Earthquake Insurance Policy in California

CEA Insurance Policies Sold by Many California Insurance Companies

Sep 11, 2009 John Wu

Many don't buy earthquake insurance policies due to high premiums and deductibles. That move is risky since a homeowner's insurance policy won't cover earthquake damage.

Most homeowners know that damage caused by a quake is not covered in a homeowner's insurance policy. Even with this knowledge, the vast majority of homeowners do not buy earthquake insurance policies even though they are a normal and frequent occurrence in California, as demonstrated by Caltech's up-to-the-minute quake map.

California, like many other regions of the world are prone to frequent tremors, which makes earthquake insurance policies important even though they're expensive. For example, Indonesia experienced a massive 9.1 magnitude quake in 1994 according to the U.S. Geological Survey. Ever since then, they have experienced 29 more tremors of magnitude 6.3 or higher, including a powerful 7.1 magnitude earthquake on September 2, 2009 as reported by The New York Times.

Earthquake Insurance Companies and the CEA

Insurance companies lost $12.5 billion from damage claims on earthquake insurance policies after the 1994 Northridge quake. They were prepared to not renew homeowner's insurance policies due to a California law that required those who offer homeowner's insurance policies to offer earthquake insurance policies as well.

The state of California, along with private insurance companies, formed the California Earthquake Authority (CEA), a quasi-public state agency that takes in premiums and pools them together to pay out future earthquake claims. All CEA policies are marketed by individual insurance companies but have the same coverage and premiums, including the unpopular 15% deductible which makes many homeowners balk at buying. But the CEA earthquake insurance policy is designed to pay out on severe damage or total loss, not on minor damage in order to keep premiums reasonable.

With the CEA, an insurance company that focuses on one part of the state such as the San Francisco Bay Area does not have to assume to entire risk of having catastrophic insured losses if an earthquake hits one region. Without the CEA, that insurance company would become insolvent. As of 2009, two thirds of insurance companies selling California homeowner's insurance have opted to join the CEA instead of managing the risk themselves.

Getting California Earthquake Insurance Coverage

It is not wise to count on the government to help financially if a home is damaged but not covered by an earthquake insurance policy. Governmental relief usually comes in the form of low interest loans, which have to be paid back. In the meantime, consumers still have to make mortgage payments, as well as any government relief loan payments, even if the house has been leveled to the ground.

Another way consumers avoid buying an earthquake insurance policy is to make improvements on their home's structure to make it more resistant to earthquake damage. This is a form of self-insurance that only works if the consumer can pay for the home improvements upfront, which can cost over well over $10,000.

Depending on one's needs, it may be wise to buy California earthquake insurance policy to mitigate the risk of total loss from a major quake, even if premiums and deductible seem high. CEA insurance policies are underwritten through individual insurance companies just like with non-CEA policies. A non-CEA policy may make sense depending on the policy's terms, price, and financial strength of the insurance company.

References:

California Earthquake Authority.

Onishi, Norimitsu and McDonalid, Mike. "Strong Quake Hits Indonesia - Killing 44." New York Times. September 2, 2009.

Seligson, Hope A. and Eguchi, Ronald T. "The True Cost of Earthquake Disasters: An Updated Tabulation of Losses for the 1994 Northridge Earthquake."

BNC101

The copyright of the article Earthquake Insurance Policy in California in Insurance is owned by John Wu. Permission to republish Earthquake Insurance Policy in California in print or online must be granted by the author in writing.

Earthquake Insurance Policy will Cover This

California Earthquake Insurance Will PayThis