California Earthquake Insurance:
What You Need to Know
California insurance consumers might soon experience a change in their earthquake coverage and premium now that a new earthquake program, administered by the state, is operational.
In September, Governor Pete Wilson signed into law a bill that created the California Earthquake Authority (CEA), which opened its doors December 2, 1996.
Insurance companies in California were unable to continue to assume the heavy demand for earthquake insurance following the Northridge quake due to the potential for immense catastrophic loses. Because of the large amount of earthquake risk, a major quake in a metropolitan area could bankrupt some insurance companies if measures to limit that exposure were not taken.
Due to state law which requires insurers to offer earthquake coverage with every homeowners policy, many insurance companies ceased selling new policies in order to reduce their earthquake exposure. This created a market crisis, making it difficult to buy homeowners insurance.
Conceived by Insurance Commissioner Chuck Quackenbush, the CEA was created to make earthquake insurance available to consumers, and to help insurance companies reduce these exposures if a major earthquake hit.
CEA will address the need for disaster protection until a federal disaster protection plan is developed and passed by Congress. CEA is a privately financed, publicly managed state agency that will provide insurance coverage for earthquake damage to residential property owners, mobile homeowners, and renters.
How Can I Get A CEA Policy?
Whether you will be offered a CEA earthquake policy depends on whether your insurance company has agreed to join the program. CEA policies will be sold by agents or brokers only through insurance companies which are CEA members.
Companies that participate in the CEA must offer CEA policies when selling a homeowners policy. A participating company can also opt to change your existing earthquake policy to a CEA policy when your homeowners policy comes up for renewal.
Non-participating companies are still required to offer earthquake insurance to policyholders – whether it is a traditional earthquake policy or a mini-earthquake policy, but cannot offer a CEA policy.
What is Covered?
Consumers will have an easier time purchasing homeowners and earthquake coverage, but the limits and cost of a CEA policy may be surprising.
The CEA policy has the same policy limits as the homeowners, condominium, mobile home, or dwelling policies, but contains less coverage. The CEA policy will pay for structural damage to your dwelling, but not damage to pools, fences, driveways, and detached buildings or garages. The CEA policy will also pay up to $5000 to repair or replace personal items, and $1500 for living expenses while your home is being repaired. This is probably less than what you would receive now under your current earthquake policy. Claims are subject to a deductible of 15% of the amount of coverage on your home. Typically in the past, the deductible was 10%.
Insurers may offer supplemental policies to customers who need additional coverage.
The rating plan approved by CEA has a statewide average rate of $3.29 for every $1000 of coverage, with homeowners in low-risk areas paying less and those in high-risk areas paying more.
If an earthquake produces more claims than available resources can handle, and you have a CEA policy, you may be required to pay an assessment which could add up to as much as 20% of future earthquake premiums.
Companies are required to inform you of any changes to your policy. If you receive a notice from your insurance company about the CEA, contact your insurance representative immediately so he/she can help you review the changes in coverage and the gaps created by the CEA policy. There may be alternative options that will help protect your assets.
We are pleased to provide this "Bulletin" as a service to you. While this information was obtained from sources believed to be reliable, its accuracy is not guaranteed. It does not change or alter insurance contracts or coverages.
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