Earthquake Insurance – Is it a Shaky Case?
Surviving a Sharknado is one thing. But now Californians – at least the movie version of them – will have to outlast a massive earthquake. If you’ve been to the movies during the past couple of weeks, you might have seen the trailer for San Andreas, due in theaters next month.
Here’s what happens: The Big One finally hits California, along the more-than-800 mile San Andreas Fault extending through the state. The trailer hints that the earthquake is so massive it can be felt along the East Coast. There’s devastation, helicopters, and more devastation.
But what about in real life? How prepared should homeowners be for a San Andreas-like situation? Or for any earthquake, regardless of the intensity or the state? Before you answer, you should know that standard home insurance doesn’t cover earthquakes.
The argument for coverage
The movie earthquake, of course, devastates California and every building that crosses its path – maybe more, judging from the trailer. In real life, the most damaging U.S. earthquake since 1980 was a January 1994 temblor in California that caused $44 billion in damage in Northridge, Los Angeles, the San Fernando Valley, and elsewhere.
That amount of damage, by itself, can help make the case for purchasing earthquake insurance for what, in many cases, is a person’s largest investment. The cost of quake coverage varies according to the amount of risk in a particular area. In California, for example, earthquake premiums average nearly $800 a year. Premiums are much lower in other areas.
So what happens if an earthquake damages your house and you don’t have coverage? You’re stuck with the bill for repairs. Counting on federal disaster aid? It almost always comes as a loan. That means you have to pay the money back.
Earthquakes don’t just happen in California. In fact, the first and third most destructive U.S. earthquakes – in terms of insured losses based on current values – in history occurred in Missouri and South Carolina, according to estimates compiled by AIR Worldwide Corp.
According to the U.S. Geological Survey, 42 states are at risk of a quake. About 20,000 earthquakes occur in the country each year.
That said, you might be surprised by the following:
- Only 12% of California residents currently have earthquake coverage, according to the Insurance Information Institute (III). That’s down from 30% in 1996, when memories of the Northridge disaster were fresh in residents’ minds.
- Only 7% of U.S. homeowners have earthquake insurance. In the Northeast, it falls to 2%.
The argument against it
Why do so few people – especially those in California, where the threat is higher – buy coverage? It has much to with the deductible – the amount you agree to pay toward a claim before your provider kicks in. Earthquake coverage comes with an earthquake deductible, which in the Golden State can be as high as 20% of the insured value of a home. It can be as low as 2% in other states.
Here’s why it matters: Say you have a home insured for $200,000 with a 20% earthquake deductible. You’re responsible for the first $40,000 in repairs. Many homeowners don’t consider the reward in that case to be worth the ongoing cost of coverage.
To insure or not to insure
Ultimately, you must weigh whether you’re comfortable with forgoing earthquake coverage. The premiums and deductibles aren’t attractive to many homeowners, despite the threat. But if the thought of the Big One leaves you quaking in your boots, you likely will opt for protection.
Either way, you’ll still be on your own if a tornado hurls man-eating fish at you from the sky. That’s a sharky – and shaky – situation, too.