Beware of Holes in Earthquake Coverage

California homeowners, it may be time to start shopping around for insurance coverage.

“We are right at the beginning of a buyer’s market for homeowner’s insurance,” says California Insurance Commissioner Chuck Quackenbush. “As this market begins to heat up and companies come back into the state to do business, you are going to see a price war among homeowners’ companies.”

The “buyer’s market” Quackenbush refers to may better be described as a return to a normal market, something that ceased to operate in California after the 1994 Northridge quake, which caused tens of billions of dollars in damage.

Insurers began to pull out of California en masse after the quake for one simple reason: California law required them to offer earthquake coverage. The quake convinced many insurers that, given the coverage of most policies and the high risk of additional quakes, they simply weren’t willing or financially able to continue to offer such coverage.

As a result, by late last year, 80% to 90% of the home insurers operating in the state stopped issuing new policies, Quackenbush and agent groups agree. Agents began to advise their clients to hold on to the policies they had--at almost any cost--because getting a new policy would be a nightmare.

People who moved, built new homes or were canceled by their previous insurers were hard hit. These homeowners often found themselves forced to buy bare-bones policies or go through surplus lines brokers, who would offer more insurance but often at a high price. Some homeowners say their rates more than doubled.

A new state earthquake insurance pool began operations last month, and all insurers have resumed writing policies, Quackenbush says. Thus an ordinary homeowner’s policy is likely to be far more affordable than had been the case before. If you’re buying earthquake coverage, though, you should realize that the quake policy you’re getting is likely to be a far cry from what was available before.

The new California Earthquake Authority policies will pay for damage to the structure of your home. But they, unlike earthquake policies issued in the past, do not cover detached structures ranging from garages to swimming pools. In addition, whereas the average policy used to pay up to 50% of the structure amount to replace personal belongings in the house--furniture, china, etc.--the new policies limit this coverage to just $5,000. And if you have to move out while your house is being repaired, the new earthquake policy will pay only up to $1,500 in living expenses.

Finally, these policies carry 15% deductibles, compared with the 10% on the standard quake policy of yesteryear. (The deductible is the amount you must pay yourself to cover damage before the insurance begins reimbursing you.)

However, some insurers are selling separate policies to fill in the gaps the new earthquake coverage leaves, says David Benesh, a spokesman for Insurance Brokers & Agents of the West in San Francisco.

Consumers who want quake coverage must understand what they’re getting with the CEA policy. If the insurance is inadequate for your needs, have your agent investigate supplemental policies for you.

Want to shop, but don’t have a good insurance broker? The independent agents group operates a toll-free referral line at (888) 936-7873. The voice-response system will either read off the names and phone numbers of three local agents or fax a list to you.

Understanding investment risk: Do you understand investment risks and know how to mitigate them? If not, request the booklet put out by the Mutual Fund Forum. The 12-page booklet, “Understanding and Managing Investment Risk,” does a nice job of explaining the types of risks you might face when investing and what to do about them. It does not discuss specific investments, however. To get a free copy, call (800) 200-1819.

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Consumer Checklist is a weekly feature that covers a range of pocketbook issues of interest to Californians. To contribute information about new legislation, products, services or surveys, write to Kathy M. Kristof, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053; or send e-mail to [email protected]