Common Misconceptions About Insurance

Years ago, when I was a cook, I had absolutely no reason to think about insurance. Life was good! I had a paycheck, (albeit a small one) but it was enough to eek out an existence. Back then, I collected knives, cookbooks, and old vinyl jazz records, and I just didn’t need much. I was finally independent, and I LOVED exploring my new city that was 3000 miles away from my childhood home and family. I rented an attic apartment in the home of a retired couple, and I drove a car that I bought with money my grandmother had left me.  I know I had car insurance, but I have zero recollection of the coverage. I only learned about insurance when I was in a single vehicle accident, and my car was totaled. Due to depreciation, I couldn’t afford to replace it with a similar car as Grandma’s money didn’t go that far.  

Returning to California, it was hard to get insurance because the DMV was not online with other states. It was automatically assumed that I was in the high risk pool. This was before Prop 103 (passed in 1988). Other than thinking it was expensive, (I was still working as a cook) I recall nothing about my insurance. Nothing at all.

Fast forward to a decade later. I was working at Charles Schwab as an “Investment Specialist” when I called my insurance company to make a policy change, and that was the very first time an agent reviewed my coverage with me.  Apparently, an auto insurance policy could do more than fix my car. I had no idea.  I was well over 40 years old when I bought my house.  Until that time I had never had renters insurance — because it had never been required. Seriously, I had no idea such a thing existed.

Why am I telling you this story?  It’s because I think and talk about insurance every day now. Most of the people I talk to are quite savvy about life stuff.  Many are parents or grandparents. They have homes, cars, jobs, families, businesses, and investments. In short, they are smart people with plenty to lose, and insurance is a valuable tool to protect their quality of life.

Despite this, there’s a tremendous amount of confusion and misunderstanding about insurance policies, the insurance industry, and how it all works. One of the reasons I write this column is to share useful information, to clear up confusion, and to help you be wiser consumers.

Today, the article is about policies with the word California in their title.   People commonly think these policies are managed by the state.  Just as there’s no babies in baby powder, the state of California is NOT in the insurance business.

CA FAIR Plan facts:

• FAIR is an acronym for Fair Access to Insurance Requirements.
• 35 States have a FAIR plan.CA is unique because our plan is NOT RUN by the state.
• The CA FAIR plan was established in 1968 following the riots and brush fires of the 1960s.   All “admitted” insurance companies participate in the CA FAIR plan.  This allows them to share risk of catastrophic loss.
• The CA FAIR plan is California’s “insurer of last resort” — providing access coverage for Californian’s unable to obtain insurance from a traditional insurance carrier.  
• The CA FAIR plan is a non-profit association led by a governing Board that includes the California Insurance Commissioner and insurance company executives.
• The CA FAIR plan is distributed through a network of licensed insurance agents.  There is no consumer direct channel to purchase this coverage.

California Earthquake Authority facts:

• Since the 1980s, every insurance company in CA is required to offer homeowners earthquake insurance.
• On October 17th,1989, the San Andreas fault performed as expected with the Loma Prieta earthquake.  This was a magnitude 6.9 earthquake that left several areas with pockets of extreme damage. 
• On January 17th, 1994, the Northridge earthquake occurred on a “blind” or buried thrust fault.  This caused widespread damage in part because building codes had not accounted for this type of movement.
• The Northridge earthquake caused an estimated $20 billion (1991 dollars) in residential damages alone—and only half of that was covered by insurance.
• By January of 1995, companies representing 93 percent of the California homeowners insurance market had either restricted or stopped writing homeowners policies altogether, sending the California housing market into a tailspin.
• The CEA was established in 1995 with a no-frills mini-policy to allow insurers to meet the requirement to offer earthquake insurance.
• The CEA is a Non Profit and receives no taxpayer funds.  It was originally funded by a CA bond measure and an assessment to all partner insurance companies.  Today, CEA is funded by insurance companies and policyholders, and has more than $19 billion in claim-paying capacity.
• Consumers purchase CEA through the same company and agent that insures their home.
• There is a private market for earthquake insurance.  It pays to shop!