Kathleen
Pender
Sunday, September 11, 2005
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
quake.abag.ca.gov and plug your address into interactive shaking
and liquefaction maps.
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