With the East Coast earthquake still a fresh memory, lawmakers on Capitol Hill are pushing a bill designed to cut rates so more homeowners can afford quake insurance coverage, but the scope of the plan remains a big question mark with critics arguing that California would be the big winner at the expense of the rest of the nation.
The nonprofit California Earthquake Authority is pushing the “Earthquake Insurance Affordability Act” that it says would cut rates by as much as 20 percent for homeowners. It also could leave the federal government on the hook for up to $5 billion in loan guarantees.
“We are charging our policyholders so much each year to withstand an event that doesn’t happen very often,” said Glenn Pomeroy, CEO of the California Earthquake Authority. “There are people out there that can’t buy earthquake insurance, because they can’t afford it. Homeowners look at this and think, ‘Pretty expensive. I think I’ll run the risk myself.’ “
Critics say the bill is little more than a California bailout. The state, after all, bears the brunt of earthquake activity in the United States. Even after last month’s rare 5.8 quake in Virginia that rattled the East Coast, damage was minor. Few affected homeowners even had quake coverage.
“It might be true that California would be saving money this way,” said Michelle Minton, political analyst with the Competitive Enterprise Institute, “but the rest of the United States wouldn’t. This is exclusively a California bill. And everybody knows it.”
Earthquake protection is not covered under standard policies, and even in quake-prone California, it is estimated that only about 10 percent of homeowners have purchased supplemental quake coverage. Quake policies usually carry a deductible calculated as a percentage of the replacement value of the residence. On a $100,000 house with a 10 percent deductible, for example, the homeowner would pay the first $10,000 in repair bills before the coverage kicked in.
The bill’s sponsors are California’s two Democrat senators, Dianne Feinstein and Barbara Boxer. It has been referred to the Senate Banking, Housing, and Urban Affairs Committee, and could be voted on sometime this fall.
“The tragedy and devastation of the recent earthquake in Japan was a real wake-up call,” Mrs. Feinstein said. “We cannot prevent an earthquake, but we must do everything we can to prepare for one by ensuring homeowners have access to affordable earthquake insurance coverage.”
The bill is designed to apply to all nonprofit, state-run earthquake insurance programs nationwide, but opponents point out that CEA is the only company fitting that description.
Earthquake insurance flew under the radar for years. Then, in 1994, the Northridge quake devastated Southern California. Before that, many companies offered cheap earthquake insurance, so a larger number of homeowners were covered.
The 6.7-magnitude Northridge temblor caused $20 billion in damage and was one of the most expensive natural disasters in the nation’s history.
Insurers, required by state law to offer earthquake coverage with home policies, began to flee the state.
When the lack of insurers made it difficult for prospective buyers to purchase new homes, slowing the real estate industry, the state created the California Earthquake Authority, a nonprofit earthquake insurance company.
It worked, but prices are high.
The Senate bill would authorize the Treasury Department to guarantee up to $5 billion in loans for insurers such as the CEA to borrow from private lenders.
“If we ever do need to borrow money, we’ll pay that debt back,” Mr. Pomeroy said. “There’s almost no potential that we’d ever default on our debt.”
The CEA argues this bill will save taxpayer dollars in the long run. When regional disasters strike, such as Hurricane Katrina in New Orleans, the government comes in and pays for the clean-up and the rebuilding of the city. The government, however, is not on the hook for homes already insured.
Critics say the government should not take on another expense, when there is already a big push to cut back on spending. Frank Nutter, president of the Reinsurance Association of America, called the bill “out of step with the current mood of the government.”
“It appears it has no political traction on Capitol Hill,” he said.
Opponents also argue that cheaper earthquake insurance rates actually would encourage people to live in dangerous areas near fault lines, because they wouldn’t have to worry about the cost of rebuilding. That could ultimately lead to more claims.
“Insurance is a signal to people that their behavior is risky,” Ms. Minton said. “They’re living in neighborhoods that are dangerous. Insurance provides a financial incentive to make safer choices.”
CEA officials say their goal is not to make money, but to ensure that more homeowners are financially protected from quakes.
“We just need a little bit of help to do that,” Mr. Pomeroy said.