Moving to an Earthquake Area: Do I Need Earthquake Insurance?

Earthquakes are particularly damaging and can be extremely costly to homeowners. This is why many question whether they can afford earthquake insurance. But while we commonly think of earthquakes occurring in just California, earthquakes have struck 39 states in the last century and have done damage in all 50 states. The Federal Emergency Management Agency estimates that earthquakes cause $4.4 billion in damage each year – making them the fourth most costly natural disaster ($8.6 billion from fires, $5.4 billion from hurricanes and $5.2 billion from floods).

But do you need earthquake insurance? Your can purchase an earthquake insurance rider as long as your home meets three standards: your water heater must be secured to the house, the walls must be reinforced with plywood, and the home must be anchored to the foundation. It is estimated that earthquake insurance policies cost $3.29 for every $1,000 of coverage provided. Whether to pay for earthquake insurance is up to you. While it can be costly, you also must factor in the costs of not carrying such insurance on your home. It could be a risk too great to take.

Factors to consider

Unlike flood insurance, earthquake insurance isn’t required. You should think about it seriously, however, because you could face serious losses that aren’t covered by insurance. Several factors can affect earthquake insurance rates such as your home’s location and age. Obviously, if you are near a fault line it will cost much more for earthquake insurance.

• Deductibles: When you purchase earthquake insurance, the deductible will be calculated based on the replacement cost for your home. The deductible will range from 2 to 20 percent of your home’s replacement value. The higher the deductible, the lower the premium: but raising your deductible could be costly. If you have a 20 percent deductible and your home costs $400,000 to rebuild, your out of pocket expenses will be $80,000 up front.
• The alternative: If you opt not to purchase earthquake insurance, you will have zero home equity – your home’s value will likely vanish in the earthquake – and you will have no insurance that will pay for repairs and reconstruction. But you will still have a mortgage, and you must continue to pay it. Consider the great financial risk you take if you forego earthquake insurance: no home, mortgage payments, no support.

Earthquake insurance in California

Most homeowners who discuss earthquake insurance are residents of California. After the 1994 Northridge earthquake, insurance companies stopped writing earthquake policies. Today, most policies are sold through a state-run insurance program called the California Earthquake Authority. (Very few private companies do sell earthquake insurance riders, however.) If you choose to get earthquake insurance through CEA, the base policy covers $5,000 for personal property and $1,500 for living expenses. Homeowners can select a 10 or 15 percent deductible on dwelling coverage, and you also may increase personal property coverage up to $100,000 and living expenses up to $15,000. The CEA has approximately $8 billion on hand to pay out claims in the event of a major earthquake. Bt the CEA’s policies cover dwellings only – not water features, pools, patios or decks.