California Earthquake Authority
Basic Earthquake Policy
Summary: The 1994 Northridge earthquake in California led to severe restrictions in coverage availability for homeowners due to an existing rule that earthquake coverage must be offered. The quake caused an estimated $20 billion in residential damages alone, and insurers pulled back from writing homeowners policies because of earthquake risk. In 1995, due to the severe lack of coverage, the legislature created a reduced-coverage earthquake policy covering the basic dwelling but excluding non-essentials such as pools, patios, and detached structures. Carriers could offer this mini-policy and satisfy the requirement to provide earthquake coverage.
In 1996, California developed the California Earthquake Authority (CEA) as a publicly managed non-profit and largely privately funded provider of earthquake coverage. Insurers must become a participating member in order to offer insurance through the CEA, and many companies have done so. The CEA provides two-thirds of the residential earthquake policies in California, making it one of the largest providers of residential earthquake coverage worldwide. The policy was updated in 2020 and 2023, and there are new changes effective on or after January 1, 2025.
The United States Geological Service provides probabilities of future earthquakes and estimates a major quake in the San Francisco Bay area before 2032. Most Californians live within 30 miles of an active fault, and there are nearly 16,000 known faults in California.
Topics covered:
General Information
There must be a Companion policy in force for the full term of the earthquake policy. The Companion policy is an insured’s basic dwelling policy and provides coverage for other perils; at minimum, it must provide fire insurance coverage. The Companion policy must be issued by a carrier that is a participating insurer of the CEA. The Companion policy and the earthquake policy must be issued by the same carrier. If, for some reason, a Companion policy is not in force at the time of an earthquake loss, the earthquake policy is void and no payment will be made.
There are two types of homeowners policies: Standard, also referred to as Basic, and Choice. Coverages are very similar. Under the Choice policy, coverage for personal property is optional and not included, and a separate personal property deductible applies, ranging from 5% to 25%. Homes with a limit greater than $1 million or built before 1980 on a raised or other foundation without a retrofit are only eligible for a 15%, 20%, or 25% deductible. This deductible is separate from the dwelling deductible.
Under the Standard policy, the combined deductible for the Companion policy also applies to personal property. However, no coverage will be provided for personal property until the combined deductible has been fully satisfied by the amount of property damage losses under Coverage A, Coverage B and Item 3, Land under Other Coverages..
Loss of use coverage is included in the Standard policy and optional in the Choice policy.
Under both policies, the dwelling and other structures limit for the earthquake policy can be the same as the Coverage A limit of the Companion policy. Coverage for personal property ranges from $5,000 to $25,000, and coverage for loss of use ranges from $1,500 to $100,000. Building code upgrade coverage is $10,000, with optional increases to $20,000 or $30,000; coverage is not available for mobile homes.
Guaranteed replacement cost is not available for either policy. If the loss exceeds the applicable limit of insurance, full repair or replacement is not an option.
The deductible for each policy can be a dollar amount or a percentage of the Coverage A and Coverage B combined limit of insurance. The deductible does not apply to Coverage D, loss of use, or to the first $1,500 of coverage provided under Other Coverages for Emergency Repairs. If the CEA does not have sufficient funds to pay losses, claims may be paid on an installment or pro-rata basis; this means that an insured may not be paid the full amount of his claim. The State of California is not responsible for payment of any earthquake claims. Likewise, if the CEA funds are completely exhausted when a claim is made, a surcharge of up to 20% of the claimant’s annual policy premium may be applied.
Changes went into effect for new policies on August 1, 2023, and for renewals on November 1, 2023. These changes include a lower maximum limit for Coverage C: the former limit is $200,000 and the new maximum is $25,000, which still exceeds the statutory minimum of $5,000. If a home’s value is more than $1 million, and/or the home was built before 1980 and is not verified to be seismically retrofitted, then the lowest available deductible is 15% of the Coverage C limit. The breakable personal property and exterior masonry veneer optional endorsements have been removed since they are no longer applicable based on the coverage changes.
Further changes are scheduled for new and renewal policies on or after January 1, 2025. All policies will sustain a 6.8% rate increase, and new and renewal policies that include personal property coverage will include a $500 sublimit for certain breakable items, such as glassware, pottery, crystal, china, ceramics, porcelain, marble, and similar items. A clarification is also being made for roofing materials. Solar shingles have always been and continue to be rated in the same category as slate and tile. Solar shingles are not the same as solar panels; solar panels are rated based on the underlying roof material.
Premium discounts are available for older houses that have been retrofitted to better withstand earthquakes. Some grants help pay for retrofits are available, and discounts can be up to 25%. The following discussion applies to the Basic policy.
Basic Earthquake Policy
Important Notices
The Standard/Basic policy begins with a section of notices. First, it advises insureds that the terms of the CEA policy are substantially different from the insured’s Companion policy and other policies that cover dwellings. Five things in particular are presented, but it is advised that the homeowner read the entire CEA policy.
Deductible is discussed first, and it is made clear that no payment is made until the amount of covered loss for which the insured is making a claim exceeds the deductible stated on the declarations. It clearly states that because of how the deductible is determined, the insured may have a substantial uninsured loss. There are two coverages not subject to any deductible: Coverage D Loss of Use, and the first $1,500 of coverage provided under “Other Coverages”, Item 1, Emergency Repairs. This allows the insured to make some immediate emergency repairs to prevent further damage to the property. Emergency repairs are discussed in depth later.
A Companion policy is required in order for an insured to obtain a CEA policy. The Companion policy must provide fire insurance and be issued by the same participating insurer that issued the earthquake policy. If there is no Companion policy in effect at the time of loss, the CEA policy will provide no coverage.
Guaranteed replacement cost coverage or extended replacement cost coverage is not available. If the damages to the property exceed the limit of insurance there is no coverage extension to provide for full repair or replacement. If a sublimit applies to the loss, the sublimit will apply as stated.
If the CEA’s available capital is exhausted and no additional funds are available to pay claims, then claims may be paid on either a pro-rata or installment basis, based on a plan provided to the insurance commissioner. In such circumstances, an insured may not be paid the full amount of the claim, and the State of California will not be responsible for payment of the claim.
If the CEA’s claim-paying capacity is exhausted, then an annual surcharge of up to 20% may be applied to an insured’s premium.
Insuring Agreement
The policy clearly states that coverage is provided for accidental, direct physical loss from an “earthquake” that begins during the policy period due to a “seismic event”. Property described in Coverages A, B, and C is covered, and Coverage D, loss of use, is available. Standard deductible, premium payment, and policy period clauses are present in the agreement, and policy and claim services are provided by the insurer that provides the Companion policy.
Deductible
Unless explicitly stated in the policy, payment only occurs when the covered loss exceeds the amount of the deductible shown on the declarations and calculated in accordance with the deductible clause. If these conditions are satisfied, then payment up to the applicable limit is paid for covered losses.
Premium payment and policy period are straightforward. Premium payment states that the insurer will provide the insurance described in the policy if the insured pays the premium and complies with the applicable provisions. The policy period is listed on the Declarations and begins and ends at 12:01 a.m. Pacific Standard or Pacific Daylight Savings Time, whichever is in effect on the inception or termination date of the policy.
Companion Policy
The insured agrees to keep a Companion policy written by the participating insurer that services the CEA policy in effect for as long as the CEA policy is in effect. If the Companion policy is not in effect at the time of the loss, then there is no coverage under the earthquake policy.
Policy Services
The policy clearly states that policy services and claims handling will be provided by the participating insurer. Any questions or correspondence should be directed to the participating insurer.
Deductible Clause
A separate deductible clause is presented to explain how the deductible is applied. The deductible does not apply to Coverage D Loss of Use, and the first $1,500 of losses under Other Coverages Item 1 Emergency Repairs. Loss to any property, including personal property under Coverage C, is not covered until the deductible shown in the declarations has been exceeded by an amount of covered loss to property covered under Coverage A Dwelling, Coverage B Extensions to Dwelling, or Other Coverages, Item 3, Land. In order for any damage to personal property to be covered, there must first be enough damage to the dwelling or extensions to the dwelling that exceed the deductible. For example, if the deductible is $5,000 and the dwelling itself has not sustained that amount of damages, then the personal property damages will not be covered at any amount, even if the damage to personal property is $5,000 or greater.
The deductible amount is a percentage of the combined single limit of insurance for Coverage A Dwelling and Coverage B Extensions to Dwelling. The deductible percentage and amount in dollars is shown on the declarations page.
The deductible is specifically calculated and applied, and only certain amounts are counted towards the deductible as follows:
The deductible shown on the declarations does not apply to Coverage D losses, nor to the first $1,500 of loss for “emergency repairs” under Other Coverages.
The deductible shown on the declarations applies as follows:
- To the reasonable and necessary costs, up to the replacement cost, of any of:
- Damages under Coverage A (the deductible will not exceed any sublimit);
- Damages under Coverage B (the deductible will not exceed any sublimit);
- Above the $1,500 included for emergency repairs under Other Coverages, Item 1, Emergency Repairs, an excess amount is provided for necessary costs to protect property from further damage under Coverage A or Coverage B. That excess amount is equal to a 5% sublimit of the combined limit of Coverage A and Coverage B; and
- The cost to replace, rebuild, stabilize, or restore “land” under Other Coverages is covered up to a $10,000 sublimit. The deductible may not exceed this sublimit.
Definitions
Many definitions are similar to standard policy language, and some are self-explanatory. There are, however, some particularly unique definitions due to the specialized nature of the policy. As described earlier, this policy is issued by the “California Earthquake Authority” (CEA) which is authorized by state law to transact insurance as necessary to sell policies of basic residential earthquake coverage. The CEA is defined as the entity that issued the policy. Here, we will look at the unique definitions.
“Chimney” is defined because there is a separate sublimit for that item. A “chimney” is defined as the flue or vent and the building code-required structure that surrounds it, including exterior chimney facings from the firebox to the outside of that structure. Hearths, mantels, and fireboxes are not included in the definition of “chimney.”
“Companion policy” is the fire insurance, homeowners, or other insurance policy that provides coverage against fire for the property that is the subject of the CEA policy. The Companion policy must be issued by the same participating insurer that provides the CEA policy.
“Domestic partners” are separately defined and are not included in the definition of insured. The relationship must be registered by the California Secretary of State through the filing of a Declaration of Domestic Partnership.
The definition of “dwelling” means the residential structure or mobile home listed in the declarations. Specifically excluded is land, including that under the structure or mobile home; other structures are excluded as a “dwelling” unless they share a common wall or continuous roofline, or are attached by a continuous foundation, or are contiguous to the foundation of the structure. Other structures such as garages, sheds, or gazebos are not covered unless attached to the dwelling.
“Earthquake” is defined as a vibration-generating rupture event caused by displacement within the earth’s crust through the release of strain associated with tectonic processes. The surface of the earth is composed of large plates that move slowly; when they get stuck, it creates tension. When the plates shift, this tension is released, causing vibrations due to the energy released from the plates. This energy travels through the earth’s crust and causes the shaking felt on the earth’s surface. Included as earthquake are effects such as ground shaking, liquefaction, and damaging amplification of ground motion. These result from the displacement of the earth’s crust. Landslides caused by an earthquake and that would not have resulted but for the earthquake are covered.
A “participating insurer” is the insurance company that issued the Companion policy and meets the legal requirements to offer residential earthquake coverage by participating in the CEA. This participating insurer provides claim and policyholder services for this policy on behalf of the CEA.
A “seismic event” is defined as one or more earthquakes within a 360-hour period, which is 15 days. Since earthquakes often have aftershocks for several days after the original earthquake, this definition includes all earthquakes and aftershocks within the 15 days following as part of the original event.
Because “sublimits” subtract from the available payout, they are defined. A “sublimit” is defined as a dollar limit on a coverage for a specific type of property within a category of property that has a higher total limit of insurance. Payment under a sublimit reduces the total amount of coverage available. For example, “chimneys” are subject to a $10,000 sublimit; this $10,000 is included in the total amount available for Coverage A, so if $10,000 is paid for damage to a “chimney”, there is $10,000 less available for damage to other property under Coverage A. However, no more than the $10,000 sublimit will be paid for loss to any or all chimneys.
Natural adjustments of the earth’s crust that are completely in response to regional stress conditions caused by natural dynamic forces within the earth’s interior are “tectonic processes”. Any adjustment initiated in whole or in part by any human activity is not considered “tectonic processes.”
Single Limit of Insurance
Because limits are handled differently, a separate section outlining how limits apply exists. The policy has a combined single limit for property covered under Coverage A and Coverage B. Unlike the standard homeowners policy, Coverage B is not a percentage of Coverage A. One limit is available that encompasses both coverages. Payment under one portion of the policy will reduce funds available for payment under another section of the policy.
Coverages
The policy outlines that if a combined single limit of insurance for Coverages A and B is shown on the declarations, that is how coverage is applied subject to the application of the deductible. If payment is made for damages under Coverage A, then the amount available for Coverage B will be reduced, and vice versa. Sublimits within the limits may also reduce available recovery amounts.
Property Covered - Coverage A
Property Covered Coverage A is subject to the combined single limit for Coverage A and Coverage B. The coverage includes the dwelling except those parts excluded under Property Not Covered - Coverages A and B. Wall-to-wall carpeting attached to the dwelling is part of Coverage A; so are reasonable expenses incurred in removing debris of damaged property from Coverage A, including transportation to landfills, disposal, or recycling facilities. Payment of such debris removal reduces the combined single limit of insurance available. If the single limit of insurance is exceeded, an additional 5% of the combined single limit is available for the expenses of removing debris.
Special Limits Coverage A
There are certain sublimits which do not increase the limit of insurance. If property falls into more than one sublimit, the lowest applicable sublimit is what applies.
Damage to any and all chimneys attached to or part of the dwelling is limited to $10,000, regardless of the number of chimneys. This sublimit will be reduced by any amount paid under other coverages, Item 1. Emergency repairs or emergency repairs to chimneys, and by any amount paid under Coverage A, Item 3 for removal of the debris of chimneys.
Damage caused by fungi to the dwelling or wall-to-wall carpeting attached to the dwelling is limited to $5,000. The fungi must directly result from an earthquake, and coverage includes cost to repair damage from fungi or testing, monitoring, abating, mitigating, removing, disposing of or remediation of fungi. This sublimit is reduced by any payments under Other Coverages, Item 1, Emergency Repairs, for emergency repairs resulting from fungi. Other than what is specifically described in this sublimit, there is no coverage for loss directly or indirectly caused by or that results from, is aggravated by, or contributed to by fungi.
Coverage B Extensions to Dwelling
Property covered under Coverage B is again subject to the combined single limit of insurance for Coverage A and Coverage B showing on the declarations.
Included in Coverage B are equipment and utility services structures for electric, telephone, gas, heating oil, water, septic, and sewer that are owned by the insured and located outside the foundation of the dwelling and affect the habitability of the dwelling. Walkways, driveways, decks, or patios necessary for regular pedestrian or non-ambulatory ingress or egress to the dwelling are included. Walkways, driveways, decks, and patios not needed or not regularly used for pedestrian or non-ambulatory entrance and exit from the premises are not covered. Bulkheads, piers, retaining walls, and masonry fences integral to the structure of the dwelling are also covered. However, the cost of repairing, replacing, or stabilizing the land under such structures is not covered.
If the residence premises is part of a common interest development that is governed by an association of owners, then the insured’s share of loss assessment is covered, as long as the loss assessment is for replacement of walkways, driveways, bulkheads, retaining walls, etc. The loss assessment is provided as a $10,000 sublimit of the combined single limit of Coverage A and Coverage B. If the assessment is made in part for property under Coverages A and B and other areas, then only a pro-rata portion of the loss assessment will be made.
Coverage B has its own debris removal coverage for removal of damaged property covered under Coverage B. It includes expenses for transportation and disposal of the debris to landfills, disposal, or recycling facilities. The combined single limit of Coverage A and Coverage B will be reduced by any amount paid for this debris removal. If the covered losses exceed the combined single limit, an additional 5% of that single limit is available for removal of damaged property covered under Coverage A or Coverage B.
Property Not Covered Coverage A and Coverage B
As always, certain property isn’t covered under the policy. Under Coverages A and B, property that is not covered includes land and the land under the dwelling, land stabilization, structures, apparatuses or devices to stabilize the land, and engineering associated with land stabilization, except for a limited amount found under Other Coverages.
Other property that is not covered includes awnings and patio coverings and their support structures, antennas, satellite dishes, towers, brackets and support systems, exterior masonry veneer, plaster, and any decorative or artistic features including but not limited to works of art, statuary, murals, stained glass, mirrors, mosaics, chandeliers, carvings, aquariums, fountains and their systems. If any such decorative items serve a utilitarian function, the cost to replace or repair the feature is covered, provided the cost does not exceed the cost to replace it with a non-decorative functional replacement. Carport covers are not considered awnings or patio coverings, and chimney facings are not considered exterior masonry veneer.
Plaster is not covered to the extent that its replacement exceeds the cost of sheetrock or drywall.
Except for what is specifically listed as covered in Coverage B, there is no coverage for other structures, including outbuildings and detached garages; underground structures or equipment including but not limited to irrigation, sprinkler and water reclamation systems; underground pipes, cables, flues, drains, electrical supply systems, walkways, driveways, decks, and patios; and bulkheads, fences, piers, outside walls including retaining walls.
Likewise, except for what is specifically covered in Other Coverages, additional costs for compliance with ordinance or law or building codes are not covered.
Not covered are landscaping, trees, shrubs, and plants, even if damaged by repairs to the property. Swimming pools, spas, and hot tubs, including the tile or other material linking the pool to a deck or the dwelling, are not covered.
Coverage C
The personal property coverage is pretty standard; property owned or used by an insured at the insured location is covered, as is property owned by others that is on any part of a dwelling up to $2,500. Debris removal for damaged personal property is covered, and the cost to repair or replace property or remove debris does not apply to the deductible. If property falls into more than one special limit category, the lowest sublimit is what applies. If an item falls into both a sublimit and a category under Property Not Covered Coverage C, then no coverage applies. All special limits apply in the aggregate.
Property Not Covered - Coverage C
Property not covered is similar to standard policy language: pets, birds, fish, livestock, and other animals are not covered; neither are motor vehicles, riding lawn mowers, or motorized land conveyances, including parts or accessories. An exception exists for motorized land vehicles not licensed for use on public roads that are designed to assist and are used by the handicapped, or parts of said conveyances. Likewise, electronic equipment designed for operation by the electrical system of a motor vehicle or camp trailer while the equipment is in such a vehicle is excluded. Such equipment includes but is not limited to computers, cb radios, satellite and cellular phones, radio receivers, radar detectors, televisions, video players and recorders, speakers, tapes, carrying devices, and similar related equipment. Aircraft, including parts and equipment, are also excluded.
Property not owned or used by an insured, including property of roomers, boarders, and other tenants, is not covered. An exception exists for property owned by others that the insured requests be covered; this coverage is limited to $2,500 under Item 2 of Property Covered-Coverage C. An exception is also made for property of roomers and boarders related to the insured.
Also not covered are valuable papers and records, including books of account, drawings, card index systems and other records, data stored on electronic data devices including tapes, wires, discs, magnetic or optical media, and similar devices. An exception is made for the cost of blank recording or storage media and prerecorded computer programs available on the current retail market, subject to the sublimit in Special Limits.
Artwork, including but not limited to paintings, frames, sculpture, photographs, and rugs, is excluded. Breakables are a category of its own, and excludes glassware, crystal, china, pottery, and porcelain items designed as table settings, serve ware, or otherwise intended for serving or consuming food, whether being used at the time of loss or not. Also excluded are figurines, vessels, vases, and other ornamental products made of crystal, china, porcelain, glass, marble, ceramics, or pottery. These items are easily broken and are among the first things to be damaged in an earthquake; therefore, there is no coverage under the Basic policy.
The remaining excluded items include watercraft, including furnishings, equipment, and motors; trailers; trees, shrubs, or plants, or their containers; pools, spas, hot tubs and all components; and antennas and satellite dishes including towers, brackets, or attachments to support or secure them.
Coverage D Loss of Use
Coverage D provides additional living expenses and loss of rents, both of which must be caused by an earthquake that damages the dwelling during the policy period and makes it unfit to live in. Additional living expenses are paid for the shortest time to repair or replace, or until the insured relocates permanently, whichever is shorter.
Loss of rent is similar and pays for the shortest time to reasonably repair or replace the property. Loss of rents due to cancellation of a lease is not covered.
Coverage for evacuating the property based on orders from a civil authority has no time limit, unlike the standard policy that limits coverage to two weeks. Coverage is provided whether the insured dwelling is damaged or other premises have been damaged.
Other Coverages
Additional coverages are available for emergency repairs, building code upgrades, land, and energy efficiency and environmental safety replacement upgrades. Except for the first $1,500 covered under Item 1 Emergency Repairs, all coverages are subject to the deductible.
Emergency repair coverage includes measures taken to protect against further damage, to remove broken glass, or to repair broken windows if the dwelling is otherwise habitable. A sublimit of five percent of the limit of insurance for covered property involved is the amount of coverage available. The first $1,500 is not subject to the deductible, although costs beyond that are subject to the deductible. No more than 5% of the policy limit will be paid for the property being protected. An insured’s taking steps to protect the property does not negate the required duties after a loss.
Building code upgrade coverage is dependent on the insured repairing damage to property covered under Coverages A and B. If those repairs are made, then the limit shown on the declarations page is available to bring the property up to local code standards in place on the date of the earthquake, but only for the reconstruction costs necessary to meet the requirements of securing governmental approval of the reconstruction permit process for repair of the property. The full amount of loss covered under this coverage will be applied, up to the limit shown in the declarations for building code upgrades, to meet the deductible.
While most insurance policies do not cover land, this policy allows $10,000 for the cost, including engineering costs, to replace, rebuild, or otherwise stabilize or restore land that is necessary to support the dwelling or covered extensions to the dwelling; or to add devices to stabilize the land that supports the dwelling as long as the need for stabilization is directly caused by an earthquake that occurred during the policy period. This is a sublimit of the limits for Coverages A and B, and reduces those limits if payment is made under this coverage.
Coverage is also available for energy efficient and environmental safety replacement upgrades, with a $25,000 sublimit. Coverage is for additional costs to repair or replace property with material that adheres to such standards. Included in this section are energy efficiency upgrades, electronic equipment-Energy Star replacement, window, door, roofing and insulation upgrades, and plumbing upgrades. Environmental safety upgrades include interior finish materials upgrades, elimination of ozone-depleting substances upgrades, and flush out of reconstructed space. The most paid for replacement or upgrade of any item is 200% of its replacement cost using material that does not meet the energy and environmental standards.
Losses Excluded
The policy states that it does not cover any loss that is not directly caused by an earthquake that occurs during the policy period. Certain losses that may be caused by, contributed to, result from, or are aggravated by regular losses are not covered. Therefore, fire and explosion; nuclear hazards; pollution of groundwater, land, or personal property as well as expenses and cleanup; theft, vandalism, or other human conduct causing loss following an earthquake; requirement of ordinances or laws not covered in the other coverages section; power failure; insured’s neglect to take reasonable action to protect property; war and other such actions; and intentional acts are excluded.
The water exclusion is unique in that while the standard water exclusion applies, an exception is made and coverage applies for damage that results from an earthquake and is caused by the release of water from water heaters, refrigerators, or water supply pipes in the dwelling; displacement of water from swimming pools, spas, hot tubs, and decorative pools; the release of water from municipal water supply lines on or off the residence premises; or the release of water or sewage from sewers or drains on or off the residence premises, or precipitation through an opening in a roof or wall if the hole was direct damage from the earthquake.
Earth movement, settling, shifting, mudflows, subsidence, or earth rising, shifting, or sinking is excluded unless it is induced by and would not have occurred in the absence of an earthquake and causes a loss within one year after the earthquake that caused the loss. For example, if an earthquake loosened the dirt and six months later heavy rains created a mudflow, that is covered.
Fungi are excluded, as is the cost to repair or replace property damaged by fungi and the testing, monitoring, abating, mitigating, removing, disposing, or remediating of fungi, except for damage to the dwelling or wall-to-wall carpet caused by fungi that directly results from an earthquake. A $5,000 sublimit applies as outlined under Special Limits of Insurance - Coverage A, Item 2.
Rights Concerning Claims Investigation
The policy lists specific rights of the insured: the right to have the claim handled in accordance with the California Insurance Code and Code of Regulations; the right to be represented by an attorney at the insured’s expense; and the right to privacy under California and federal law.
Conditions
The standard policy provisions apply with a few modifications. No more is paid to an insured than their insurable interest, nor more than the applicable limit of coverage. A standard fraud statement and standard duties after a loss are included. The standard pair and set clause is also included.
Under loss settlement for Coverages A and B, payment will not exceed the smallest of the replacement cost at the time of loss, the amount actually spent to repair or replace the damaged property, or the limit of insurance.
If the dwelling is rebuilt at another location, settlement is for the cost to rebuild at the original site. Increased costs due to ordinances or laws will be paid as provided in the Other Coverages section.
Coverage for walkways, decks, patios, or driveways is provided only to the extent to restore ingress and egress by pedestrians or non-ambulatory individuals. Loss to plaster is paid up to the amount to replace the plaster with sheetrock or drywall. Glass will be replaced with safety glazing when required by ordinance or law.
Damage to chimneys is paid at the lesser of the $10,000 sublimit, the cost to replace a masonry chimney with a non-masonry, earthquake-resistant chimney, or the amount necessary to replace or repair the damaged chimney.
Losses to personal property are paid at replacement cost, except for property that, by its inherent nature, cannot be replaced; property that has not been maintained in good or workable condition; or property that is obsolete, outdated, or not useful for its intended purpose. Such property is paid at actual cash value. Payment for items under Coverage C will be the smallest of the replacement cost at time of loss, the amount actually spent to repair or replace the damaged property, or the limit of insurance.
A standard appraisal clause appears, with each party choosing an appraiser within 20 days of receiving a demand for an appraisal. The appraisers have 15 days to select an umpire, and if they cannot agree, either party may request a judge to appoint one. A decision by two of the three appraisers sets the amount of loss.
If there is other insurance that covers an earthquake loss, the CEA policy will pay in proportion to the applicable limit of coverage the policy bears in proportion to all limits. If the other policy does not cover earthquake losses, but does cover other damages covered under the policy, then the CEA policy is excess over that coverage.
Standard subrogation, legal action, loss payment, and no benefit to bailee clauses appear. The insurer has the option to repair or replace the property if the insurer gives the insured written notice within 30 days of receipt of the proof of loss.
The carrier has the option to examine the property and perform tests to determine whether the damage was caused by an earthquake. If the opinion of the carrier is that the property did not sustain earthquake damage and the insured wants further testing, the insured is responsible for payment for that testing unless the insured’s testing proves that the damage was caused by an earthquake.
If there is a mortgagee listed as loss payee and the mortgagee required the insured to purchase an earthquake policy and list the mortgagee as loss payee, then any payment will list both the mortgagee and the insured. If more than one mortgagee is listed, the order of payment will mirror the order of the mortgages. A denial of the claim to the insured does not invalidate a mortgagee's claim to coverage, as long as the mortgagee notifies the insurer of any change in ownership or condition of the property, pays any premium due, and submits a signed, sworn proof of loss within 60 days of notice from the insurer that the insured did not file a proof of loss form.
The mortgagee will be notified of any cancellation or nonrenewal, and the insurer will be subrogated to the mortgagee's interest in the property.
If the insured’s initial payment is by check, and the check is not honored on presentation, then the policy is void from the date of inception. If the insured does not pay the renewal premium, the policy is automatically terminated. If the Companion policy is cancelled, the earthquake policy is also cancelled as of the same effective date.
Cancellation, nonrenewal, waiver or change of provisions, assignment, death, recovered property, abandonment of property, and liberalization provisions are self-explanatory. The policy automatically terminates at the end of the policy period if the insured does not pay the renewal premium before the end of the current term.
If the policy expires between the date of a level 5 or higher earthquake, and 30 days after the earthquake, the carrier can refuse to make any changes requested by the insured such as changing limits, deductible, or the purchase of additional coverages. The carrier may also inspect the premises prior to granting any renewal request with different terms.
Likewise, if an earthquake occurs during the policy term, the insurer may refuse any request for changes to limits or deductibles until 30 days after the earthquake occurred. The insurer also has the right to inspect the premises before granting any such changes to limits, coverages, or deductibles.
If at any time the available capital of the CEA is insufficient to meet anticipated losses and there are no additional funds available, the CEA may pay claims on a pro-rata basis from the remaining funds available; or claims may be paid on an installment basis based on a plan approved by the California insurance commissioner. If this occurs the insured may not be paid the full amount of the claim. The State of California is not liable for any claims in excess of funds available from the CEA.
Christine G. Barlow, CPCU
Christine G. Barlow, CPCU, is Executive Editor of FC&S Expert Coverage Interpretation, a division of National Underwriter Company and ALM. Christine has over thirty years’ experience in the insurance industry, beginning as a claims adjuster then working as an underwriter and underwriting supervisor handling personal lines. Christine regularly presents and moderates webinars on a variety of topics and is an experienced presenter.