Established in the aftermath of the destructive 1994 Northridge earthquake, the California Earthquake Authority (CEA) was conceived to ensure the availability of earthquake insurance for homeowners, given the reluctance of insurance companies to offer such policies due to the high risk associated with earthquakes.
Origins and Purpose
The CEA came into existence through legislation passed in 1996, a response to a critical need for earthquake insurance coverage in California. The Northridge earthquake had resulted in unprecedented insurance claims, leading many insurers to reconsider their engagement in the California market. The state legislature’s solution was to create a publicly managed, privately funded organization to provide earthquake insurance.
While the CEA was created by the state and is subject to state regulation, its financial underpinnings come from premiums paid by policyholders, not taxpayer dollars. It operates in a manner similar to a mutual insurance pool, with the participating insurance companies sharing in the risk.
Financial Stability and Government Role
The CEA emphasizes its financial stability, maintaining a substantial claims-paying capacity to cover possible losses from earthquakes. However, their financial rating was downgraded in 2023 to “B++” by AM Best, the largest credit rating agency in the world specializing in the insurance industry.
The government’s role is primarily regulatory, ensuring the CEA adheres to insurance laws and regulations and does not directly back the CEA financially. Moreover, the CEA policy specifically states that should the CEA run out of funds, the policyholder can be paid less, in payments, or both and the state of California will not be responsible.
Pro-rata or Installment Claims Payments. In accordance with California Insurance Code section 10089.35, if at any time the California Earthquake Authority Governing Board determines that the CEA’s available capital may be exhausted and that no additional funds (from specified sources) will be available to the CEA to pay policyholder claims, the CEA may pay claims on a pro-rata basis or in installment payments, based on a plan presented to the California Insurance Commissioner. If this occurs, you might not be paid the full amount of your claim or your claim might be paid in installments, or both. Under no circumstances will the State of California be responsible for the payment of your claim. Link to CEA sample Policy
Conclusion
The California Earthquake Authority (CEA) represents a hybrid model, blending aspects of public management with private funding. While this structure ensures the availability of earthquake insurance for Californians, certain policy limitations and financial vulnerabilities raise significant concerns. For instance, the downgrade in the CEA’s financial rating by AM Best may affect its ability to promptly and fully meet claims, especially after a major earthquake. Additionally, the CEA’s policy provisions allow for pro-rata or installment payments if funds are insufficient, which means policyholders might not receive immediate or full compensation after an earthquake. Given these issues, California homeowners are advised to thoroughly research and compare different earthquake insurance options available in the private market. Working closely with an insurance agent to understand the nuances and coverage limits of various policies can provide homeowners with a clearer picture and potentially more robust protection against earthquake damages.