Only 17% of California’s homeowners have earthquake insurance. Are the rest in denial--or making a rational choice?

Some financial planners suggest the latter. They say that the majority of California homeowners are opting out after weighing the relatively remote chance of a temblor destroying their homes against the high cost of today’s earthquake coverage.

But we don’t buy insurance coverage just to protect us from likely occurrences. We get insurance to guard against unlikely and financially devastating events.

That’s why we buy life insurance: Most of us don’t expect our families to need it. Not having coverage, however, could mean a financial nightmare for our families if the unlikely should happen and a breadwinner dies prematurely.

Of course, some people wouldn’t buy, say, auto liability coverage at all if it wasn’t required by law. Some would even forgo homeowners insurance if their mortgage lenders didn’t force them to buy it. Some people are more than willing to roll the dice--but they should be clear about the real stakes.

In the case of quake insurance, people who decided long ago to do without it might want to revisit the issue--especially in light of changes in the last year that have made coverage more appealing.

Earthquake insurance coverage changed radically after the 1994 Northridge temblor.

Until then, companies that wrote homeowners insurance in the state were also required to offer earthquake coverage. After Northridge, most insurers refused to write either, saying the $12.5 billion in insurance claims from the quake was far higher than expected--higher, in fact, than the total of all earthquake insurance premiums ever collected in California.

The state Legislature eventually responded by created the California Earthquake Authority, a state-run insurance pool.

The first policies were bare bones. Instead of 5% or 10% deductibles, the CEA policies required homeowners to pay 15%. That meant that a homeowner insured for $300,000 had to pay the first $45,000 for repairs before coverage kicked in. The policies didn’t cover landscaping, pools or anything else outside the actual home.

Inside the home, earthquake coverage was spartan, covering just $5,000 of contents. Everything else that toppled over, wrenched apart or fell out of cabinets had to be replaced by the homeowner.

Oh, and you probably would have had to move in with relatives; unlike previous earthquake insurance policies, which covered rent and other living expenses for six months to a year while your home was being rebuilt, CEA’s coverage paid just $1,500--which just about covered a month at a Motel 6.

To make matters worse, the coverage was often more expensive--sometimes much more expensive--than the more comprehensive private earthquake policies it replaced. CEA’s enabling legislation required the authority to base its rates on the latest scientific advancements in predicting earth movements, and the scientists discovered that some areas once presumed safe--portions of San Bernardino and Riverside, for example--were actually riskier than previously thought.

But the state finally responded to homeowners’ howls by offering more quake insurance options through CEA, including lower deductibles and greater contents coverage, for somewhat higher premiums.

Two private companies, Pacific Select and GeoVera (now both owned by St. Paul Cos.), also began to offer more comprehensive earthquake policies.

CEA now says demand for its enhanced policies is greater than anticipated: Nearly 34,000 homeowners have purchased the additional coverage in the first year it was been available, compared with 917,000 who have the bare-bones CEA policies.

That still leaves nearly five out of six homeowners with no quake coverage, however.

Some people are wealthy enough to be able to walk away from the financial investment of a home, of course, and others have so little equity at stake that protecting it from earthquake damage may not make much sense.

But if your reasons for not having earthquake insurance include any of the following, you may wish to rethink your stance:

* “My home survived the [fill in the blank] earthquake just fine.” For anyone who knows anything about quakes, this is perhaps the silliest of all rationalizations.

Each earthquake is as individual as a fingerprint, with motion traveling through the ground in unique ways. In addition, new fault lines are being discovered all the time. The earthquake created by the fault under Northridge may not have touched your bungalow, but a shifting fault elsewhere in the Los Angeles area could leave it in splinters.

* “My home is bolted to its foundation”’ This is a better argument than most; some respected earthquake researchers are themselves spending money on earthquake retrofitting rather than paying for insurance coverage.

But even they will admit that no amount of retrofitting can protect against a truly devastating shaker. Bolting seems to work best for one-story wood-frame homes; homes that are two or more stories or have big picture windows or other large gaps in the frames, are likely to suffer more damage even if bolted.

Of course, all the bolting in the world won’t help much if the ground beneath the foundation gives way. In Anchorage, Alaska, a whole neighborhood of homes slipped out to sea when the massive 1964 earthquake liquefied the ground on which they sat.

* “I’ll get FEMA money to rebuild.” Affected homeowners may qualify for low-interest loans offered by the Federal Emergency Management Agency through the Small Business Administration. But these loans are not free money; homeowners are obligated to pay them back, and they are entered in your personal net worth statement as a liability, offsetting an equal amount of assets.

Some observers question how much money will available after the next major earthquake; numerous disasters have soured many in Congress on the idea of handing cash to people who refuse to get insurance.

* “I’ll just hand over the keys to the bank.” Homeowners who let their banks foreclose on earthquake-devastated homes not only lose all their equity, but also put their credit rating at risk. Depending on lenders’ reactions, it may be difficult or impossible to borrow money for another home for several years.

For many of us, our homes represent our largest financial asset. We should think carefully before considering walking away as an option.

Of course, even people who do have insurance will probably suffer some loss of equity in a quake-hit area, at least temporarily. Just ask anyone who tried to sell a home in Northridge in the mid-1990s. A few intrepid souls snapped up these “distressed” properties, reasoning that the chances of another quake hitting the same area were especially remote, but many potential buyers stayed away.

Facing a temporary loss of equity is one thing; it’s quite another to suffer such a huge loss from uninsured quake damage that you’re saddled with a 10- to 30-year rebuilding loan, or that you lose your equity entirely by foreclosure.

Californians have a well-deserved reputation for being in denial. We build our homes on flood plains, on brushy mountainsides, in the path of mudslides and on or near earthquake faults. Most of the time, most of us avoid catastrophe. But we should acknowledge that someday our luck could run out--and consider whether it’s worth taking precautions to protect against the unthinkable.