If you live in a flood zone, you’re required to have flood insurance. If you have a home mortgage, you have to be insured for fire damage. But if you live near a fault line in California – a state known to shake – you’re not required to have earthquake insurance. In fact, despite certainty among scientists that another “big one” is coming, most Californians don’t have earthquake insurance, according to Glenn Pomeroy, CEO of the Sacramento-based California Earthquake Authority (CEA), the state’s nonprofit earthquake insurance provider.


“Scientists are clear – it’s certain that there is going to be a Northridge-sized earthquake event or greater somewhere in California in the next 30 years,” Pomeroy said in an interview at the Business Journal’s offices. In fact, scientists are 99.9% certain, he noted.


Glenn Pomeroy is CEO of the California Earthquake Authority, the state’s nonprofit earthquake insurance provider. According to Pomeroy, most Californians aren’t insured for earthquake damage to their homes or rental units. (Photograph by the Business Journal’s Larry Duncan)


The 1994 Northridge quake measured 6.7 on the Richter scale and caused about $42 billion in overall damages, according to AccuWeather. If that same earthquake were to occur today, it would cause about $75 billion in damage to homes alone, Pomeroy said.


Although most Californians live within 30 miles of an active fault, about 90% of them don’t have earthquake insurance, Pomeroy noted. As a result, only about $7 billion out of the $75 billion in damages that would be caused by another Northridge quake would be insured, he explained. Thus, $68 billion in damages would be uninsured.


“More alarming is that there is a 75% chance of a 7.0 occurring somewhere in Southern California in the next 30 years. And that’s three times as strong as Northridge,” Pomeroy said. “The [earth’s tectonic] plates are shifting and it’s going to happen. I don’t think we need to live in fear about it. We just need to be prepared.”


About 1.2 million homes in California need basic retrofitting, according to Pomeroy. These homes are typically built above ground with crawl spaces on “spindly studs” that aren’t able to hold the home in place in the event of a significant earthquake. “When the ground shakes, the studs wobble and the home goes off the foundation,” he explained. “This is a common construction in homes built prior to World War II. Construction codes started to get better then, but you’ll still find homes like this built all the way up to 1979.”


The CEA offers a 20% discount on its policies to homeowners who retrofit. “The retrofit just involves going under the home into the crawl space, and you put in some braces or bolt them to the foundation, depending on how much room you have to work with,” Pomeroy said. “You wrap it in plywood sheathing and you’ve dramatically reduced the risk of loss.” For a home on level ground, such a project costs about $3,000 to $5,000, he said. “We’re working to develop funding sources to help people with these costs, but those funds aren’t unlimited,” he added.


A few myths are behind Californians’ apparent reticence in buying earthquake insurance, according to Pomeroy. One is an attitude that “it won’t happen to me,” he said, again emphasizing that scientific statistics indicate otherwise. He recounted a story of a homeowner who canceled his earthquake insurance just days before the Northridge quake. He lost his home and all his retirement savings and was only able to get by with the help of his adult children, Pomeroy said.


“There is also a perception that the government will bail them out,” Pomeroy said of those who don’t have earthquake insurance. “That just doesn’t happen. Government assistance is available, but it’s limited,” he continued. “You can apply for a FEMA grant and that maxes out at about $32,000. . . . You can’t rebuild a home for that.”


Also a deterrent is the perception that earthquake insurance is expensive. But as a nonprofit, the CEA’s mission is to provide affordable, quality earthquake coverage, Pomeroy explained. In fact, it has lowered its rates five times since it was founded in 1996.


Although the State of California requires all insurance providers to offer some form of earthquake coverage, after the Northridge quake insurance companies began to pull back on their offerings. To make up the difference, the state founded the CEA, a nonprofit earthquake insurance provider with plans sold through participating insurance companies.


The CEA is overseen by a five-member governing board, including the governor (who has appointed a cabinet member to represent him, Pomeroy noted), the state insurance commissioner and the state treasurer as voting members. Non-voting members are the speaker of the state assembly and the chair of the state senate rules committee.


To be able to offer CEA’s insurance, companies have to “buy in,” Pomeroy explained. The initial total buy-in, divvied up amongst its members, was $1 billion. That seed capital has since grown through investments and policyholder payments to the point where the CEA now has a total coverage capacity of $12 billion. “We estimate that if Northridge were to reoccur today our losses would be about $4 billion,” he said.  “So we have the capacity to handle three Northridges.”


Since the CEA was established, it has lowered its rates by 55%, Pomeroy said. And as of this year, it has expanded its offerings to include an array of policies, from minimalistic plans to beefed-up options.


Initially, the CEA offered a policy that insured the full cost to replace a home (not its market value), and up to $5,000 was covered for the contents of the home. The plan had a 15% deductible, meaning that 15% of the total replacement value for the home had to occur in damages before the CEA would pay a claim. But once that 15% mark was triggered, CEA would cover all the costs – the policyholder would not be responsible for the deductible, Pomeroy explained. This policy also provided $1,500 in living expenses for displaced residents.


Now, in addition to the full replacement cost of the home, CEA offers as much as $200,000 in contents coverage, and there is a wide range of deductible options for those seeking cheaper payments. Up to $100,000 in living expenses for displaced residents are covered. “It’s a whole new ball game,” Pomeroy said.


Pomeroy was the insurance commissioner of North Dakota in 1997, when the state had a horrible winter with a snow pack that just “wouldn’t melt,” he recalled. When spring came, the snow melted, resulting in massive flooding. The city of Grand Forks was entirely evacuated – the largest evacuation of an American city since the Civil War, he said.


“We had a mess on our hands. But it was really when I learned about the importance of insurance for natural catastrophes, whether it’s wildfires, earthquakes, hurricanes or tornadoes or floods. It’s important to have financial protection for the home,” Pomeroy said of his experience in North Dakota – an experience that drew him to lead the CEA when he was approached in 2008. “The risk is real, and Long Beach is certainly aware of that from the historical events that have occurred here.”