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DAVID LAZARUS

The high cost of quake insurance will rock your bank account

March 05, 2010|David Lazarus

Yves Didier has been a strong believer in earthquake insurance since the 1994 Northridge quake, when his apartment building was severely damaged and some of his neighbors lost their lives.

He didn't hesitate to pay as much as $2,500 a year for coverage after he purchased a three-bedroom house in Reseda in 1999. He said he's never missed a payment and (thankfully) never had to make a claim.

So it came as a shock for Didier, 45, to recently be told by his insurer, GeoVera Insurance Co., that his annual premium would nearly triple to $7,100 and that his deductible would soar to more than $100,000.

"I've been hearing all about health insurance rates going up by 39%," Didier said. "That's pretty bad. But how do you explain earthquake insurance rates going up by almost 200%? That's just crazy."

The earthquakes in Chile and Haiti serve as a powerful reminder -- as if one was needed -- that Southern Californians should be prepared for the worst. Yet the vast majority of homeowners in the region don't have quake insurance.

Didier said he had to let his coverage lapse when it came up for renewal in January. For the first time as a homeowner, he's now without earthquake insurance.

"I really feel that I've been stripped of something that I need as a homeowner in Southern California," he said. "But I can't afford $7,100 a year."

Relatively few people can, especially in an economy like this.

The state-managed California Earthquake Authority, the leading provider of quake insurance statewide, estimates that 88% of homes that are covered for fires or other damage are not insured separately for quakes.

Yet the experts say there's a 99% likelihood that the state will be hit with a major quake during the next three decades.

"I guess you could say it's a case of 'out of sight, out of mind,' " said Glenn Pomeroy, chief executive of the California Earthquake Authority. "It's been a while since the state was rocked by a huge earthquake."

The cost of quake insurance, he acknowledged, is a main factor in explaining why so few California homes are covered.

Although policies sold through the California Earthquake Authority are typically cheaper than private policies sold outside the system, premiums for single-family homes still average $830 a year and average deductibles run almost $60,000.

That's a lot of coin.

Pomeroy's answer is something called the Catastrophe Obligation Guarantee Act, a federal bill that would allow agencies like his to cut their reinsurance overhead and pass the savings to consumers in the form of lower premiums and deductibles.

Reinsurance is essentially insurance for insurance and is a routine aspect of the risk-management business. The act would allow coverage providers like the California Earthquake Authority to cut back on reinsurance and instead rely on private-sector borrowing in the event of a disaster. It would place the federal government in the role of vouching for the state entity and thus guaranteeing the loans.

This would obviously be swell for disaster-prone places like California and Florida, which is why the legislation is sponsored by California and Florida lawmakers.

But it seems like a decidedly risky bet for taxpayers nationwide, who could be on the hook for billions of dollars in potentially unpaid California and Florida insurance claims.

Pomeroy said he expected to be on Capitol Hill next week making the case for the bill. "It's not a slam-dunk," he admitted.

Meanwhile, the CEO of Fairfield. Calif.-based GeoVera, Kevin Nish, declined to chat with me by phone about his company's recent rate increases. But he sent an e-mail responding to my questions.

He said GeoVera received approval from the state Department of Insurance in November 2008 to tinker with premiums and to change the methodology it uses to value the replacement cost of people's homes.

"As a result, some customers' rates were significantly reduced and some were significantly increased," Nish said. "In certain limited circumstances, a small number of customers experienced very significant increases.

"We believe our rates are fair and that they adequately reflect the insured risk."

Didier paid about $1,700 a year for quake coverage when he bought his home 11 years ago. The premium climbed more than 55% since then -- before the most recent increase.

Didier said he'll now see if the California Earthquake Authority can offer a lower rate than GeoVera, which it almost certainly can. But it still won't be cheap.

This isn't a product for everyone. One rule of thumb says that the more equity you have in your home -- in other words, the less you owe the bank -- the more you need quake coverage.

Another school of thought says the feds will probably bail out disaster-hit homeowners in any case, so what's the point of paying all those premiums?

My sense is that you shouldn't gamble on Uncle Sam riding to the rescue and that everyone should be prepared for the unexpected. That goes for disaster coverage, and it goes for health insurance.

Unfortunately, both safety nets are increasingly out of reach.

David Lazarus' column runs Tuesdays and Fridays. He also can be seen daily on KTLA Channel 5. Send your tips or feedback to david.lazarus@latimes.com

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