Earthquake Insurance

Last month, you will recall that I wrote to you about Umbrella Insurance policies and the month before that, Homeowner’s policies in general. This is Part #3 in a four part series and today I will be writing about Earthquake Insurance. Should you shake loose the cash for earthquake insurance? That is a question I hear time and time again. If you are expecting that I am about to definitively answer your question herein with a “yes” or “no” then I’m afraid that you might be disappointed. If instead you are interested in some thoughts then please read on. Earthquakes are one of the natural disasters that are not typically covered under conventional homeowner’s insurance policies and while many people think that Californians are the only ones who need to worry about earthquake insurance, the reality is that earthquake risk is far more widespread than just the Golden State. In fact, there is exposure to earthquakes throughout the country. Different states have different sources for consumers, but there are significant earthquake fault zones in many parts of the country and it's important to know your risk. The United States Geological Society publishes Seismic Hazard Maps (http://earthquake.usgs.gov/research/hazmaps/), which show fault lines in most areas of the country. In addition, the Society's website has various predictive tools to help homeowners best assess their area's risk for earthquakes. Consumers can also contact their state insurance commissioner's office for specifics on the fault lines that exist in their state, as well as any activity recorded along a specific fault line. The most significant activity does just happen to be in California. Now if after researching where the risk exists and you decide to explore the purchase of earthquake insurance, you should know that in most states, earthquake coverage can be purchased from private insurance companies. Not so fast tho. In California, coverage is available only through the California Earthquake Authority (http://www.earthquakeauthority.com). Earthquake coverage typically costs between $1.50 and $3 per square foot. Thus, a 2,000 sq. ft. home may cost between $3,000 and $6,000 to insure with, and here’s the “kicker”, a typical deductible of 5% to 15% of the home's value. For example, if the home is insured for $200,000, the deductible would be $10,000 to $30,000, possibly with separate deductibles for the structure and the contents. Is insurance worth the cost? It’s tough….maybe impossible…. to say. Only 10% of Californians have earthquake insurance which is likely the result of high deductibles and premiums. The typical policy has a 15% deductible so if a dwelling's insurance limit is $500,000--not unusual for many areas in the San Diego area, policyholders don't get a dime until damage exceeds $75,000 on their homes. If the damage totals $100,000 then the policyholder would get a $25,000 payout. Measuring that against premiums is where the value becomes a bit less clear. Such a policy may cost $3,000 per year so if the homeowner pays that for 10 years, he or she has already exceeded what would be paid out for $100,000 worth of damage. Of course, if the home is completely destroyed in an earthquake then the homeowner would get up to $425,000. During major earthquakes where the affected areas have been declared federal disaster areas, the Small Business Administration may step in to help homeowners. However, this is not a sure thing and has some caveats. Grants may be available for very low-income homeowners, but the majority of the assistance is through low-interest loans of up to $40,000 for contents such as clothing or furniture as well as automobiles destroyed during the quake. Loans up to $200,000 to repair or replace primary residences to pre-disaster condition may be available, but may not be used for upgrades. There are other factors that affect the decision. If you have a mortgage, the decision may be made for you because you need to have a method to paying that mortgage if the home is destroyed unless you're willing to walk away from your home. That action has its own consequences not the least of which is that doing so will severely impact your credit and cause you to forfeit any equity you have built in the home. In the end, like nearly every other financial decision the homeowner will make, it comes down to weighing the risk vs the cost of taking that risk. While the cost of earthquake insurance is steep indeed, having it can protect what is probably your greatest investment. Next month will conclude my four part series on insurance and I will cover mold and whether it might be covered under your homeowner’s policy.

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