Seismic experts are in complete agreement that the next major earthquake is coming to California. It isn't a matter of if — it’s simply a matter of when.
But here’s a fact that should keep everyone involved in home lending up at night: More than 90 percent of California homes have no earthquake insurance.
The California Earthquake Authority is working to change that. We seek to work more closely with the lending industry to make home buyers aware both of their earthquake risk and of flexible new options available in earthquake insurance.
This widespread lack of earthquake insurance leaves mortgage lenders exposed. The 1994 Northridge earthquake cost the mortgage industry up to $400 million in foreclosure expenses, property-repair costs, lost interest income, write-downs of existing loan balances and administrative costs, according to Aon Benfield.
Why do so few Californians have earthquake insurance? CEA has extensively researched the question. Most of the reasons we’ve found seem rooted in myths or misunderstanding:
- Many believe the government will bail them out. This is a false hope: Government assistance, if available, is extremely limited. The maximum FEMA grant is $33,300; the average FEMA grant awarded after the 2014 Napa quake was just $2,670.
- Others think their homeowners policy will cover their earthquake damage. But acting under state law, insurers have excluded shake damage from homeowners policies for more than 30 years.
- Still other home buyers believe earthquake insurance costs too much or that the deductible is too high. But these buyers are likely unaware of significant changes the CEA has introduced in recent years — particularly in 2016.
Now Californians can choose the policy that meets their needs and budget.
While the cost to rebuild a home in California has soared by more than 175 percent since 1996, CEA has lowered rates several times over that period. CEA policies today cost half of what they would have cost without these rate cuts.
The CEA in 2016 introduced many new options for deductibles and additional coverages. Homebuyers can now choose deductibles ranging from 25 percent down to 5 percent. They can also now select up to $200,000 in personal property coverage and up to $100,000 to cover extra post-quake living expenses.
Finally, CEA offers a great incentive for buyers of older homes to finance seismic retrofits at the time of purchase. An average retrofit costs between $3,000 and $6,000, but that basic fix can dramatically lower the risk of the home’s toppling off its foundation in a quake. The CEA now offers premium discounts of up to 20 percent on homes with verified, code-compliant retrofits.
California’s next big earthquake is coming. The CEA wants to close the preparedness gap. And California Bankers Association members want to avoid costly foreclosures. These are truly shared goals, so let’s start working together today.
Glenn Pomeroy is CEO of the California Earthquake Authority.