Earthquake Insurance

Earthquake insurance protects your home in the event of a…you guessed it, earthquake.  But we’re willing to bet you don’t have it. And we assume you probably don’t care, probably because you think you’re already covered, or that FEMA will step in, or that serious damage just won’t occur.

While some of this may be true, it’s important to note that your homeowners insurance policy most likely does not cover you against damage from an earthquake…even if you live in San Francisco.

And many insurers don’t even offer earthquake coverage as an endorsement to their policy, so you would need to buy a separate policy to cover your home against earthquake damage.

This is similar to flood damage, which is not covered by any homeowners insurance policy sold in the United States. Flood insurance coverage can only be purchased under the National Flood Insurance Program (NFIP).

Insurance agents will tell you it’s a common misconception that homeowners believe they’re covered against any damage to their home or contents, no matter what the cause of damage, so long as they pay their homeowner’s insurance premium.

See the top 10 things that may not covered by a homeowner’s insurance policy for more on that.

Why Earthquake Insurance Is Not Automatically Included?

Hopefully this doesn’t come as a surprise to you, but insurance companies are “in it” to make money. Their goal is to insure as many homes as possible, and pay insurance claims on very few.

If a large earthquake strikes a particular city in which an insurer covered several thousand homes against earthquake damage, the insurer would be up a creek without a paddle! There’s a good chance they would not have collected enough premium dollars to pay for the claims.

Even though insurance seems like a rip-off to many of us, insurers are willing to completely rebuild your multi-hundred thousand dollar home for about $1,000 per year. A certain loser of a deal if they got caught in the situation described above.

How Much Earthquake Insurance Is Necessary?

The amount of coverage you need is dependent on a few things. Earthquake insurance covers the insured value of your home per the homeowner’s insurance policy, not the market value.

And it is recommended that you purchase a replacement cost loss settlement policy when insuring your primary residence.

You may opt for an actual cash value loss settlement policy if your home is paid off or if insuring a rental property that may not be in the best of shape, or is older and might have significantly depreciated in value.

(Learn more about the difference between replacement cost and actual cash value and why your home’s replacement cost is so high.)

Remember to ask if coverage for unattached structures on your property are covered by the policy as well (assuming you would want to rebuild them in the event they were destroyed as a result of an earthquake).

You should also be sure to obtain enough coverage to pay for the cost to replace your home’s contents as well. You may be able to save a few premium dollars by choosing an actual cash value loss settlement for your homes contents if you’re willing to accept a lower payment amount than replacement cost.

What About the Deductible?

Good question. This is typically a matter of personal preference and/or your finances.

Also, depending on which state you live in, you might have to forget about choosing between the standard $500 and $1,000 deductible seen on typical insurance policies.

Your options may come down to somewhere between 10% and 20% of the value of the home. In more earthquake-prone areas, the deductible will be higher.

If your home is destroyed by an earthquake, you will pay less out-of-pocket for repairs with a lower deductible in place.

Conversely, if you have a hefty deductible tied to your policy, you may actually have to pay for all the damages yourself before the earthquake insurance even kicks in.

How Much Does Earthquake Coverage Cost?

Again, this depends on where you live and what deductible you choose. There are slight variances in the premium based on the construction of your home and its age, and its proximity to a fault.

Wood frame homes are actually less expensive to insure than brick, as they tend to stand up a little better to an earthquake (assuming it’s not a massive one). The reverse is true on a typical homeowners insurance policy.

Also, the newer the home, the lower the premium may be. Newer homes are typically more structurally sound and therefore may suffer less damage in a minor (or major) earthquake.

Is Earthquake Insurance Worth It?

This is an endless debate, and one that is largely dependent on your particular situation. As noted, the premium cost can be quite high, espeically when paid on top of your homeowner’s insurance policy.

Then there’s the deductible, which is often so high that you’ll only be compensated if serious damage occurs – but that’s what earthquake insurance protects against right?

Just be sure you know what you’re getting with a policy, and how much coverage is actually afforded for both your structure and its contents.  And always shop around as you would for any other type of insurance!