Answering Questions on Policies for Quakes

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My July 9 column on new policy options from the California Earthquake Authority generated a fair number of questions about earthquake insurance in general. Here are some answers:

Q:Kevin P. asks, "Let's say there's an earthquake. Your house isn't damaged, but a fire breaks out in the neighborhood as a result of the quake, and your house is burned. Does your fire insurance cover this, or would it be refused because the damage was indirectly the result of a quake?"

A: In California, your homeowners policy would cover fire caused by an earthquake, your quake insurance would not.

"A quake policy covers the shake damage. Homeowners insurance is responsible for fire following an earthquake," says Glenn Pomeroy, the earthquake authority's chief executive. There is "no confusion" about this in the industry.

Nicole Mahrt Ganley, spokeswoman for the Association of California Insurance Companies, agrees. She says the standard homeowners policy in California does not cover damage caused by an earthquake, but it does "cover damage from a fire, including fire following earthquake."

This is required under California insurance code section 10088.5.

Homeowners insurance also covers explosion, theft or vandalism that follows an earthquake, but it does not cover most other types of damage that follow a quake, says Don Griffin, a vice president with the Property Casualty Insurers Association of America.

For example, it does not cover water damage if a water heater or water main breaks and floods your home as a result of an earthquake. Nor does it cover ,landslides. "If shaking of the ground turns it into mud, it liquefies and slides, that is not covered by homeowners insurance," Griffin says.

Policies issued by the California Earthquake Authority will cover most damage from broken water pipes, landslides and mudslides, but only if it results directly from an earthquake. It does not cover damage from a tsunami.

This is why it is important to read your policies carefully to know what is and is not covered. Go to for a sample CEA policy.

Q:Francesca W. writes, "I've had a policy with CEA through my insurance company State Farm for years. After reading your article, I went to the CEA website to see what my current policy should cost under the new programs for 2012. Lo and behold, my policy priced out at $228, rather than my current premium of $346 for a renter's policy. I'm wondering why neither State Farm nor the CEA contacted its policyholders, or adjusted their customers' premiums automatically, when such adjustments were in the insured's benefit."

A: Francesca's rate reduction was the result of a rate restructuring that took effect Jan. 1, not the new policy choices that I wrote about last week.

The January rate restructuring was the result of new science about seismic risk. It raised quake rates for some customers and lowered them for others.

Like most changes in insurance premiums, the January changes take effect the next time a customer's policy renews, not on the effective date itself.

"This holds true for rate decreases and increases," says Sevag Sarkissian, a spokesman for State Farm.

Francesca's policy renewed in December. After learning she was due for a decrease, she called her State Farm agent last week, who offered to cancel her existing earthquake policy and renew it at the new rate, saving her a few bucks.

"Though it is uncommon, customers may choose to cancel a policy and have it reissued for the remainder of the policy term to see the benefits of a rate decrease more quickly," Sarkissian says.

The CEA's Pomeroy says, "Although our rate approval was done with a host of assumptions including the new rate for an individual would take effect upon renewal, nothing prohibits them from canceling a policy and having their insurance company reissue a new policy at the new rate."

Q:Pam V. asks, "Our house insurance broker said last week that there are now other options for earthquake insurance. We've had CEA for years and are reluctant to change. Is CEA nonprofit and if so, would it be backed by the federal government in a large loss earthquake? What other options are available?

A: In California, companies that sell homeowners insurance also must offer earthquake insurance. After the devastating 1994 Northridge earthquake, many companies stopped or threatened to stop selling homeowners insurance rather than offer quake policies. To prevent that, in 1996 the state Legislature created the California Earthquake Authority to offer limited-coverage residential earthquake insurance that companies could sell in lieu of their own.

The authority is a nonprofit insurance company. It is not a state agency, although it is governed by public officials including the governor, treasurer and insurance commissioner. If a big quake happened today, it could pay $10 billion in claims, which Pomeroy says is enough to cover at least two, maybe three Northridge quakes. This claims-paying ability comes from premiums, assessments on participating insurance companies, return on invested assets, borrowed funds and reinsurance.

It is not backed by the federal or state government. In the unlikely event it did not have enough money to pay claims, "we would pay claims on a pro-rata basis," Pomeroy says.

Doug Heller of Consumer Watchdog says that if the CEA was a for-profit company, "they'd be tearing it up." There have been no major quakes since it started, which has allowed it to put almost all of its premium income into claims-paying ability.

Go to for a list of companies that offer CEA policies. Any company that sells insurance in California and is not on this list offers alternative coverage.

Some other companies that offer quake insurance include Western Mutual, Pacific Specialty and GeoVera, says Ganley of ACIC.

In March, the insurance department settled a noncompliance action against GeoVera after an investigation found some underwriting practices that it thought were illegal. GeoVera denied that it violated the law but agreed to change some practices, provide some refunds to customers and pay a $235,000 fine.

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