How The 1994 Northridge Earthquake Transformed California’s Earthquake Insurance Market

The 1994 Northridge Earthquake stands as one of the most significant seismic events in California's history—not just for the devastation it caused, but for how it fundamentally reshaped the earthquake insurance market. The quake revealed critical gaps in coverage, prompting insurers to withdraw from the market and leaving homeowners, landlords, renters, and business owners struggling to find affordable options.

In this article, we explore how the Northridge Earthquake led to the creation of the California Earthquake Authority (CEA), how coverage options have changed, and why earthquake insurance is more vital than ever.

Pre-Northridge Earthquake Insurance Market
Before the 1994 Northridge Earthquake, earthquake insurance was more accessible, and the market was far less restrictive. Insurers offered earthquake coverage as part of standard homeowners and commercial property policies or as reasonably priced endorsements.

Residential Coverage:

• Many homeowners had earthquake coverage included in their homeowners insurance policies or could add it at a reasonable cost.
• Deductibles were lower, and earthquake insurance policies covered a broader range of damages, making coverage attractive and affordable.

Commercial and Business Coverage:

• Business owners could often secure earthquake coverage through their commercial policies without needing a separate standalone earthquake insurance policy.
• Competitive premiums and lower deductibles made it easier for landlords and businesses to protect their investments.

However, the Northridge Earthquake changed all of this almost overnight.

The Aftermath: How the Market Collapsed
The Northridge Earthquake caused an estimated $44 billion in damage, resulting in catastrophic losses for insurance companies. Many insurers faced financial hardship and withdrew from offering earthquake coverage entirely. Those that remained imposed stricter terms, higher deductibles, and significantly increased premiums.

To prevent a complete collapse of the residential earthquake insurance market, California established the California Earthquake Authority (CEA) in 1996. While this stabilized coverage for homeowners, it left landlords, renters, and business owners in a much more precarious position.

The Role of Reinsurance in Reshaping the Market
After the 1994 Northridge Earthquake, reinsurance (insurance for insurance companies) became harder to secure and more expensive. Reinsurers faced significant losses, which forced primary insurers to reduce earthquake coverage or raise premiums. This reinsurance squeeze was a major factor behind the overall contraction in the market.

Reinsurance continues to influence the availability and affordability of earthquake insurance. When reinsurance markets tighten, the effects cascade, resulting in fewer options and higher costs for consumers.

The Creation of the California Earthquake Authority
The California Earthquake Authority was created as a state-managed, privately funded entity to ensure that homeowners had access to basic earthquake insurance. While it provided a lifeline for residential coverage, it came with limitations:

• No Coverage for Commercial Properties: Business owners and landlords were left without a public solution and had to rely solely on private markets.
• Basic Coverage: CEA policies focus on protecting the home’s structure with limited personal property and loss-of-use coverage. Detached structures like pools, guest houses, and retaining walls are typically excluded.
• Higher Deductibles: To keep premiums manageable, deductibles often range from 5% to 25% of the insured value.

The Impact on Landlords and Renters
The Northridge Earthquake exposed significant vulnerabilities for landlords and renters as coverage options tightened and costs increased. The availability and type of earthquake insurance for landlords depend on the size of their rental property.

Landlords:

• 1-4 Unit Buildings: Landlords of smaller residential properties can typically purchase earthquake insurance through a participating carrier with the California Earthquake Authority (CEA). This provides essential protection, but CEA policies often come with high deductibles and limited coverage for detached structures.
• 5-Unit or Larger Buildings: These larger multi-family properties are classified as commercial and fall under the commercial insurance market, not eligible for CEA coverage. After the Northridge Earthquake, commercial earthquake insurance became significantly more expensive and harder to obtain, leaving many landlords unprotected and at substantial financial risk.

Renters:
Renters face unique challenges after the Northridge Earthquake. Many mistakenly believe their landlord’s insurance covers their personal belongings—it doesn’t. Separate earthquake insurance policies are required to protect personal possessions and secure temporary housing in the event of a disaster.

Commercial Market Challenges
For business owners, the situation became even more dire. The commercial earthquake insurance market contracted severely, and coverage that once was affordable became limited and prohibitively expensive. Before the Northridge Earthquake, many business owners could add earthquake coverage as an affordable endorsement to their commercial property policies. Today, that is no longer the case.

Key Challenges for Business Owners:

• High Premiums: Premiums for commercial earthquake insurance skyrocketed after the  Northridge Earthquake, forcing many business owners to go without coverage. Fewer affordable options remain today.
• High Deductibles: Commercial earthquake policies often require deductibles between 10% and 25%, making even covered losses a significant financial burden.
• Limited Availability: The number of carriers offering commercial earthquake insurance has significantly declined, leaving business owners with limited options and making it harder to find comprehensive earthquake protection.

Current State of Earthquake Coverage
Despite the lessons of the Northridge Earthquake, earthquake insurance remains underutilized in California. Today, only 10% to 15% of homeowners carry earthquake insurance, compared to roughly 30% at the time of the 1994 Northridge Earthquake. The numbers for renters, landlords, and business owners are even lower.

Why Coverage Has Declined:

• High Deductibles: Many homeowners and business owners are deterred by high deductibles, not realizing that having partial coverage is far better than none.
• Misconceptions About Federal Aid: Some believe that federal disaster relief will fully cover losses, but it primarily offers emergency assistance or low-interest loans.
• Cost Concerns: While premiums may seem expensive, the financial impact of a total loss is far greater.
• Coverage Complexity: The complexity of understanding what is covered, especially for business owners and landlords navigating the commercial insurance market, discourages many from purchasing policies.
• Limited Awareness: Many homeowners, renters, landlords, and small business owners remain unaware that standard homeowners insurance policies do not cover earthquake damage in California, leading to low participation in the earthquake insurance market.

Parallels to Today’s California Homeowners Insurance Crisis
The current crisis in the California homeowners insurance market mirrors the post-Northridge Earthquake environment in several ways. Recent catastrophic wildfires, including the Palisades Fire and Eaton Fire, have led to massive losses for insurers, prompting many to reduce their exposure by restricting new homeowners insurance policies or withdrawing from high-risk areas altogether.

Just as reinsurance became scarce after the Northridge Earthquake, it has become increasingly difficult for insurers to obtain affordable reinsurance for wildfire-prone regions in California. The result is similar:

• Fewer insurers offering coverage.
• Higher premiums and stricter underwriting standards.
• Increased reliance on state-managed programs like the California FAIR Plan.

The parallel serves as a warning that history may repeat itself if comprehensive solutions aren’t implemented. Just as the California Earthquake Authority helped stabilize the earthquake insurance market for homeowners, new solutions may be necessary to address the growing challenges in wildfire-prone areas.

Conclusion
The 1994 Northridge Earthquake was a wake-up call for Californians, reshaping the earthquake insurance market and highlighting the critical importance of being prepared. While the California Earthquake Authority has helped stabilize the residential market, landlords, renters, and business owners must still navigate a more limited and expensive private market.

Understanding how the market has changed since the Northridge Earthquake is key to making informed decisions about earthquake insurance today. Whether you rent or own a home, a rental property, or a business, ensuring you have the right coverage can protect your financial future.

Earthquake insurance remains a crucial yet often misunderstood part of protecting your home. Many homeowners believe myths that leave them financially vulnerable when disaster strikes. To ensure you have the right coverage, read our companion article on understanding earthquake insurance, common myths, and why it matters.

For a personalized earthquake insurance review, contact Schneiderman Insurance Agency at (818) 322-4744. We’ll help you explore your options and find the right coverage for your needs.