Should You Buy Earthquake Insurance Coverage For Your Home?

By Carla Turchetti. May 7th 2016

California. The land of sunny weather. Palm trees. Vineyards. Movie stars. And earthquakes. If you own property in California, you might be wondering if you need to purchase earthquake insurance.

Earthquake insurance is available to aid homeowners and renters in replacing housing and possessions if an earthquake strikes. But even in California, a state known for its risk of earthquakes, only 12 percent of residents elect to buy this additional insurance coverage. Industry experts say that this is because of the cost of earthquake policies. Before deciding whether you should get earthquake insurance, you should check out the following guide.

Your Homeowner’s Or Renter’s Policy Probably Doesn’t Cover You

Most standard homeowners and renters insurance policies don't offer any coverage for earthquake damage. The government has disaster-relief programs in effect, but this coverage is extremely limited. That's why California law requires insurers who sell property insurance to also offer earthquake coverage.

Many standard homeowner’s policies cover fires that result from earthquakes, but actual earthquake damage isn't covered. Keep in mind that with standard homeowner’s coverage, even if a property is destroyed in an earthquake, the homeowner is still responsible for the mortgage payments.

Questions To Consider Before Purchasing Earthquake Coverage

Homeowners or renters can ask themselves these questions about their financial situations and the dollar amount of earthquake insurance that is needed.

  • How expensive would it be to replace possessions like furniture and clothing if damaged in an earthquake?
  • How much would temporary accommodations cost if the homeowner had to live somewhere else while earthquake damage was being repaired?
  • How much would it cost to rebuild a home?
  • What kind of loans are in effect? A mortgage? A second mortgage? A line of credit?

The Cost Of Coverage

The cost of earthquake coverage varies widely from company to company. However, there is generally a formula that will determine how much you will have to pay for the coverage. The formula typically evaluates the following factors:

  • The likelihood of an earthquake occurring in your area. This is ranked on a scale of 1 to 5.
  • How close your property is to known fault lines. The closer to a fault line, the more expensive the policy will be.
  • The nature of the soil your property is built on. Property on unsteady or unstable ground could be more likely to shift when the earth moves.
  • How old your home is. Older homes are more expensive to insure against earthquake damage than newer ones.
  • What your home is made of. The building material of the home is also a consideration since wooden structures handle tremors better than brick.

It is important to note that earthquake insurance comes with historically high deductibles that can range from 2 to 20 percent. If the policy includes a 10 percent deductible to replace an earthquake damaged home, that means the owner of a $200,000 house would be paying the first $20,000 out of pocket to rebuild.

The California Earthquake Authority has an online calculator that estimates premium costs. Consider this example of a yearly premium for a Los Angeles County home valued at $441,400.

For a wooden, one-story home, built since 1990 on a concrete slab, a plan composed of a 15 percent deductible, $25,000 in personal property coverage and $25,000 to cover temporary housing would cost $1,005 dollars per year. This is a lot of money for a relatively small amount of coverage.

What's Covered?

Earthquake insurance generally covers the cost to rebuild or repair your home, minus the out of pocket deductible. It also covers a dollar amount to replace possessions and money for temporary housing and food.

Making A Claim

In California, the California Earthquake Authority oversees earthquake coverage, but the policies themselves are written by private insurance companies.

If a policyholder experiences earthquake damage, the claim has to be reported to the insurance agent who sold the policy or the insurance company administering the policy. If those parties can't be reached, the claim can be reported to the Earthquake Authority, although the reimbursement process will be slower.

An adjuster will visit the damaged site. While the homeowner is waiting to get the insurance money, she is asked to protect the property as much as possible with items like tarps and plywood, and keep receipts for those purchases. Taking photos of damage before it is cleaned up is also helpful for an adjuster.

Beyond California

While California and Washington State are the most at risk for earthquakes, geologists also focus on the New Madrid Seismic Zone for its earthquake potential. The zone runs from Arkansas into southeast Missouri, western Tennessee, Kentucky and southern Illinois.

Missouri in particular has been pinpointed as one of the places where a large-scale earthquake could potentially occur. As a result, Missouri is third in the country in the dollar amount of earthquake premiums paid by policyholders.

To Buy or Not to Buy?

The California Earthquake Authority suggests considering a few questions before deciding whether or not to buy earthquake insurance. They are:

  • What is the likelihood that a damaging earthquake would happen in your area?
  • What is the likelihood that items in your house would be damaged by a large earthquake?
  • How well will your home’s structure resist against earthquake damage?
  • How concerned are you about earthquake damage?
  • Do you have a financial recovery plan in the event your house is damage or destroyed by an earthquake?

The bottom line is that earthquake insurance is expensive. However, if you live in a high risk area, have the money and want the peace of mind, earthquake insurance might be a good idea. If you do decide to buy a policy, do your homework ahead of time to ensure that you get the best deal on your coverage.


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