New earthquake coverage options -- will anybody sign up?

The big news for California homeowners Monday was the Legislature voting to bar lenders from moving ahead with foreclosures while they were negotiating with borrowers over an alternative, such as a modified mortgage with lower monthly payments. The millions of borrowers who aren’t defaulting, however, may be more pleased by a less-heralded development: the California Earthquake Authority’s announcement of lower-cost options for quake insurance.

The new offerings are one of several efforts by the authority to persuade more people to carry coverage. Despite the state’s well-known history of disastrous earthquakes, remarkably few homeowners have signed up for insurance -- only about 10%, according to Glenn Pomeroy, chief executive of the CEA.

The problem isn’t that Californians have an irrational appetite for risk; it’s that the standard coverage offered by the state (and sold through private insurers) isn’t that attractive. Even though the deductibles are high -- a home has to lose 10% to 15% of its value before any compensation is paid -- the coverage costs hundreds to thousands of dollars annually, depending on the value of the structure and its contents.

The authority responded Monday by giving homeowners an alternative to the standard policy, which covers damage to the structure, losses to its contents and temporary living expenses. Policyholders may now choose instead to obtain coverage just for the structure, or just the structure and its contents, or just the structure and living expenses. Any of the alternatives would be less expensive than the standard package, although they would require policyholders to shoulder more risk.

A related problem with the coverage was the prohibitively high deductibles, which made it hard to insure the contents of a home against temblor-related damages. For example, the owner of a $400,000 structure could sustain thousands of dollars worth of damage to furniture and TV sets from a quake that shook the home violently, yet receive no compensation because the deductible was $40,000 to $60,000.

Starting this month, homeowners will be able to set a separate deductible for the personal property in their dwelling -- either 10% or 15% of the value of the contents. The separate deductible will cost more than the single deductible, but it will dramatically reduce the threshold for recovering compensation in the event of a quake.

These changes should entice more people to carry insurance, as should the authority’s other efforts, including a 12.5% cut this year in the average premium for its standard policy. That reduction was made possible by new science that improved loss projections.

Still, an even deeper cut in prices will probably be necessary before Californians take up quake coverage en masse. The authority is still pushing a proposal in Congress that would enable it to save $100 million annually on reinsurance costs, pushing premiums sharply lower, by having the federal government provide loan guarantees in the event of a major quake. That may be a long shot, however, considering lawmakers’ aversion to the deeply indebted federal government taking on new risk.

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