Lawmakers, Governor Should Maintain Insurer Obligation to Protect Consumers In Wake of Major Earthquake

Santa Monica, CA — The California Earthquake Authority (CEA) is scheduled to lose a multi-billion dollar source of funds to cover claims in the event of a major disaster at the end of 2008, unless lawmakers and Governor Schwarzenegger change the law governing earthquake insurance in California. Since the inception of the CEA in 1996, insurance companies have been on the hook for as much as $2.2 billion in earthquake claims by CEA policyholders if a disaster were to exceed the amount the CEA has to cover claims. That obligation is set to expire on December 1, 2008. To date, the companies have not been assessed as no major quake has struck since the formation of the CEA in 1996.

Treasurer Phil Angelides called for legislation that would require insurers to continue their financial obligation to the system at a meeting of the CEA today. Consumer advocates support the proposal, saying that retaining this obligation is necessary to ensure that the CEA is capable of paying homeowners’ claims in the wake of a massive earthquake. CEA sells nearly half of all the earthquake policies in the state.

“Prior to the Northridge quake, private insurance companies were required to sell earthquake coverage. The CEA bailed the industry out of that obligation, but the new system depends on insurers as a financial backstop in case the big one hits,” said Douglas Heller, the Executive Director of the Foundation for Taxpayer and Consumer Rights (FTCR). “The insurance companies will be free of that responsibility in 2008 if the law is not amended. In order to protect homeowners who have purchased earthquake coverage, the insurance industry money will need to be there. Lawmakers and the Governor should step in and protect homeowners from a worst-case-scenario situation in which an earthquake hits, but the CEA does not have enough money to pay the claims.”

If the legislature does not act and the industry layer of funding is allowed to expire, premiums for earthquake insurance could rise, according to FTCR. With so many homeowners uninsured as a result of the current high price of earthquake insurance, the consumer group expressed concern that a lack of legislative reform could lead to an even greater number of residents who do not have earthquake coverage.

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