For those of us who are Southern Californians, (you remember. . .) it was 4:30 a.m., January 17, 1994, when an earthquake measuring 6.7 on the Richter Scale shook us out of bed. The epicenter of the earthquake was located 20 miles northwest of Los Angeles, nine miles beneath San Fernando Valley. The direct cause of the Northridge Earthquake was the sudden rupture of a previously unknown, entirely subsurface (i.e., “blind") thrust fault. In a span of forty seconds or less, at least 57 people died, 12,000 were injured, 200,000 homes and apartments were destroyed or damaged, another 114,000 buildings were destroyed or left uninhabitable, thousands of vehicles were destroyed or damaged, and several major roads and bridges were left unuseable.
Several days later, nearly 10,000 homes were still without electricity, 20,000 homes and offices were without gas, and twice that number were without water.
600,000 insurance claims were filed after the Northridge Earthquake; total insured losses reached $15.3 billion, making it the most costly insurance disaster in U.S. history. In addition, economic losses were estimated between $40 to $50 billion, making it not only one of the worst natural disasters, but also the costliest seismic disaster in the United States. Insurance losses were 28 times greater than the premiums recovered in 1993, causing some insurers to teeter on the edge of bankruptcy. Other large insurers debated withdrawing from the California homeowners insurance market altogether because California law required insurers to offer earthquake coverage to new home buyers. Under heavy siege from the insurance lobby in Sacramento, the California Legislature in 1996 created the California Earthquake Authority, allowing insurers to offer earthquake coverage to homeowners on policies written by the CEA – not themselves.
Not surprisingly, seventy percent of the insurance companies doing business here in California joined the CEA, which effectively allowed them to cancel all of their existing earthquake clients and stop offering their earthquake coverage to new homeowner clients. While this legislation solved the insurance companies’ problem of being overexposed to earthquake losses, it coincidentally resulted in premiums that were double in size and with severe limits on the insureds’ ability to collect claims. State surveys show that the percentage of homeowners that purchased earthquake insurance dropped from 32% to 20% after the CEA was offered. Thus, the Northridge Earthquake singularly changed the homeowners insurance landscape in the State of California.
Just 36 hours before Hurricane Charley’s landfall, Tropical Storm Bonnie struck the Florida Panhandle near Apalachicola. The significance of Bonnie, however, is not that she arrived in Florida but when she came to shore. Not since 1906 have two storms struck the State of Florida so close together. It was an omen of bad things yet to come.
Charley, rated a Category 4 storm with sustained winds estimated at 145 m.p.h., struck Florida’s west coast about 4:30 p.m. on August 13, 2004, with awesome force, toppling trees, snapping utility poles, and ripping the roofs off of homes and buildings. At least 27 people died. Within an hour of Charley reaching shore, over 700,000 people were without power. Insurers are likely to pay an estimated $7.4 billion in claims for damage to homes, businesses and personal possessions such as cars. However, that estimate does not include uninsured property and flood damage or huge agricultural losses. If the estimate holds, Charley would be the second-most expensive hurricane in U.S. history, following 1992’s Hurricane Andrew which caused $15.5 billion in insured losses. State officials estimated earlier that damage to insured homes alone could be as much as $11 billion.
To make matters worse, Hurricane Frances stormed ashore near the Florida Panhandle on September 5, 2004, just three weeks later. Not since 1950, when Hurricane Easy and Hurricane King drenched Florida in September and October 1950, respectively, had two major hurricanes struck this state in such a short time period. Although Frances was downscaled to a Category 2 storm prior to arrival, she still packed a big punch, leaving more than 1.8 million Floridians without power and causing 90,000 to seek safety in shelters. In addition, 20,000 farms were caught in Frances’ destructive path, which caused nearly $1 billion in damages to citrus fruit, timber, nursery products, etc. Charley and Frances combined have caused more than $2 billion in damages to Florida’s agriculture, alone, in less than a single month -- that's almost one third of Florida's annual 6.4 billion cash crop receipts.
Now, Hurricane Ivan appears poised to strike Florida and, as if that wasn't bad enough, it’s the largest of the bunch. With sustained winds estimated at 160 m.p.h., Ivan qualifies as a Category 5 storm – that’s the biggest rating that can be assigned to a hurricane – and is already considered to be one of the strongest hurricanes ever to hit the Caribbean. Even if "Ivan the Terrible" doesn’t reach Florida, insured losses will clearly exceed $11 billion, which means that economic losses – if indeed the Northridge Earthquake can offer any realistic comparisons between these two kinds of “ripples” – will likely reach $30 to $40 billion in Florida before this hurricane season is over. If Ivan does hit Florida and inflicts further damage in the days to come, who knows how the landscape will change in Florida and elsewhere as a result of these three hurricanes.
One thing is certain, though. Homeowners insurance coverage for hurricane-related damage surely will be subjected to the same kind of scrutiny and market forces that occurred immediately after the Northridge Earthquake. More importantly, since insurance companies are not in the business of losing money, it's reasonable to assume that the contours of homeowners insurance along Florida's shorelines will never be the same.