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Is this the big moment?

Earthquake insurance rates just dropped 22% statewide. For those who don't have coverage -- most of us -- it might be time to consider it.

July 02, 2006|Gayle Pollard-Terry | Times Staff Writer

EARTHQUAKE insurance: Most California homeowners don't have it, but Bill Saake wouldn't think of going without it.

After the 1994 Northridge quake damaged his Chatsworth house beyond repair, his Allstate policy paid to rebuild. But Allstate, like many other insurers, no longer offers earthquake insurance in California, so Saake pays around $1,700 a year for coverage on his four-bedroom, three-bathroom home from the California Earthquake Authority, a privately funded, state-run insurance pool.

He won't have to pay that much when he renews his policy, however, because his earthquake insurance just got cheaper. Saake's bill will be halved.

On July 1, the authority reduced rates an average of 22% statewide, a drop that state officials and insurers hope will get the attention of the 86% of California homeowners who do not carry earthquake insurance. They include those who balk at the high premiums and high deductibles, those who don't believe an earthquake will rattle their neighborhood and those who believe good old Uncle Sam will come to their rescue in the event of a catastrophe.

For The Record
Los Angeles Times Thursday July 06, 2006 Home Edition Main News Part A Page 2 National Desk 1 inches; 36 words Type of Material: Correction
Quake insurance: A Real Estate article Sunday about earthquake insurance reported that after the Northridge earthquake, the Federal Emergency Management Agency paid out nearly $10 million in assistance. FEMA paid out nearly $10 billion in assistance.
For The Record
Los Angeles Times Sunday July 09, 2006 Home Edition Real Estate Part K Page 2 Features Desk 1 inches; 35 words Type of Material: Correction
Quake insurance: A July 2 article about earthquake insurance stated that the Federal Emergency Management Agency paid out nearly $10 million in assistance after the Northridge quake. FEMA paid out nearly $10 billion in assistance.

The lowest rates -- as little as $250 a year in parts of Ventura and San Diego counties -- will go to those who own one-story, wood-frame homes built after 1991 that aren't located near an active earthquake fault or on shaky ground. But the relief isn't universal. Rates will increase in Riverside County, parts of Palm Springs and Palm Desert and portions of Palmdale and Lancaster, which are at a greater risk for earthquake damage.

The CEA based the new rates in part on information on all faults in the state provided by the California Geological Survey. Among factors considered, according to Michael Riechle, the chief seismologist, were the magnitude and frequency of earthquakes expected and whether a home is on hard rock or on softer alluvial material.

"We have developed a map for the state of California that shows the different geological substrates and how they might impact the amount of shaking," he explained. In areas where rates went up, strong ground shaking could be amplified by the soil and cause more damage.

Rates are coming down overall because of the improving financial status of the CEA, which opened in 1996. Since then, the authority has never had to pay out on a major earthquake and has built up cash reserves.

"We opened our doors with $600 million in capital," said spokeswoman Nancy Kincaid. "We now have more than $2 billion."

To cover claims from a major quake without going broke, the authority buys reinsurance to spread its loss risk. The price has dropped on that, providing another cost savings.

The CEA was an outgrowth of the Northridge earthquake, the last major temblor in the state and the most expensive in U.S. history in terms of damage.

The 6.7-magnitude quake killed 57, injured thousands, destroyed houses, collapsed apartment buildings, crumpled businesses, wrecked freeways and ran up huge bills for insurance companies. Insurers paid out $12.5 billion, which was more than the total of all earthquake insurance premiums ever collected in California. After that loss, insurers balked at writing new earthquake policies or renewals and threatened to stop doing business in the state. In response, the Legislature created the state-run insurance pool.

Funded by premiums and contributions from member insurance companies, the CEA writes about 69% of the quake policies in California.

To get a CEA policy, you must have a homeowner's policy with one of the 19 companies that belong to the CEA, Kincaid said. Those companies include Allstate Insurance Co., Farmers Insurance Group and State Farm Insurance. Nonauthority companies, including GeoVera Insurance Co., Firemen's Fund and Pacific Select Property Insurance Co., issue 31% of the state's quake policies.

The CEA's rates are based on factors including the home's proximity to an active fault, age of the home, number of stories, cost to rebuild and other variables such as the type of roof -- a shake roof costs more to replace than a tile roof -- and type of construction. In an earthquake, a one-story, wood-frame house holds up better than a two-story brick house.

The basic policy includes a 15% deductible based on the cost to rebuild, which is lower than the market value of the house because it doesn't include the cost of the land. It does not cover garages, swimming pools, fences or walls but provides $5,000 for damage to personal property such as television sets and furniture. It also provides $1,500 for emergency living expenses, such as a motel room, while a damaged home is repaired.

Homeowners can buy additional coverage. They can pay more to decrease the deductible to 10% for structural damage, increase the coverage for contents up to $100,000 and raise loss-of-use protection up to $15,000. But at best, the CEA's policies provide less coverage at higher prices compared with those written before the Northridge earthquake, prompting some consumer advocates to question the value.

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