Earthquake Insurance: What You Need to Know
Even a small earthquake can shake you to your core, both literally and figuratively. Earthquake insurance is a specialty insurance combined with homeowners, condo or renters policies to provide coverage that repairs your home, replaces personal items and gives you funds to stay somewhere after earthquake damage. Average costs range from $800-$5,000 annually.
Define Earthquake Insurance
Earthquake coverage pays for the repairs or replacement of your dwelling damaged during an earthquake. It has limited coverage for personal property, detached structures and loss of use. The California Earthquake Authority is a top provider for earthquake insurance set up as an insurance pool.
How Earthquake Insurance Works
Does Homeowners Insurance Cover Earthquake Damage?
Homeowners insurance does not cover damage that happens during the earthquake. Homeowners’ insurance policies have specific exclusions for earth movement, meaning if the earth is moving (earthquake, avalanche or mudslide), these are not covered perils. Few insurance carriers offer a rider for homeowners’ insurance policies to cover earthquake. Most require you to purchase a companion policy specifically to cover earthquake.
Define a Companion Policy
A companion policy is a specialized insurance policy that requires a primary policy before you can get coverage. This is common with earthquake and flood insurance. You can’t have earthquake insurance if you don’t first have a homeowners’ insurance policy.
As a companion policy, the dwelling coverage must match the dwelling coverage of your homeowners’ policy. Personal property coverage is offered but not required; it caps at $200,000 regardless of what your homeowners’ policy states. You may also elect to increase the building code upgrade from $10,000 to $30,000. Loss of use pays for you to live somewhere while your home is rebuilt; you can elect no coverage or up to $100,000.
Who Earthquake Insurance Is For
Anyone who owns or rents property should have earthquake insurance. Here is how it breaks down for residents in earthquake country and the minimum options you should buy.
- Homeowners: Dwelling coverage and loss of use.
- Condos: Dwelling coverage, loss of use and loss assessment.
- Renters: Loss of use.
Notice that none of those said that personal property was a minimal coverage you should get. That isn’t to say, “don’t buy it.” Quite the opposite. If your home is destroyed, you will be starting over. But consider the expense. A sample policy for a home valued at $186,000 with $5,000 in property coverage costs $613; increasing property to $200,000 bumps the cost to $1,020.
I know what you’re thinking: what dump is valued at $186,000 in California? Remember it is replacement value and not fair market value. That’s the thing with California real estate; the cost to build something is a fraction of what it is worth on the market.
Prioritizing Earthquake Insurance Options
Having somewhere to live rather than a shelter or camping out is extremely important. It’s my personal feeling, but as someone who has served clients who had major home losses, knowing they had a place to go was critical.
If cost is a factor when purchasing earthquake insurance, insure what is necessary to restart rather than everything. Keep in mind that non-essentials may not be covered. This includes fine art, Grandma’s heirloom China or those Persian Rugs.
If you own a condo with a homeowners’ association, you need to consider the extent of your HOA’s master policy earthquake coverage (if they have one) and what your assessment for that deductible would be. Condo policies for earthquake coverage have an added option called loss assessment. This pays your portion owed to the HOA for the deductible on the master policy.
Is Earthquake Insurance Worth It in California?
The heart of earthquake country is California. Compared to homeowners’’ policies, earthquake insurance isn’t cheap. It has high deductibles and starting at 5% of the dwelling replacement cost but the best-priced plans have a 25% deductible. The difference in cost is almost $500 annually for the moderate single-family home.
Why Do So Few California Homeowners Have Earthquake Insurance?
Californians feel earthquake insurance is expensive for what it covers. Traditionally, the entire deductible had to be met before coverage even for persona property started. The California Earthquake Authority has modified plans to provide more extensive personal property coverage, added structures and reduced deductible options.
Current earthquake insurance policies are deductible specific to the coverage option. Homeowners additionally have the option to add breakables coverage, making these more robust policies.
|Policy Type||Dwelling / Deductible||Property / Deductible||Loss of Use||Loss Assessment||Cost|
|Homeowners||$300,000 (15%0||$50,000 (15%)||$15,000||N/A||$1,060|
|Condo Owners||$100,000 (15%)||$25,000 (15%)||$15,000||$50,000||$1,331|
Things Affecting Cost
The primary things affecting earthquake insurance costs other than your coverage are:
- Multiple Stories Including Basement
- Anchored to Foundation
- Raised or Slab
- Cripple Walls
These home construction and upgrades can either increase premium or provide a discount. Preparing your home to withstand an earthquake with anchored foundation and cripple walls will reduce premium and make your home safer.
An Example of an Earthquake Claim
Because earthquake insurance policies are companion policies, claims may not be covered as intuitively as you’d expect. Take a look at the following example of a homeowner’s damage during and just after an earthquake.
Assume you wake up with everything shaking. You manage to put a pillow over your head and neck to protect yourself from the falling ceiling stucco. The shaking lasts for what seems like minutes but really only 15 seconds. It wasn’t a long time but you are certain there is damage.
You are okay, grab your bugout bag from next to your bed, put on a flashlight and make your way through the house to check other areas. In that time, part of the walls collapsed, the windows broke and you notice cracks in the ceiling with large patches of stucco missing. As you walk through the house, you hear something in the kitchen. The stove has moved away from the wall and the gas connection is broken.
Wisely you decide to leave the house. As you close the door outside, just enough of a tremble makes its way through your home, causing a metal fork to fall from the counter in the kitchen, creating a spark that sets the gas aflame.
Here is how the coverage works:
- The structural damage to the home would be covered by earthquake insurance.
- The fire happened after the earthquake and is covered by homeowners’ insurance.
Will It Matter In the End Which Policy Covers What?
It could. If the whole home burns down because of the fire, the earthquake damage is essentially moot. This could work in your favor since your homeowners’ policy probably has a lower deductible and much higher coverage for personal property than the earthquake insurance policy.
Let’s alter the scenario slightly. Instead of fire, a pipe burst and led to flooding of the ground floor but most of the earthquake damage was on the second story of your home. In this case, you would be relying on both policies to cover different losses: one structural damage during the shaking and a burst pipe that happened due to strain after the shaking.
Insurance claims adjusters will determine exactly how the policies cover any specific loss during and after an earthquake. The good news is because they are companion policies, you will be covered to the maximum extent adjusters can justify.
Final Thoughts on Earthquake Insurance
Not every homeowner will opt to buy earthquake insurance. There are a few mortgage companies that require it to get mortgage funding completed. As a homeowner, you must consider the cost, the risk and what your options will be for housing and financing repair and rebuilding your life after a major earthquake.