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By DAN REYNOLDS, senior editor

Like many cities, Los Angeles self-insures for as much of its property coverage as is legally possible. But for what is arguably its chief risk, earthquake damage, the city is as vulnerable as an actress on a casting couch.

"They're so unpredictable and the damage they can do is frightening," says Victor Parker, risk manager for the city of Los Angeles. He was working for the city when it hit, and he sprung to action to help emergency response units scrambling in the wake of the 6.8-magnitude temblor.

But for Parker earthquake insurance is far too expensive. So he and his colleagues in charge of Los Angeles' surrounding municipal authorities that control the airports, the ports and water and power distribution rely on waivers from California's insurance commissioner.

A provision in the Stafford Act would require them to obtain coverage for any event for which FEMA has reimbursed them in the past. So Parker forgoes spending on earthquake insurance, but he does spend taxpayer money on property coverage for bond-financed city-owned buildings, like its new $400 million police headquarters.

The city's total insured values come to $4.4 billion. Of that, $2.2 billion is tied up in the wastewater system on which the city has a $1 million deductible. Premiums on the wastewater system alone are responsible for $2.2 million of the city's $4.3 million insurance budget.

An additional $1.2 million of that $4.3 million insurance budget is spent on aircraft hull and liability coverage for the city's police and fire helicopters, which are on 24-hour surveillance above the city's network of tree-lined freeways, barrios and miles of strip malls. If one of those helicopters falls out of the smog, that's a million-dollar loss, according to Parker. Broker fees and miscellaneous casualty coverage make up the remaining $1 million of the city's premiums.

For other liability and additional property risks like wildfires, floods, and earthquake damage that stops short of catastrophic, the city maintains a contingency fund of about $200 million, or 3 percent of its $6.8 billion budget.

For one, there's that L.A. Aqueduct, the controversial 236-mile concrete gravity system that carries water from the Owens Valley south to Los Angeles. The aqueduct also happens to run right over the San Andreas Fault, but that's not a reason for Avery Neaman, risk manager for the Los Angeles Dept. of Water and Power, to spend a dime on earthquake insurance. "I haven't purchased earthquake insurance for seven years," he says.

Experience breeds familiarity and the water and power department has hedged its earthquake bets over the years. In the 1950s, the city devised a scheme for the location of its four major power plants that is designed to defeat earthquakes. To date, none of the city's four main power-generating stations is located close enough to be knocked out of service by the same quake.

Even the Northridge quake was able to put the city's grid on total blackout for only a few hours. Neaman does buy boiler and machinery coverage, which he considers a risk equal to or perhaps just behind earthquake risk. He also buys terrorism insurance on the chance that someone will figure out the vulnerable points in the grid and shut it down.

December 1, 2008

Copyright 2008© LRP Publications