While earthquakes and earthquake insurance are primarily matters of concern in California, there have been earthquakes in 46 states since 1975 and insurers underwrite earthquake policies in all 50 states. The California experience with earthquake insurance is therefore potentially important well beyond that state’s borders. In their commentary, Cynthia Mellema, Jeff Butler and Norman Lau of Sonnenschein Nath & Rosenthal LLP:

 

 

As a result of a state law enacted in 1986, insurers must offer earthquake coverage with their homeowner policies covering properties in California. Initially, most such policies were relatively inexpensive, had a manageable deductible and provided broad coverage, e.g., they covered appurtenant structures, personal property and additional living expenses.  The 1994 Northridge Earthquake, which left the insurance industry facing $16 billion in earthquake claims, changed all that. Virtually all residential property insurers refused, as was their right, to write new homeowner policies in the state. To encourage insurers back into the market, the California Legislature permitted earthquake insurers to reduce the scope of structural coverage, limit coverage for personal property and living expenses, and raise the deductible.

 

Thereafter, the California Legislature established the California Earthquake Authority, a privately funded, but publicly managed entity.  The CEA now underwrites 70% of earthquake policies in California. The commentary describes how this system is set up to work. A combination of special assessments, reinsurance and existing capital would allow the CEA to pay over $8 billion in earthquake claims. Following an earthquake, homeowners will submit claims to their homeowner insurers, not the CEA, and the insurers will adjust those claims. The commentators warn, “How this system works in practice has yet to be seen, given there have been no major earthquakes in California since the CEA was created. Inherently, however, this system could well be an administrative nightmare. Further, given the budget deficits in California, an understaffed CEA could end up a bottleneck for insureds obtaining benefits at the time they most need them.”

 

This commentary describes how homeowners, with or without earthquake insurance, should prepare their homes and themselves for the next large earthquake. It discusses the measures those with earthquake insurance should take following a large earthquake. Significantly, policyholders must deal with the timing problems caused by the prompt notice provision and contractual limitations period typically found in property insurance policies.  Policyholders must submit a claim within one year of the date damage has occurred and file a lawsuit within one year of the closure of a claim. But hidden earthquake damage is often not found within those time limits. Moreover, the commentators point out, “Even when homeowners did timely submit claims, the insurer’s adjusters, working under catastrophe conditions, sometimes missed the hidden damage.”

 

The commentators offer a solution to the problem: “[R]etaining consultants such as structural engineers and contractors may mean the difference between a timely submitted covered claim and a claim denied.”

 

Access the complete commentary on lexis.com

 

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