D. Marie Why most California homeowners don't have earthquake insurance
On Oct. 17, 1989, Arthur Reyes was in his dorm room at Stevenson College, on the picturesque hilltop campus of the University of California at Santa Cruz, when his bed started to shake violently.
“I looked across my dorm room to see books flying off the shelf, the door swung open and the light fixture fell from the ceiling,” he recalled.
It was 5:04 p.m. From its epicenter just 10 miles north of Reyes, near the Loma Prieta Peak, the 7.1 magnitude quake roared along a 22-mile stretch of the San Andreas fault through the Bay Area, collapsing a portion of the Bay Bridge and the Cypress Freeway in Oakland, and crushing homes in the Marina District in San Francisco and the Pacific Garden Mall in Santa Cruz.
When it was over, 63 people were dead, more than 11,000 homes destroyed and $6 billion in damage done.
Also See: Photos: Loma Prieta earthquake, 27 years later.
THE MORNING REPORT
Start your workday the right way with the news that matters most.
Your information is 100% secure with us and will never be shared Disclaimer & Privacy Policy
Today Reyes is a project manager and biologist at Genentech, and married with three children, but he’s still struggling with the Loma Prieta quake, in a different way.
For many of Reyes’ generation, who are now entering their peak earning years and looking to purchase bigger homes to accommodate families, the aftershocks of the Loma Prieta quake, as well as the 1994 Northridge quake in Southern California, are financial. He paid more than $1,200 this year on top of his homeowner insurance for an earthquake rider on his Palo Alto house, and the price increases every year. The average premium in Santa Clara County was $1,447 in 2014, according to the California Earthquake Authority (CEA), which writes about 76% of earthquake insurance policies in the state. Still, of the close to 7 million single-family homes in California, there are only 908,000 CEA earthquake policies in force, though that’s up from 879,000 two years ago.
“As a homeowner, it’s frustrating dealing with these insurance premiums,” he said. “We might get priced out of our home if our premiums keep increasing.”
The likelihood of a severe quake for Californians is never far away either, a major quake with a magnitude of 7.0 or more strikes ever ten years, according to the CEA and a moderate earthquake of 5.5 or more strikes about four times a year. All told, there are more than 2,000 earthquake faults in California, the CEA said.
In June, a 5.2 magnitude quake rocked the Southern California desert in San Diego County, about 14 miles northwest of Borrego Springs. Monica Reichl, a drama teacher at Tahquitz High School in the town of Hemet, about 60 miles away from the epicenter said the 1:05 a.m. temblor, which was about 150 miles southeast of Los Angeles, was still strong enough to wake her and her dogs. “It was a noisy quake. Long but not too bad,” she said. Still, like a veteran of the London Blitz in World War II, she was unfazed. “My (dogs) woke up but we didn’t want to get out of bed for it,” she said.
Even though Californians like Reichl and Reyes live with quakes as a near daily occurrence, earthquake insurance often isn’t a priority. The expensive deductible related to earthquake insurance are sometimes as high as 15% of the value of the home, which has many homeowners giving the insurance a second thought.
Premiums are determined by a combination of a home’s replacement value and its proximity to a high-risk fault. And for homeowners in Northern California, where some of the most valuable real estate in the country lies in an earthquake hot zone, that makes for an expensive financial double whammy.
An expensive one-two punch
The CEA was set up in the aftermath of the 1989 and 1994 quakes to help provide low-cost insurance, after many property and casualty insurance companies pulled out following the quakes. According to the CEA, average earthquake insurance premiums statewide rose from about $540 a year in 1998 to $830 in 2005. The CEA instituted a decrease in premiums later that year, but they have been rising ever since, averaging about $800 a year in 2014.
But the average figures don’t really illustrate the cost in some of the highest-risk and most populous areas. The average premium in 2014 on earthquake insurance for homeowners in San Francisco County was $2,156; it was $1,806 in Alameda County (along the Hayward Fault) and nearly $1,000 in Los Angeles County, according to the CEA.
In contrast to Florida, where hurricane insurance is often mandatory, earthquake insurance is entirely optional in California. And as premiums have gone up, more homeowners have opted out. The number of earthquake insurance policies in California has dropped to just 10% of homes statewide, down from 34% in 1994, according to Risk Management Solutions, a Newark, Calif.-based company.
Newcomers to the Bay Area who haven’t experienced a big quake and are put off by the insurance price are partly responsible for the low numbers of home buyers signing up for earthquake insurance, according to RMS.
Andy Doran is one of those Californians considering the cost of insurance coverage. He was a senior at Berkeley High School in Berkeley, Calif. in 1989 when the quake hit. “I remember turning on the TV after riding it out in the doorway and finding static on all the channels except one,” he recalls. “‘The Cosby Show’ was somehow happily humming along so I knew everything would be all right.”
Now a scientist at Lawrence Berkeley National Laboratory, in the East Bay hills, Doran bought a house in Berkeley in 2011 (where the median home value today is more than $1 million and up 12% in the past year) and is looking to add earthquake insurance, but premium payments in the realm of $4,000 a year and a $70,000 deductible are putting him off.
“The fact that it is a separate policy and so expensive with such a huge deductible, it’s difficult to impossible to accurately assess,” he said. “I’ve been convinced we should get it, but figuring out how to afford it is hard.”
Another ‘big one’ is inevitable
The most recent major quake in the Bay Area occurred on Aug. 24, 2014 quake in Napa, just north of San Francisco, and was a 6.0 magnitude quake, causing more than $250 million in damage while killing one person and injuring more than 100.
The reticence of California homeowners to buy earthquake insurance has many state and federal officials worried. The U.S. Geological Survey predicts that there is a 68% chance of a 7.0 magnitude earthquake in the Bay Area in the next 30 years, either along the San Andreas fault, which ruptured in 1989 and 1906, or the Hayward or Calaveras fault. The chance of a 6.7 magnitude quake over the next 30 years is now predicted at 99%, the USGS says. In addition, the USGS estimates that there’s a 75% chance that a 7.0 magnitude quake will strike Southern California within the next 30 years.
The insurance “gap” in the Bay Area, as the CEA sees it, is more than $609 billion as of 2014, assuming $690 billion in reconstruction costs and having only about $90 billion in earthquake insurance in force as of 2014. The CEA says it has the ability to pay $12 billion worth of claims.
“California is completely uninsured,” given the risk of a major quake along the faults, said David Schwartz, a geologist with the U.S. Geological Survey in Menlo Park, southeast of San Francisco. “I can’t tell you which (fault) will be the first to go, but we know that these faults have to move. You can run, but you can’t hide.”
Getty Images
Firefighters and rescue personnel use search dogs to look for victims in a collapsed home in San Francisco after the Oct. 17, 1989 earthquake.
A 7.9 magnitude quake (The estimated size of the Great San Francisco Earthquake along the San Andreas fault on April 18, 1906) in the Bay Area could potentially cause as much as $200 billion in damage and $25 billion in insurance claims, and have a regional and national impact as bad as Hurricane Katrina’s aftermath, according to RMS. The CEA said in April of this year, on the 110th anniversary of the 1906 quake, that it would cost about $555,000 to rebuilt a single family home in the nine-county Bay Area if a similarly-sized temblor struck.
In addition to the San Andreas fault, the Hayward Fault runs under much of the East Bay and directly under the University of California at Berkeley’s Memorial Stadium (which was upgraded to be more earthquake resistant in 2012 at a cost of more than $300 million and has halves designed to move independently in a quake). Both RMS and the USGS predict that the Hayward fault is most likely to experience an earthquake of a 7.0 magnitude.
A quake of that magnitude could severely disrupt the Port of Oakland, one of the West Coast’s biggest ports alongside Seattle and Long Beach, Calif. Oakland handled more 2.3 million containers in ship traffic, or 1,400 vessels a year in 2015, nearly 100% of the Bay Area’s containerized import and export traffic.
“Our real concern is the Hayward Fault: It’s got the highest population density, and it’s heavily industrialized,” said Schwartz.
Indeed, the Bay Area has added nearly 8 million new residents since 1989, and seen the value of its residential real estate go up 50%, to $1.2 trillion, in that time. “The good thing about a financial boom is it creates money to do seismic upgrades,” says Lewis Knight, the former regional director of planning and urban design with the architecture and design firm Gensler in San Francisco, who is now with Facebook. “We’ve made so many advances in the 25 years since Loma Prieta.”
Knight noted that dozens of warehouses in the Bay Area—now home to tech companies and dot-coms — that were dangerous in 1989 have been rehabbed. “Any time you do 20% or more floor rehabilitation you must do a seismic upgrade per California code,” he said.
The CEA has also tried to convince Californians to buy more earthquake insurance.
CEA chief executive Glenn Pomeroy,has implored residents to buy insurance and not to be put off by premium prices, which on average was $803 a year as of Dec. 31, 2014 and is as little as $100 a year in less vulnerable regions of California, like Sacramento or Fresno. (Of course, one reason earthquake insurance is inexpensive in those areas is that they’re far from active faults.)
“The insurance premiums aren’t the culprit,” Pomeroy said in an 2014 MarketWatch interview. “There’s a misperception out there that insurance is based on market value and not the reconstruction cost. The problem is that the reconstruction costs keep going up,” he said. Pomeroy, a former state insurance commissioner in North Dakota and the former president of the National Association of Insurance Commissioners (NAIC) said that the CEA now offers deductibles as low as 5% of the limit of insurance for the property as well as discounts of up to 20% for seismic retrofitted homes. “If you’re uninsured for earthquake damage, you have a 100% deductible.”
Ibrahim Almufti, a structural engineer at Arup in San Francisco, says given the sizable deductible for most insurance policies, either offered through the CEA or elsewhere, it makes better sense for homeowners in the most vulnerable areas to spend the money upgrading their home seismically.
Getty Images
Emergency workers prop up a collapsed building in the Marina District disaster zone after the earthquake.
“My advice to my clients is not to buy earthquake insurance but invest it in your home yourself,” he said. Indeed, state homeowners can qualify for the California Residential Mitigation Program’s Earthquake Brace and Bolt Program, which offers up to $3,000 in financial incentives to help pay for a seismic retrofit in the most quake-vulnerable zip-codes.
Hemant Shah, the co-founder and chief executive officer of RMS, who was a student at Stanford University during the 1989 quake, disagrees, but he’s not surprised to hear the advice. “It’s a classic dilemma for homeowners,” he said. “The costs are here and now and the benefits are in the future.”
That’s just what Melissa Clyde Baylis, who lives in Pleasanton, just east of the Bay Area, is thinking.
A teenager living in Oakland at the time of the quake, she now lives in a home built in 1994, after both the Loma Prieta and Northridge quakes led to stronger building codes. As for earthquake insurance, she and other family members have opted to skip it entirely given the expense.
“We will just take our chances,” she said.
This article was updated on Oct. 17, 2016 to reflect the 27th anniversary of the quake.
Published at Mon, 17 Oct 2016 18:32:35 +0000
