Excel Adjusters: Learnings from Northridge Quake
In 1972, a 7.0 earthquake hit Sylmar, located 15 miles away from Northridge. 22 years later, a 6.9 earthquake hit Northridge, resulting in approximately 40 deaths and 800 injuries.
Earthquake caused approximately 430,000 property damages in 30 miles radius from the epicenter. The quake also caused the biggest property damage in the U.S. history up until that time. Insurance company reportedly paid over $20 billion in compensation.
Insurance companies experienced massive loss because they charged very low insurance premium based on the assumption that an earthquake will not occur easily. They declared to the California Department of Insurance that they will no longer sell earthquake insurance policy due to the loss they suffered. California Department of Insurance threatened to revoke sales of all insurance policies if the insurance companies did not carry earthquake insurance. If the insurance companies ceased their operation in California, the largest insurance market in the U.S., it would mean that they would forego a big chunk of business.
The insurance companies finally settled the issue, allowing them to sell fire insurance without selling earthquake insurance. As a result, they were able to once again gain large profits.
At that time, an average home cost about $150,000. Approximately 20% of the homeowners had earthquake insurance, meaning 2 out of 10 home and commercial properties had earthquake coverage.
Let’s talk about the scope of damage and its compensation for a detached house.
During the Northridge earthquake, many homeowners did not receive proper compensation from their insurance company. Such cases resulted in passing a law that would allow the homeowners to submit another claim after certain number of years from the date of the original earthquake. We can find out the compensation difference of other insurance companies if we review your previous claims history and negotiate with other companies.
Insurance companies typically paid $30,000 to $50,000 in benefits to the homeowner. However, a re-investigation determined that benefit amount should have been around $120,000. Cost of earthquake insurance was lower than fire insurance at that time.
Although it is difficult conclude definitively, I estimate that insurance companies paid additional compensation as low as $30,000 and as high as $180,000. Through reviewing various cases, I saw vast differences in compensation amount, as more than half of the claims received almost double the amount in compensation than insurance company’s calculation. On the other hand, some insurance companies also paid extremely little, which resulted in them paying hefty fines.
Today, a house that used to cost $150,000 is now worth about $450,000. Currently, approximately 17% of homeowners and building owners have earthquake insurance. However, it is speculated that even fewer Korean Americans have earthquake insurance. This is quite alarming.
When making loans, banks require the building owners to have fire insurance, as a way for them to protect their assets. This is regardless of whether the building owners want the coverage. On the contrary, earthquake insurance is optional and not mandatory, because not all businesses are in earthquake prone areas.
Insurance companies allocate approximately 70% of their income as compensation expenses. California Earthquake Authority, a non-profit organization operated by the state government, reserves about 85% of its income as compensation expense. They are currently equipped to pay about $10 billion in compensation. This is considerably a large reserve, when we realize that the insurance companies paid about $20 billion during the Northridge earthquake. Aside from these institutions, there are 4-5 private insurance companies that sell earthquake insurances. For commercial property owners, earthquake insurance can only be purchased through private insurance companies, and not California Earthquake Authority.
Earthquake insurance premium is determined by Replacement Policy Limit, which estimates how much it will cost to rebuild the property. The cost to rebuild is currently lower than what it was 10 years ago.
There is about $100 difference in insurance premium depending on the region, but the cost is almost the same.
$1,400 annual premium for earthquake insurance with up to $300,000 coverage amount, if offered by state government operated insurance agency.
$1,600 annual premium for earthquake insurance with up to $450,000 coverage amount, if offered by state government operated insurance agency.
$1,800 annual premium for earthquake insurance with up to $600,000 coverage amount, if offered by state government operated insurance agency.
$2,000 annual premium for earthquake insurance with up to $800,000 coverage amount, if offered by state government operated insurance agency.
Are there premium differences between areas that were damaged by Northridge Earthquake and non-damaged areas? There are almost no difference
Why is there no difference? Has the benefit premise changed since the Northridge Earthquake? Yes. There has been lots of changes. It is important to understand the changes.
What are the reasons and rationales behind promoting earthquake insurance enrollment at this point?
Jung Park, PA
Excel Public Adjusters