Woeful lack of insurance

Published on

The San Francisco Chronicle

It’s sad that only 25 to 60 percent of homes in the areas affected by Hurricane Katrina and its aftermath have flood insurance. It’s scary that only 15 percent of homeowners in California have earthquake insurance.

Standard homeowners insurance covers damage from hurricanes, but not from flooding or quakes. Even if they don’t have flood insurance, some Katrina victims may get reimbursed under their homeowners policies if insurance companies or the courts decide that flooding was caused by the hurricane.

But if there’s a giant temblor in California, homeowners could get squat.

The standard excuse for not buying quake insurance is that it’s too expensive.

It is indeed expensive. On my house, quake insurance alone would cost 50 percent more than my homeowners insurance.

Yet if you look into the numbers, the rate for $1,000 worth of coverage in earthquake insurance is not a lot higher than flood insurance and could even be less. Deductibles, however, are usually much higher for quake than flood insurance.

If the California Earthquake Authority gets permission to restructure rates, quake insurance premiums will fall 22 percent on average statewide next year. (Rates will go up in some areas.)

Given the rise in housing prices, plus the wake-up call from Katrina, it may be time to reconsider earthquake coverage.

It’s hard to make an apples-to-apples comparison between flood and quake insurance because the price depends largely on a home’s risk of damage from each peril, and most homes are not equally susceptible to both.

But to give an example, Janet Ruiz, a spokeswoman for State Farm, looked at an actual 900-square-foot house in South San Francisco that is covered by both flood and quake insurance.

This homeowner pays $745 per year for $178,000 worth of flood insurance and $1,112 a year for $229,000 in quake insurance.

The rate per thousand dollars is actually cheaper for quake insurance, but the deductible is higher — $22,900 for quake damage versus $5,000 for flood damage.

I also compared premiums for a hypothetical one-story, wood-frame home built in 1985 in an area of Walnut Creek that is at risk for both earthquakes and flooding. The coverage is $250,000 for structure and $100,000 for contents.

For a federal flood insurance policy, the premium would be $1,050 per year, according to the Federal Emergency Management Administration, which administers flood insurance.

For a California Earthquake Authority policy, the annual premium would be $1,212.50. (Under the proposed rates, the premium would drop to $964 in July.)

Again, the quake deductible is much higher — 15 percent of the policy limit or $37,500.

The standard deductible for the flood policy is $500 for structure plus $500 for contents. Homeowners can accept a higher deductible to lower their premium.

Partially offsetting the steep deductible is that the quake policy will pay up to $15,000 in additional living expenses if the homeowner is displaced. The flood policy has no coverage for loss of use.

It’s also difficult to compare quake and flood insurance because the programs differ.

Most flood insurance is sold by the National Flood Insurance Program, a federal program administered by FEMA.

Commercial insurance companies sell the flood policies and handle claims, but the insurer is the U.S. government.

Federally regulated lenders must require homeowners in specified high-hazard zones to buy flood insurance. The insurance is supposed to cover at least 80 percent of the dwelling’s value (excluding the land), but cannot exceed $250,000 for structure and $100,000 for contents.

Lenders that are not federally regulated don’t have to require flood insurance unless they want to sell their mortgages to Fannie Mae or Freddie Mac. Homeowners without a mortgage don’t have to buy flood insurance.

The premium for each home is based on when it was built, how susceptible it is to flooding and its type (such as one- or two-story).

The average premium nationwide is $400 a year for $100,000 in structural coverage, FEMA says.

Renters may purchase flood insurance for their belongings.

Nationwide, 49 percent of people who live in a flood plain have flood insurance, according to a Rand Corp. study for FEMA. In the South, market penetration is around 60 percent.

FEMA does not know how many people affected by Katrina had flood insurance, but suspects the number could be about 60 percent, based on the Rand study.

Robert Hartwig, chief economist with the Insurance Information Network, estimates that only one-quarter to one-third of homes in the area had flood insurance, based on his and other analyses.

Companies that sell homeowners insurance in California must offer earthquake insurance, either their own policies or one issued by the California Earthquake Authority.

The authority is a consortium of 19 insurance companies that offer a common policy. It is governed by five elected state officials, including the governor, treasurer and insurance commissioner.

The authority was started in 1996, when insurance companies started fleeing the state after the 1994 Northridge earthquake. In California, 12.7 percent of homes have a policy from the earthquake authority, and about 2 percent have other quake insurance.

The authority bases quake rates on the type of home, its age, construction method, soil type and proximity to faults. Rates range from $1.10 to $7.90 per $1,000 in coverage and average $5.25. Homeowners don’t have to buy quake insurance, but if they do, they must purchase the same amount of coverage they have in their homeowners policy.

The authority says it could pay out $7.1 billion in claims. That money would come from $1.9 billion in premiums it has collected thus far, plus assessments on participating insurance companies and reinsurance.

If claims from one or more large quakes exceeded $7.1 billion, it would pro-rate claims, and policyholders might get less than full coverage. The state cannot bail out the authority, nor can it go after the authority’s reserves.

The Northridge quake resulted in $14 billion in insured losses, but quake insurance was far more generous then, and more people had it. Based on its current customers and type of policies, the authority could handle two quakes the size of Northridge, according to Nancy Kincaid, a spokeswoman for the authority.

Doug Heller, executive director of the Foundation for Taxpayer and Consumer Rights, says, “I’m not worried about the solvency of CEA. I’m much more worried about the lack of” homeowners with quake insurance.

Want to see how your property might shake in a quake? Go to: http://www.quake.abag.ca.gov and plug your address into interactive shaking and liquefaction maps.
Flood versus quake insurance:

Flood Insurer – Federal government
Required? – Lenders must require borrowers in high-hazard zones to buy it.
Pricing – Based on flood risk, type, age and elevation of home.
Maximum coverage – Structure: $250,000. Contents: $100,000. Living expenses: none
Deductible – Structure: $500 and up Contents: $500 and up
Premium* – $400 per $100,000

Earthquake Insurer – California Earthquake Authority
Required? – No
Pricing – Based on location, age, soil and type of home
Maximum coverage – Structure: No limit; must equal coverage on homeowners
policy. Contents: $100,000. Living expenses: $15,000
Deductible – 10 or 15 percent of structural coverage limit
Premium* – $525 per $100,000


Source: FEMA, CEA
E-mail Kathleen Pender at [email protected]

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