Did You Feel It?

With the recent magnitude-6.8 earthquake off of the coast of Northern California, as well as a much smaller earthquake near Los Angeles, there is a predictable heightening of interest in earthquake insurance.  Many homeowners realize (and many don’t) that homeowners insurance does not cover the damage caused by an earthquake.  But how can you protect yourself to ensure that you don’t lose your home as a result of a major earthquake?

If you have homeowners insurance in California, you see it every other year at least:  An offer of earthquake insurance, usually through the California Earthquake Authority (CEA).  You see the 15% deductible and you see the premium and wonder to yourself, “Is it worth it?”.  As with many things in life, it depends on whom you ask.  If you’ve never lived close to the epicenter of a major earthquake your perspective will be much different from someone who lived in Northridge in 1994 or San Francisco in 1989.  Does the likelihood of loss and the amount of coverage justify the expense of earthquake insurance?

It’s Not a Question of “If”, but “When”

There are not many insurable risks out there where you know that the peril insured against is going to happen.  Most homes do not catch fire.  Most drivers aren’t involved in serious accidents.  However, earthquake insurance is different.  We know that major earthquakes are going to happen.  For years, the experts have warned us to expect major quakes and to prepare for them.

The most famous fault and the prime suspect as the cause of the next “Big One”, the San Andreas Fault, runs through most of the State of California.  It is commonly divided into two segments, the Northern segment and the Mojave segment.  Each segment ruptures on average every 140 years.  The Northern segment’s last major quake was the infamous 1906 San Francisco earthquake with an approximated magnitude of 7.8.  The Mojave segment’s last major quake was in 1857 and shook to the tune of a magnitude-7.9.  Both of those are more than 10 times the strength of Northridge, the costliest earthquake in U.S. history.

A 2008 report by the United States Geological Survey estimates that the next big one on the San Andreas will cause upwards of $200 billion in damage, dwarfing every other natural disaster in U.S. history.  That same report reminds us that when it comes to another major earthquake, it’s not as much of a question of “if” but rather “when” it will happen.

However, it is important to note that the San Andreas isn’t the only fault capable of a catastrophic earthquake in California.  In fact, much of the state is riddled with earthquake faults capable of a major earthquake.  Look around you, if you live in California chances are you live near some hills or mountains.  If you are looking at a mountain, you probably are also looking at a major fault capapble of a M6+ earthquake.

Is Earthquake Insurance Expensive?

With this likelihood of such historic levels of damage, you would expect earthquake insurance to be costly.  Surprisingly, earthquake insurance is not expensive in many areas of California.  As might be expected, the San Francisco Bay area, with its older homes, loose soils and geologic activity has some of the most expensive rates in the state.  However, in other areas, it’s certainly not uncommon to be able to get earthquake insurance for less than $1 per $1,000 of coverage.  However, keep in mind that many factors influence the premium including soil type, construction of the home, age of home and, of course, amount of coverage.  Also, it can be important to shop around for coverage options other than just the basic California Earthquake Authority policy.  Many other companies are now in the earthquake insurance game, whereas it used to be almost exclusively written by the CEA.  Our experience has shown that most risks can get substantially better coverage, at a lower rate, from other companies such as GeoVera, Pacific Select, The Hartford or other independent agent companies.  To find the other companies, you would need to talk to an independent agent who can figure out which company is the best fit for you in terms of coverage and premium.

Also, it is important to note that where once the only option was a bare-bones style policy similar to the basic CEA policy, many broader coverage options now exist.  Often these more comprehensive earthquake insurance policies cost less and provide a far superior level of coverage.

What About the Government, Will FEMA Step In?

It is likely that following a catastrophic earthquake that the government would step into a limited extent with loans.  Contrary to popular belief, post-disaster loans don’t come from the Federal Emergency Management Agency (FEMA).  In reality, post-disaster loans typically come from the Small Business Association (SBA).  The SBA may loan up to $200,000 to restore your home to livable condition.  It is important to remember that these are not grants of money but rather simply loans that must be repaid, complete with interest rates up to 8-percent.

According to the SBA,  to make a loan, they must know the repair cost, be assured that you can repay the loan, and they will take precautions to make sure the loan is repaid.  Additionally, disaster SBA loans are only for the amount estimated to make a home livable again.  This means that you might only recover a fraction of the funds necessary to restore your home and life to pre-earthquake condition.  Contrast this with earthquake insurance which, within the policy limits, will pay to restore your home to pre-loss condition.

Finally, one more factor to consider is the navigation of the government bureaucracy that would be necessary following a major disaster at the exact same time that thousands upon thousands of homeowners are doing the same.

Consider this and all of above factors when deciding if relying on the federal government is the best strategy for you.

Next Time:  Comparing Different Earthquake Insurance Policies and Options

In my next article in a few weeks, I will explore the different types of earthquake insurance policies available on the independent market.  We will explore pricing and compare the myriad of deductible options.  Also, I will explain a few very important considerations that I believe should be central in deciding on an earthquake insurance policy.