HILO, Hawai'i — Fifteen years ago the state launched a program to provide homeowners' insurance to residents on thousands of acres on the Big Island that are most at risk for lava inundation.

The result, depending on whom you ask, was an economic boon for the island or a disaster waiting to happen.

The program, called the Hawaii Property Insurance Association, now provides more than 2,400 policies to homes that private insurers won't cover in the highest risk lava zones of Puna and Ka'u, filling a critical need for residents who generally can't buy homeowners' insurance elsewhere.

The state-created HPIA has made rapid housing development possible in precisely those areas of the Big Island most likely to be devastated by lava flows from the Kilauea eruption, or from future eruptions of Mauna Loa volcano.

On Thursday, lava flowed down Kilauea to within a quarter-mile of the mostly abandoned Royal Gardens subdivision, illustrating once again the danger of building homes on the slopes of an active volcano.

The Big Island County general plan and the state Civil Defense agency discourage growth in the highest risk lava zones, but the coverage offered by the Hawaii Property Insurance Association makes that growth possible.

Puna, with its many lava zones, is the fastest-growing region on the Big Island, and is expected to have the largest population of any of the island's nine districts by 2015, according to projections in the county general plan.

Many states have set up programs like HPIA to offer coverage to residents in high hazard areas, said State Insurance Commissioner J.P. Schmidt, adding that it is generally good policy. Schmidt said it is up to state and county land use planners to decide whether to limit development in the highest risk lava hazard zones.

"It's booming because they've allowed it to be developed," Schmidt said of the surge in building in high-risk lava zones. "Certain agencies in government have certain duties and certain expertise, and need to deal with those duties.

"You get into a lot bigger problems when you have an agency like the Insurance Division, which has a completely different duty and role to play, stepping in and essentially controlling the land-use process."

AFFORDABLE HOUSING

The high-risk areas offer some of the most affordable housing in the state, attracting both first-time homebuyers and baby boomers such as Raleigh, N.C., residents Douglas and Wendy Pase. The couple bought land in the lush Leilani Estates subdivision smack on Kilauea's East Rift Zone, where they plan to build a house and retire in about five years.

"Leilani is a gorgeous area," said Douglas Pase, a computer engineer. "It's affordable, it's close to the things that were interesting and important to us. It's beautiful. It's green. The people that we met there were all very friendly and open."

The subdivision is also on land where the lava risk is highest. Pase said he took a hard look at the volcanic threat and the terrain the lava would have to cover to reach his land, and concluded "the risk is not zero, but it's still reasonably manageable."

Pase called various insurance companies to price coverage and said HPIA was the only willing insurer he could find. That was critical because "without some way of insuring the house that we would build, building in Leilani would not be an option for us," he said. "Since no one else would cover it, that becomes really, really important."

HAZARD CATEGORIES

Scientists classify land on the Big Island in one of nine lava hazard categories, with Zones 1 and 2 being the highest risk areas because they are on the volcano's rift zones or downslope from the rifts.

No one can say when lava will erupt into a particular area, but Kilauea is completely covered over with a new layer about every 1,100 years, scientists say. Thursday was the 25th anniversary of Kilauea's latest eruption.

Private insurers are leery of the two highest risk areas — Zones 1 and 2 — because they have been burned before. The industry suffered millions of dollars in losses when lava destroyed most of the Kalapana Village area in 1990 — the area was classified as Lava Zone 2 — and many companies stopped offering coverage in Zones 1 and 2 that year.

Banks and mortgage companies require insurance, so the state Legislature in 1991 created HPIA to help.

The program now provides coverage to 3,850 homeowners statewide who have been turned down for coverage by private insurers because of lava or other risks. About 85 percent of its policies are on the Big Island, said Bob Schuessler, assistant administrator of HPIA.

HPIA statistics show the program now provides nearly $700 million worth of insurance to homeowners in the highest risk lava zones of Puna and Ka'u.

COSTLY POLICIES

The coverage is relatively expensive, averaging about $1,000 per year for homeowner policies that cover lava, fire and other risks, but don't include hurricane coverage, which has to be purchased separately.

HPIA collected about $3.8 million in premiums last year, and uses a portion of that money to buy reinsurance to guard against major losses.

Under the law that created the program, if there are losses beyond HPIA's reserves and the program's reinsurance coverage, an assessment will be levied on property and casualty insurers operating in Hawai'i to pay the claims.

The program has enabled thousands of people to build homes in the parts of the island most at risk for lava inundation.

County records show there were 1,005 building permits issued for the riskiest Lava Zone 1 areas of the Big Island in the years before 1990, but another 1,717 permits issued in the same areas from 1990 to mid-2006 after Kalapana was destroyed.

The growth has been even more dramatic in Lava Zone 2. County statistics show 3,041 permits were issued in Lava Zone 2 prior to 1990, and 5,661 permits were issued from 1990 to mid-2006.

The situation today grows out of decisions made decades ago by county supervisors, council members and state Land Use Commission members who approved subdivisions in the highest risk areas even after the eruption of 1960 destroyed Kapoho Village on Kilauea's East Rift Zone.

From 1954 to 1973, Big Island developers, including politically connected firms such as The Realty Investment Co. Ltd. and Kalapana Corporation, won permission to chop up thousands of acres in Lava Zones 1 and 2 in Lower Puna and sell them off as more than 12,000 individual lots.

The situation below the southwest rift zone of Mauna Loa volcano is similar, with about 12,000 more lots available in the enormous Hawaiian Ocean View Estates and other subdivisions in areas designated as Lava Zone 2.

Looking back at those decisions, "if you're asking me, that's not a good idea — but they didn't" ask, said County Planning Director Chris Yuen.

SUBDIVISION 'BUILD OUT'

The bulk of the growth today in the highest-risk areas is basically the "build out" of those existing subdivisions, Yuen said, including the 2,266-lot Leilani Estates subdivision that was laid out on the Kilauea East Rift Zone itself.

The county contends it cannot stop that growth through the existing land use process because those subdivisions were approved and the lots sold off long ago. Since the land is already zoned and subdivided for development, county officials say they have no authority to prevent people from building homes there.

That means the potential for development into the future is huge, and new residents have flooded into Puna and Ka'u in a years-long building boom.

Puna real estate broker Heather Hedenschau, who was recently named 2007 Realtor of the Year by the Hawaii Board of Realtors, estimated that half to two-thirds of her clients rely on HPIA for their coverage. Without that insurance, "we wouldn't be able to sell anything" in the lava zones, she said.

Hedenschau acknowledged the element of risk, but pointed out Leilani Estates is heavily forested and green today because the last time it was covered by a lava flow was in the 1700s.

"There are a lot of areas that are supposedly in these Lava Zones 1 and 2 that are not really that hazardous, and I'm knocking on wood," she said. "People are going to flock to this area because it's some of the finest weather on the island, and it's reasonable prices, and it's a nice community, so people are going to come here anyway, because it's just a great place to live."

GOVERNMENT ROLE

Big Island Mayor Harry Kim, who served for many years as the director of the county Civil Defense agency, said the only way the county could block new construction in established subdivisions in the high hazard lava zones would be to condemn the land and compensate lot owners for the market value.

"The law says very simply, if I do that (block new building), then I have to give you the value of the property because I'm stopping you from doing what it's intended to do," Kim said. "I'd bankrupt the county government."

Kim said he supported the creation of HPIA years ago to provide coverage for homes that had already been built in the hazard zones, and also supports HPIA coverage for new construction.

"It's the responsibility of government because we zoned it for them to build," Kim said of the coverage. When private insurance companies refuse to cover risks such as floods, government has traditionally stepped in to provide coverage to protect homeowners. "This is what government does, and I think this is what they should do," he said.

There are also practical considerations.

"Can you imagine what our housing problem would be like if we did not allow people to build in Hawaiian Ocean View Estates?" Kim asked.

State Civil Defense, meanwhile, is on record urging that development in the highest risk lava zones be discouraged. Ed Teixeira, vice director of state Civil Defense, said developing those areas is "not a good idea."

"We are not opposed to HPIA per se, but we are opposed to the principle in terms of building deliberately in Lava Flow Hazard 1 and 2," Teixeira said. "That's taking a real high risk, and whoever's going to do it has got to understand the pros and cons."

OWNERS' RIGHTS

State Rep. Robert Herkes is chairman of the House Consumer Protection and Commerce Committee that oversees the insurance industry, and has a long-standing interest in disaster preparedness. Herkes argues the government officials need to promote land use planning that will keep people out of risky areas, such as land downslope from dams.

However, the sprawling Hawaiian Ocean View Estates and Hawaiian Ocean View Ranchos subdivisions in Lava Zone 2 are in Herkes' district, and HPIA is understandably popular with many of his constituents, providing nearly 800 policies.

Herkes said since the Ocean View lots are already subdivided, the government might be infringing on owners' private property rights if it ends the program to provide insurance in the lava zones, and thereby blocks new development.

"You've already got the lots; you're dealing with a taking (of owners' property rights) if you just eliminate HPIA, I would think. It's not an easy issue to deal with," Herkes said.

John Schapperle, who is chairman of the HPIA as well as president of the Hawai'i Insurers Council, said the HPIA is a good thing, but the size of the risk is obviously growing as more people move into the lava flow zones.

"Unfortunately, people want to build homes sometimes in very interesting areas, coastal areas or very scenic areas where lava tends to flow, and it's a challenge that we all face," Schapperle said.

Schapperle acknowledged HPIA provides the insurance coverage that makes additional development in the high-risk areas possible, but since that arrangement was mandated by state law, it is up to lawmakers to decide whether that should continue.

The insurance industry has no choice in the matter, he said.

He compared the lava coverage to federal flood insurance coverage that makes it possible for people to build — or re-build — in flood-prone areas.

"How do you deal with that? Is it something you put restrictions on, where people build? The insurance obviously helps the situation for those people who are allowed to build in those areas, but in my opinion it really starts with where people are allowed to build," Schapperle said. "If you don't allow people to build in certain areas, then the problem goes away."

It may not be possible to prevent people from building in lava zones under the current county building code, "but that doesn't mean that there shouldn't be changes to the code," he said.

Reach Kevin Dayton at kdayton@honoluluadvertiser.com.