Do I Need Earthquake Insurance?
Before we answer that question, let’s start with another question:
Where in the country did the all-time most damaging earthquake occur?
You might answer “California.”
Yes, it is true that no part of California is “immune” from earthquakes—in other words, there is no “low-risk” area in California for earthquakes—there are only areas of varying degrees of risk.
In fact, some parts of California that have not experienced earthquakes for 200 years or more might actually now be more susceptible to earthquakes than areas that have experienced recent earthquakes. Why? Earthquake faults build up tension over long periods of time. When that tension is suddenly released, we have an earthquake. So the current thinking is that relatively recent earthquake activity means that those faults have released built-up tension. So a lack of earthquake activity could mean that tension could still building and could be released at any time as an earthquake.
“A lot of people don’t think about earthquake insurance because big quakes are rare and unpredictable,” says Janice Gonzalez, assistant vice president of Underwriting at USAA. “The longer it’s been since a quake has hit, the more complacent people become. But it can happen at any time.”
As a result, if you live in California, you can get coverage for earthquakes through the California Earthquake Authority (CEA). This agency was specially created in 1996 after the 1994 Northridge earthquake centered near Los Angeles devastated residential areas and resulted in numerous home insurance claims.
“Insurers got their clocks cleaned,” says Glenn Pomeroy, CEO of the CEA. “Something like $14 billion was paid out.”
For decades, California law has required all homeowner’s insurance companies to offer earthquake insurance to policyholders. Rather than face the possibility of more staggering losses after Northridge, insurers began pulling out of the state.
So the CEA was created as a publicly managed, mostly privately funded way for homeowners to protect their properties. Home insurance companies that participate in the CEA offer earthquake coverage, and the CEA bears the risk.
But California is not the location of the most all-time devastating earthquake.
“Alaska” you might answer.
According to the U.S. Department of the Interior, Alaskans face an even greater chance of being shaken by an earthquake than do Californians.
In Anchorage, Alaska, a whole neighborhood of homes slipped out to sea when a massive 1964 earthquake liquefied the ground underneath them.
In fact, the state known as “The Last Frontier” accounts for more than 50 percent of all quakes in the United States. Because so many parts of the state are remote, the number is likely underreported, says the Interior Department.
But Alaska is not the correct response, either.
Ready for a surprise?
“The most severe earthquake in U.S. history occurred in 1811 in Missouri,” says Michael Barry, a spokesman for the nonprofit Insurance Information Institute.
As a result, Missouri residents must purchase earthquake coverage “at rates higher than almost any other state,” says Barry.
Top 10 states for earthquakes
As you might expect, the current highest-risk zone is along the West Coast in California, Oregon and Washington. But there are also danger areas in Nevada, Utah and Wyoming.
Moving east, a major hazard area is known as the New Madrid Seismic Zone and it takes in parts of Illinois, Missouri, Arkansas, Tennessee and Kentucky. South Carolina has its own area of quake activity.
Moving away from the continental US, much of Hawaii and Alaska (as we just mentioned) are also known for their tremors.
In the United States about 5,000 earthquakes strike each year. Since 1900, earthquakes have occurred in 39 states and caused damage in all 50.
While the United States experiences only 2% of the world’s earthquakes, some 90% of our population lives in seismically active areas. Some of our most vulnerable cities include: major metro areas in California, Seattle, Portland, New York City, Salt Lake City and St. Louis.
According to Chris Kissell of InsuranceQuotes.com, here are the top 10 states for earthquakes:
Yet, according to the U.S. Geological Survey, the risk of an earthquake in the United States is actually quite widespread. Earthquakes pose a significant risk to 75 million Americans in 39 states.
In fact, from 2002 to 2012, earthquakes of 4.0 magnitude or greater occurred in 23 U.S. states. While the damage isn’t usually severe, each tremor leaves local residents asking, “What if it’s bigger next time?” The U.S. Geological Survey reports that earthquakes of magnitude 6.5 or greater have caused fatalities, injuries and substantial damage.
Throughout the world, more than a million earthquakes occur annually. That’s about one every 30 seconds, according to the Center for Earthquake Research and Information. Yet most of them are either too small or too remote to be felt by humans.
Although it’s nearly impossible to predict where the next earthquake will strike, you can size up your own risk by referring to seismic hazard maps from the U.S. Geological Survey.
But won’t my homeowner’s insurance policy cover any damage as a result of an earthquake?
You wouldn’t be the first to ask this question.
However, homeowners often are surprised to learn that a standard home insurance policy does not cover earthquakes, says Pete Moraga, a spokesman for the Insurance Information Network of California (IINC).
In fact, a 2008 IINC poll of California residents provides the evidence.
“We found that 31 percent of homeowners said they have earthquake coverage,” he says.
The facts: IINC statistics showed that at that time, only 13 percent of California homeowners actually had this coverage. (Only 13 percent had coverage, in a state well known for its frequent seismic activity.)
Earthquake insurance covers damage to a property and its contents caused by an earthquake and can be purchased as an endorsement to a homeowner’s policy, or as a separate policy itself.
Besides location, what else figures into my risk for an earthquake?
Several factors impact your risk of damage from an earthquake and your insurance premiums. According to the California Earthquake Authority, they include:
Where you live in relation to earthquake faults.
The age and type of dwelling (wood frame versus brick) you live in.
The soil type where you live.
“Wood-framed houses tend to withstand earthquakes better than brick homes,” says Janice Gonzalez, assistant vice president of Underwriting at USAA. “And many newer homes in earthquake hazard areas use updated construction methods to make them more quake-resistant. Those factors impact your premiums.”
There are also an additional number of factors:
Type of foundation, and whether the house has been bolted to it
Insured value of the house and contents (if you include contents insurance)
Soil consistency is yet another consideration. If your home is on land that has a lot of moisture or it’s on land that’s been filled, your home is more vulnerable to quake damage, says Jerry Miller with the Independent Insurance Agents and Brokers of America.
What do I need to consider besides the premium?
The premium is only one side of the insurance equation. As a homeowner, you’ll also need to consider the deductible, or what you’ll pay out-of-pocket for damages before your insurance coverage kicks in.
The deductible is usually calculated as a percentage of the home’s value. In most areas, the deductible is 10 percent or more. This means in a $200,000 home, insurance would only cover damages in excess of $20,000.
Premium costs are calculated on a “per $1,000 basis,” according to the nonprofit Independent Insurance Insitute. A frame house in the Pacific Northwest might cost $1 to $3 per $1,000 of coverage, while the same house on the East Coast might cost less than 50 cents per $1,000 to insure, the III says.
Meanwhile, a brick house in the Pacific Northwest would cost between $3 to $15 per $1,000, while the East Coast version could be insured for between 60 cents and 90 cents.
What can earthquake insurance coverage provide for me?
In the event of an earthquake, insurance coverage can provide compensation to you as a homeowner for damage to your home and its contents. Depending on its terms, in certain situations, a policy may also provide coverage for additional living expenses while your home is repaired or rebuilt.
Earthquake coverage reimburses any such losses caused by “earth movement,” says Michael Barry, spokesman at the Insurance Information Institute.
Losses that result from certain secondary events triggered by a quake – such as a fire ignited by a burst gas pipe, or flooding resulting from broken water pipes – are covered by home insurance policies in most states, he says.
How does earthquake insurance coverage differ from traditional insurance?
Here are 8 facts you need to know:
Deductibles: With earthquake coverage, your deductible (the amount of money you would need to pay without help from insurance) is based on a percentage of your overall policy limit. If the structure of your home is insured to $500,000, the earthquake insurance deductible will typically amount to 15% of that, or $75,000. In some states you can find deductibles as low as 2% of structure limits, but the deductibles are higher in the states where earthquake risk is highest, such as California, Washington and Oregon. Along with lower deductibles come higher premiums.
Personal possessions: If your home is consumed by fire, you’d not only be reimbursed for the cost of replacing the structure, you would get insurance payments to reimburse you for the loss of all the contents of the house to a set threshold – usually 50% to 70% of the structure limits. With earthquake coverage, contents are typically covered only to a set dollar amount, such as $5,000.
Exclusions: A typical homeowner’s policy will only cover jewelry and furs to $1,000; firearms to $2,000 and silverware to $2,500. With quake coverage, there are additional exclusions. For instance, the typical quake policy does not cover the loss of landscaping, pools, fences, and separate structures (including garages) – and is likely to exclude claims for broken chandeliers, crystal and china.
Loss of use: A standard homeowner’s policy will pay to put you up in alternate lodgings if you’re forced to move because your home has been damaged in an insured disaster. Loss-of-use limits in quake coverage are far more restrictive. Usually, the loss of use coverage is set at a dollar amount that can be as low as $1,500. Further, uncovered losses don’t count toward the deductible: Policies can vary, so be sure to read yours carefully.
Cost of coverage: Despite the substantial exclusions, earthquake coverage is expensive — particularly in the areas where you are most likely to need it. In areas like Virginia and the Midwest, where quakes are rare, you can get coverage for as little as 50 cents per $1,000 in coverage, or roughly $250 annually for $500,000 in coverage. But the cost soars on the West Coast where it can cost $15 per $1,000 in coverage, or roughly $7,500 for a $500,000 policy.
Besides purchasing earthquake insurance coverage, is there anything else I can do to proactively protect my home?
Whether or not you decide to purchase earthquake insurance, it’s only one of the ways to minimize your financial risk in the case of an earthquake. If you live in an area prone to earthquakes, think about taking these other steps to keep your home safe from quakes.
Making a few home improvements to prevent damage from earth movement could be a worthwhile investment. The Insurance Institute for Business and Home Safety offers advice on a number of preventive upgrades, including:
Securing cabinets and furnishings to walls.
Installing safety shutoff valves to gas lines.
Bracing water heaters.
· Have your chimney checked and reinforced, if needed.
· Make sure your house is bolted to the foundation.
· Secure your water heater to prevent gas leaks.
· Put all hazardous and heavy items in low, safety-locked cabinets.
What if I rent?
If you rent, you can usually add an earthquake insurance rider to your renters insurance. Your premiums will be much lower, as earthquake insurance will cover damage only to your valuables and not your home in the case of a quake. It will also pay for temporary housing while your home is fixed.
What about my car?
Either way, don’t worry about your car—if you have comprehensive coverage on your car insurance, it will be covered in the case of an earthquake.
How much earthquake insurance coverage should I have?
Like the basic question of whether earthquake insurance is right for you, how much coverage is right for you depends on your individual circumstances. Asking yourself the following questions may help you decide:
Can you afford to replace your household possessions (such as sofas, beds, TVs, furniture, refrigerators, and clothing) if they were destroyed in an earthquake? How much would they cost?
If you have to find temporary accommodations because you cannot live in your home as the result of an earthquake, how much will you need to pay for those additional living expenses?
If you own your home, how much home equity do you have? Can you afford to risk losing that equity if an earthquake damages or destroys the home?
How much would it cost to rebuild your home? Do you have assets available to repair or even rebuild your home after an earthquake?
Do you have a mortgage, second mortgage, or line of credit on your home? Can you afford to continue repaying those loans while also paying to rebuild or replace your home?
As you can see, many considerations go into purchasing an earthquake insurance policy, which can make deciding whether earthquake insurance coverage is right for a particular homeowner a complicated process. A local independent insurance agent can help you decide whether you should add earthquake insurance to your home insurance policy. Speaking to an independent insurance professional is an excellent way for you to assess whether earthquake insurance can help meet your coverage needs.
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