If you live in an earthquake zone, where you’ve felt the tremors of small quakes, or been through a big earthquake, you know that few things can be more frightening. Earthquakes have caused damage in all 50 states and approximately 90 percent of all Americans live in seismically-active areas. While the government may provide disaster relief to individuals following an earthquake, it will typically come in the form of a low-interest loan to help repair or replace possessions, and is not designed to protect homeowners from loss due to earthquakes.
It’s important to know that standard homeowners or renters insurance policies do not cover losses due to “shifting earth” situations – including earthquakes, landslides, mudslides, mudflows, sinkholes or any movement that involves ground shifting, rising or sinking. But for those living in earthquake-prone areas, or people concerned about the possibility of an earthquake, earthquake insurance is available in almost every state.
Homeowners, renters and condominium owners living across the U.S. can obtain earthquake insurance from private insurance companies. Earthquake insurance can provide some financial protection in the event that your personal property is damaged or destroyed due to earthquake.
What Does Earthquake Insurance Cover?
This is very important to clarify. Earthquake insurance policies typically cover major property damage or loss due to earth movement – sinking, rising or shifting. So earthquake insurance policies typically pay to make repairs to, or replace, possessions damaged as a result of:
Earthquake insurance policies typically split out a homeowner’s loss into two categories – structure (the home) and contents (possessions).
What Does Earthquake Insurance Cost?
The cost for earthquake insurance varies widely. There are two types of costs you will typically have to pay to obtain, and keep, earthquake insurance coverage – the “premium” and the “deductible.”
Premium: The policy premium is the amount that you will be required to pay on a regular basis, typically annually, to maintain your earthquake insurance coverage. Premium amounts vary widely–as little as $500 to in excess of $3,000. The amount of your premium will depend on several factors including:
- Type and age of your house
- Any “earthquake-proofing” improvements made by the builder or you as the homeowner
- How close you are to fault lines
- What type of soil is your house built on
Deductible: Most earthquake insurance policies carry a deductible, meaning you will have to pay a certain amount first for repair or replacement of your property (home and or possessions) before the insurance company will pay for any claims you make. Earthquake insurance deductibles are typically a percentage of the replacement value of the home – meaning how much it would cost to replace your home in the current economy.
Deductibles in earthquake prone areas are typically a minimum of 10 percent of the home’s replacement value. So if it would cost $200,000 to replace your home and your earthquake insurance policy has a 10 percent deductible, you would have to pay the first $10,000 in repair or replacement costs.
It’s important to know how your insurance company applies the deductible because most companies split a homeowner’s property into two separate categories – structure (the physical home) and contents (possessions). If your company does, then you will have to pay the deductible for EACH category.
Earthquake Insurance for California Residents
In addition to obtaining standard earthquake insurance through private insurance companies, California residents also have the option of obtaining California Earthquake Authority (CEA) sponsored earthquake insurance. The CEA is a state-sponsored public-private partnership to provide earthquake insurance to California homeowners, renters and condominium owners.
CEA earthquake insurance can be purchased through licensed insurance companies who are members of the CEA. A standard CEA insurance policy carries a 15 percent deductible. The basic CEA policy covers damage to the home, for personal property up to $5,000 and up to $1,500 in “loss of use” coverage, meaning that it will pay up to $1,500 for certain expenses that you incur if you have to live somewhere else because your home is considered uninhabitable and/or is being repaired, including such expenses as:
- Temporary rental home, apartment, or hotel room
- Restaurant meals
- Telephone or utility installation in a temporary residence
- Relocation and storage
- Furniture rental
Only structural damage counts toward meeting the 15 percent deductible. So if you hold CEA insurance BUT the damage to your home’s physical structure is not at least 15% of its insured value under the earthquake policy, the CEA will not pay any claimed loss for structure or contents. You are still eligible for the loss-of-use expense reimbursement up to $1,500 if you have that coverage and your home is uninhabitable for a period of time following the quake.
An Example of How the CEA Deductible Works
Let’s say that you have a CEA earthquake insurance policy that includes $200,000 coverage on your home, (the cost to replace just the structure itself); $5,000 coverage on its contents (furniture, appliance, etc.) and $1,500 loss of use coverage. The deductible for this policy is 15% of the home’s insured value of $200,000, which means you will have to pay out the first $30,000 in expenses before the policy would pay out on a claim. Your house and contents are damaged as the result of an earthquake and made uninhabitable, and your family has to stay in a motel for several days and eat in restaurants.
- SCENARIO A: If the damage to the structure of your home IS LESS THAN $30,000 (15% of the insured value of $200,000), you will have to pay all the expenses associated with damage or loss and will not be able to file a claim to receive money from the CEA for structural damage repair or replacement. If you are temporarily forced out of your house due to the earthquake, the CEA will still pay up to $1,500 under the loss of use coverage provision for your living expenses.
- SCENARIO B: If the damage to the structure of your house IS MORE THAN $30,000 (15% of $200,000), you can file a claim and will receive an insurance policy payout to help with repairs and/or replacement costs.
If you hold a CEA earthquake insurance policy and you want additional coverage beyond the basic policy you can choose a CEA policy with “add-ons” including:
- a 10 percent deductible (meaning you will have to pay 5 percent less out-of-pocket for initial costs)
- coverage for other structures (such as extensions to the home)
- coverage for up to $25,000 for personal property (up from $5,000 under the basic policy), and
- $10,000 in coverage for “loss of use” expenses (up from $1,500 under the basic policy).
However, be aware that the premium (annual payment to maintain coverage) for this type of policy will be more than with a 15 percent deductible policy.
Insurance companies selling homeowners’ insurance in California are required to offer earthquake insurance in writing to all prospective customers. The earthquake insurance policy description must describe coverage amounts, the deductible and the policy premium. You have 30 days from the time you receive the quote to respond. If you don’t respond, the insurance firm will assume that you have rejected the offer to purchase earthquake insurance in addition to your homeowners’ insurance. Be sure you look for that description and ask your agent if you don’t see it when reviewing your policy.
When considering whether to purchase earthquake insurance, consider asking an agent the following questions:
- If you are a California homeowner, ask if the insurance company participates in the CEA program or if the policy they offer is not affiliated with the CEA. Ask how their policy compares with a CEA policy.
- If you already have a homeowners policy, ask the company if it provides earthquake insurance and if it offers a discount for policy holders who hold both homeowners’ and earthquake insurance policies through the company.
- What is my home’s risk for earthquake damage? Even if you do not think you live in an earthquake-prone area such as the California coastline, you may still have a significant risk for damage due to earth-shifting incidents such as landslides in steep rocky terrain. Ask your agent, or potential agent, how he/she is able to determine your home’s risk.
- What, specifically, is covered under this earthquake insurance policy? For example, what is the maximum coverage to repair or rebuild my home if it is damaged or destroyed in a quake? Does the policy cover possessions in my house? Does the policy cover how much I originally paid for the items or what they are currently worth? Does the policy cover how much it cost to build my house or what it would cost to replace it?
- What is the time limit for filing a claim with this policy? It can be difficult to detect damage after an earthquake and sometimes earthquake damage may not be apparent until much later, so you will want to know how long you have until the deadline for filing a claim.
- What is the premium (cost) for this policy?
- What will my deductible be with this policy (meaning how much will you have to pay before your insurance policy will pay out)? How is the deductible determined (meaning is it a percentage of your home’s total insured value?) What types of expenses qualify toward meeting my deductible?
- Is there a waiting period between the time I purchase the policy and when it takes effect? Or how long do I have to wait after an earthquake to purchase earthquake insurance?
- What if I fail to make my payment on time? Is there a penalty? Will my policy be canceled?
- Are there any additional expenses for the policy in addition to the premium?
- What levels of coverage can I choose from?
- How do I file a claim in the event that my home is damaged or destroyed due to an earthquake?
- Will the premium amount automatically go up, or could my policy be cancelled, if I make a claim?
- How quickly does your company settle earthquake-related insurance claims?
- Are discounts available if I do anything to “earthquake-proof” my home and possessions?
- How often do I need to renew my policy to maintain coverage and what is the process to renew?
- Are there any conditions under which my home’s risk could increase or decrease? How would it affect my eligibility and premium?
- What earth-moving conditions that could cause damage to my home qualify under this policy?
- How does this earthquake insurance policy work in conjunction with my homeowners’ policy? For example, are there types of damage or loss that would not be covered under the earthquake insurance policy that would be covered under my homeowners’ policy and vice versa?
- If I am a renter and looking for an earthquake insurance policy to provide financial protection for my possessions, what kind of information do I need to get in order to qualify for a policy – i.e. do I need to get my possessions appraised? How does being a renter and not a homeowner affect my premium and deductible? If I become a homeowner do I need to apply for a new policy?
- If I have to make a claim against the policy, can you tell me what will happen to the amount of my premium payments after that—will they increase?
Premiums for earthquake coverage vary widely. If you have looked at the risk and believe it would be smart for you to purchase earthquake insurance and you want to, but feel like you’re not in a position to financially afford it, consider a few options:
- ask your agent if you qualify for any discounts
- review your budget and see if there are any places you could cut back to build up enough savings to pay the premium
- plan ahead and decide in advance that you will set any unexpected bonuses, gifts and even tax return money to pay the premium
Finally, if you choose to purchase earthquake insurance, remember to keep a copy of the policy in a safe, waterproof and fireproof container and keep your insurance agent’s contact information in a convenient place in the event that you need to make a claim immediately following an earthquake. It’s also a good idea to consider setting up a household and personal property inventory book to keep a complete record of your belongings.