by a catastrophic quake.
"The insurance market is so tight for earthquake insurance right now, that we found it is either not available or affordable," said Jane Keegan, insurance administrator for the Port of Oakland. "We just hope that there is not an earthquake."
The Port of Los Angeles is required by law to provide earthquake insurance to protect the holders of $193 million in revenue bonds and certificates of participation it has issued.
Ports in the Pacific Northwest, such as Seattle, Tacoma and Portland, have earthquake insurance, but it is generally included as part of a larger property insurance policy because insurance companies perceive the risk there as small compared to areas like Southern California.
In Seattle, for example, the port pays $904,658 for all of its insurance needs, including $100 million earthquake coverage for its airport and $50 million earthquake coverage for the rest of the port, which is valued at $1.2 billion.
The Port of Los Angeles pays $1.36 million a year for its insurance policies, which cover property less valuable than the Port of Seattle and provide less earthquake coverage.