The second earthquake to strike the Los Angeles area on March 28 is a wake-up call and reminder of the risk to commercial and residential properties in Southern California, according to catastrophe modeling firm EQECAT.

(The M5.1 quake located 1 mile south of La Habre follows the M4.4 earthquake near Beverley Hills (30 miles to the northwest) on March 17.)

In its report on the latest quake, EQECAT notes that most homeowners do not carry earthquake insurance (only about 12 percent of Californians have earthquake coverage, according to I.I.I. stats), and those that do typically carry deductibles ranging from 10 percent to 15 percent of the replacement value of the home, and commercial insurance often carries large deductibles and strict limits on insurance coverage.

The remainder of the risk which is not insured is retained by property owners and frequently, their lenders. EQECAT reports:

CoreLogic regional studies have noted that a major earthquake in the Los Angeles Basin could easily produce damages to residential and commercial property exceeding $200 billion (Source: the EQECAT Insured Loss Database, 2013). The general lack of insurance coverage and high deductibles have led to concerns over the likelihood of widespread residential mortgage defaults arising from a large basin earthquake.”

This raises an important point.

Concerns have been raised before (here) about how the lack of mandatory earthquake insurance in California would result in high levels of mortgage defaults should a major earthquake occur, with widespread economic implications.

The post-quake scenario envisioned is one in which homeowners walk away from their damaged homes without repairing them, leaving many homes in foreclosure and forcing banks to bear the brunt of the loss in capital.

The potential knock-on effect for insurers and reinsurers? The loss of home ownership could severely diminish incoming capital on homeowner insurance policies.

According to an Aon Benfield report, the 1994 Northridge earthquake cost the mortgage industry up to $400 million in mortgage defaults due to foreclosure expenses, property repair costs, lost interest income, write-downs of existing loan balances and other administrative costs.

Check out an informative I.I.I. background paper on earthquake risk and insurance issues here.