Understanding California Earthquake Insurance Essay Research Paper

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Understanding California Earthquake Insurance Essay, Research Paper Understanding California Earthquake Insurance How many people remember where they were and what they were doing when the 1994 Northridge earthquake hit? I know I do. I was slipping out of work early that day. It took me three hours to drive the ten miles to my home. All the way I was wondering what was I going home to. I was lucky; I only lost a few items that tumbled from shelves and countertops. Many people were not so lucky. They came home only to find that they no longer had a home. They, unlike me, had lost everything. Buying a home is an investment milestone in life. People work hard to keep and protect that investment. Today earthquake insurance is at a premium in California; no pun intended. It is

difficult to answer the question; What will the insurance cover, how does it work and finally how much is it going to cost? Looking around for earthquake insurance is getting easier and more difficult, all at the same time. After the 1994 Northridge earthquake, 90% of the insurance companies threatened to quit issuing new policies for homes. In an attempt to protect residence of the state of California, a new state agency, the California Earthquake Authority was created. It was estimated that insurance companies spent nearly $12.5 billion dollars covering damage and losses as a result of the 1994 quake. “Had the California Earthquake Authority been around at the time of the 1994 Northridge quake, state insurance commissioner Chuck Quakenbush estimates losses would have been

closer to about $4 billion”. (”California Earthquake Insurance: What does it cover?”). How can that be? That is a difference of over $8 billion. Are people cheating the insurance companies? Are the insurance companies that poorly managed? No, the truth is the CEA (California Earthquake Authority) does not cover as much as most traditional insurance policies. They will not cover pools, fences, driveways, detached garages or plants and landscaping. A CEA policy will cover the home and its contents. The amount is capped by the liability limit declared on the owner’s homeowner’s policy. In addition, there is a 15% deductible. The CEA is mostly concerned with the structural repair. Getting people back into their home is the primary goal and objective. Basically the CEA only

covers repair on the structure of homes, personal property, and living expenses during the repairs. In regards to personal property the CEA will cover only $5,000. There are restrictions on what is considered reimbursable personal property. Also, the policy only allows for $1,500 in living expenses while the home is being repaired. One company, USAA, is asking for approval to offer a wraparound policy. This policy would only extend additional coverage for personal property and living expenses. The USAA would only offer policies to past and present Armed Forces officers and their families. So, just how does the CEA work? As the result of the creation of the CEA, how earthquake insurance works has changed dramatically. Gone are the days when claims were filed with the insurance

company and people were reimbursed for damage and loss. Now, in the event of a major earthquake, insurance companies will cover the first $700 million in claims. If claims go beyond the $700 million mark the insurance companies have agreed to pay an additional $2.148 billion. The CEA has a $1.432 billion reinsurance policy, as well as the ability to borrow an additional $716 million to make further reimbursements on claims. In the event that this is still not enough to cover outstanding claims, investors will contribute $1.074 billion. To get to this point, claims would have to have reached over $700 billion. If additional funds are still needed to pay claims, each insurance company has agreed to pay an additional $1.432 billion. Through the CEA and its structure of support