Who Will Pay Expenses from Next Big Earthquake?

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The earthquake that slammed through the San Francisco Bay area in October 1989 killed 62 people and destroyed $5 billion worth of property.

The next time the earth's giant tectonic plates slip a few yards, both people and property may be at far greater risk.

By government estimates, a quake hitting the wrong place at the wrong time of day could kill up to 95,000 and leave a $100 billion cleanup bill.

Los Angeles and San Francisco are prime targets, of course. But the peril is hardly confined to California: the Federal Emergency Management Agency believes that Seattle, Salt Lake City, Memphis and Charleston, S.C., are also at ``major'' risk.

If the Big One hits - make that ``when'' it hits - who will pay?

Even in California, relatively few property owners are covered by earthquake insurance.

But Robert E. Litan, an economist at the Brookings Institution, estimates that damage from quake-related fires and injuries could still result in up to $50 billion in insurance claims. Honoring these claims, he argues, could severely deplete insurers' reserves, driving some into bankruptcy and turning others into risk-taking zombies.

Litan's preferred fix, described in the latest edition of The Brookings Review: mandatory federal earthquake insurance, with premiums set to cover actuarial risks.

Just one California property owner in four carries earthquake insurance; nationwide, the figure is below one in 20.

If such insurance is available and most people choose not to buy it, why should the government insist?

One reason, Litan suggests, is that the private market overprices the product. Only those at greatest risk currently buy coverage, and insurers are apparently unwilling or unable to attract lower-risk customers with lower premiums.

Another reason is that owners have insufficient incentives to pay for insurance because the federal government stands ready to reimburse them for a portion of their losses.

American taxpayers, Litan reckons, shelled out $17 each for disaster relief in last year's San Francisco quake.

Uncle Sam could play hardball, giving legal notice that in the future the Treasury would help only those who help themselves.

But the threat would probably not be credible: Americans are no more likely to deny relief to uninsured victims of an earthquake than they are to deny medical care to injured motorcyclists who did not wear helmets. …