The earthquake that jolted the Napa Valley last weekend upended more than wine barrels and mobile homes. It also was an unsettling reminder of how few Californians – homeowners and businesses alike – carry earthquake insurance.
In large part because of cost, complacency and the “it’ll-never-happen-to me” syndrome, Californians are more likely to own a swimming pool than an earthquake policy.
“We do not have earthquake insurance,” said Robert Dahl, owner of Dahl Vineyards in Napa, who figures he is down about $30,000 in damaged assets and lost revenue from temporarily closing his winery in the quake’s aftermath.
“It was an option that my insurance agent tried to talk me into. But I’m from Minnesota, and I haven’t had to deal with anything like this before.”
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In the last decade, the number of individual Californians taking out earthquake policies dropped about 8 percent, from 1.21 million sold in 2004 to 1.11 million policies last year, according to state Department of Insurance figures. For businesses, the slippage was even more pronounced, plummeting 29 percent, from 119,900 policies sold in 2004 to 84,000 last year.
Overall, just 10 percent of California businesses and homeowners with property insurance also carry earthquake coverage.
Until Sunday’s 6.0 temblor, Napa Valley had not had a major quake that size since 1989.
“When you have a risk that is pretty rare, people don’t internalize that they have risk themselves,” said Glenn Pomeroy, CEO of the California Earthquake Authority, a not-for-profit agency created by the state Legislature after the highly destructive Northridge earthquake in 1994.
Traditional homeowners policies do not cover damage from a quake. Earthquake coverage requires a separate policy, purchased from a homeowners insurance broker. In California, all home insurance providers are required to offer earthquake policies – and to send their policyholders a reminder every two years that such coverage is available.
The CEA oversees about 20 insurance companies that offer homeowners policies in California, roughly 70 percent of the state’s insurance market. It manages the risk, but participating insurance companies sell and manage the policies. The CEA handles earthquake policies for homeowners only, not for businesses, which have to buy their earthquake coverage separately from commercial brokers.
Cost is a big reason so many people opt out of buying earthquake coverage, insurers say. The average annual premium is $800 for a California homeowner; for a large business, premiums can run upward of $20,000.
“The economy was definitely a factor. People looked to cut wherever they could,” said Nicole Ganley, spokeswoman for the Association of California Insurance Companies in Sacramento. “We all make decisions based on money, so a lot of people go without coverage. Some folks will have damages and there won’t be any coverage, unfortunately.”
As of late Tuesday, a preliminary estimate put damages and losses in Napa County – for the wine industry alone – at $38.2 million, according to the Napa County Emergency Operations Center.
For homeowners with earthquake coverage, premiums vary based on a home’s age, location, number of stories, foundation type and other factors. There’s also a sizable deductible, which for most homeowner policies is 10 percent to 15 percent of the insured value.
In the Napa region, less than 6 percent of homeowners and renters in Napa have earthquake policies, and less than 10 percent in Sonoma County, according to CEA statistics.
For big companies, with investors and shareholders, buying earthquake coverage – as expensive as it is – is often just “a cost of doing business,” said Alex Michon, senior vice president in the Sacramento office of Aon Risk Solutions, a global business risk management firm.
Sacramento, because it is at lower risk for earthquakes, is a relative bargain for large companies compared with cities with more seismic activity. “It’s a cheap hedge” against potential business interruption, said Michon. He noted he has clients with high-rise buildings on the K Street Mall who purchase significant amounts of quake insurance, just in case.
“For a company in Sacramento, you can go out and buy a $25 million policy, and it will cost you a tenth of what it would cost in Los Angeles,” he said. While a building owner in earthquake-prone L.A. might need to pay $200,000 for a policy, the same coverage in Sacramento might be $30,000, Michon said.
But for smaller companies, it can be a toss-up whether the hefty premiums pencil out.
“Loss prevention is almost always a better expense than just going out and buying a bunch of insurance,” said Michon. For instance, he said, a company could take the amount of its annual premium and use it instead to invest in earthquake mitigation. Napa Valley wineries, he said, might want to upgrade their storage racks to prevent losses in future quakes.
Along with repairs, earthquake insurance for the business sector covers so-called “business interruption,” the loss in revenue when a retailer or other business is closed because of damage. Business interruption is often an uncalculated risk factor, especially for smaller businesses.
“When there is structural damage and customers can’t come in for some time, that can be a pretty big hit,” Michon said.
In the days since the Napa quake, Pomeroy said, traffic to the CEA’s website has jumped about six times normal. Anytime there’s an earthquake, “even if it’s in Japan or Chile,” there’s a resulting spike in insurance inquiries, he said.