Earthquake Insurance

[SnowballCamper]

I really don't want it, but DW asks about it every several months. I tried to tell her that the camper with 4x4 pickup truck is our earthquake insurance... but you can guess how far that gets me.

My hang up is the 15% deductible ($75,000 on a $500,000 house). The home is relatively new (3 years old), and very high quality construction. It was engineered to withstand some level of earthquake, but probably not the "Big One" that will eventually happen on the west coast where we live (WA). The one year premium we were quoted was $780 back in 2017.

The other issue is the game about earthquake damage vs. water damage where the insurer refuses to pay water damage because earthquakes don't cause water damage or some such thing. We are less than a mile from the puget sound.

I think we'd have to get a pretty direct hit to be a total loss.

The house is paid for, and there are no plans or yet a need to monetize the home's value for income.

So would you get the insurance or not? And what else should I be considering, that I might not be?

 

[Another Reader]

Who is the provider? How are they backed? Is there a reinsurance market for the product?

I have skipped the CEA insurance here in California. Early on, there was no money behind it. As the pile has grown, so has the risk - more buildings and more built in harm's way. I'm not confident claims will pay out 100 percent if the earthquake causes widespread severe damage. I'm up in the hills, supposedly on bedrock. Unless the earthquake epicenter is near me or the waves interact to increase the amplitude and damage at my property, I don't expect the structures to be total losses. And the insurance is expensive. The high deductible, the low probability of complete destruction, plus the anticipated reduced payout leads me to conclude the insurance is not worthwhile in my situation.

 

[HarveyS]

Yes, I would buy it. I have earthquake insurance in IL.

 

[Walt34]

When we bought this house we did get earthquake insurance, simply because it was mentioned, I was thinking "this is one more thing they can't weasel out of paying a claim on" and this being northern West Virginia, not exactly earthquake central, the cost was dirt cheap, adding barely two digits to the policy.

Although a few years ago there was an earthquake in Virginia that could (barely) be felt here. I didn't notice it but some other people did.

 

[tb001]

Wow, I can't imagine having EQ insurance outside of the west coast! We have it now. The cost was <$1k/yr for a large amount of coverage. It's a significant % of our net worth, so it made sense to us. In the Bay Area, where the cost was significantly higher and we had less in the house, we did not. But I stressed about it all the time.

 

[calmloki]

Who is the provider? How are they backed? Is there a reinsurance market for the product?

I have skipped the CEA insurance here in California. Early on, there was no money behind it. As the pile has grown, so has the risk - more buildings and more built in harm's way. I'm not confident claims will pay out 100 percent if the earthquake causes widespread severe damage. I'm up in the hills, supposedly on bedrock. Unless the earthquake epicenter is near me or the waves interact to increase the amplitude and damage at my property, I don't expect the structures to be total losses. And the insurance is expensive. The high deductible, the low probability of complete destruction, plus the anticipated reduced payout leads me to conclude the insurance is not worthwhile in my situation.

We just got multiple letters from USAA urging us to accept earthquake insurance. We're going to pass, even though La Quinta is neatly tucked in between the San Andreas and San Jacinto fault lines. We would be paying $390 for insurance on a $300,000 policy with a 15% deductible - the house would need to sustain $45,000 in damage before the insurance paid it's first dollar on a $45,001 bill. We paid a bit more than three times that much when we bought it at auction in 2010. Long as we aren't crushed inside it it's destruction would have very very little effect on our lives and finances.

 

[Teacher Terry]

We live in Nevada and don’t know anyone that has it due to price and high deductible. I am sure it’s cheap in IL.

 

[RobbieB]

I buy it every year with a big deductible, it's cheap.

 

[Another Reader]

After looking at the cost to rebuild in the areas hit by wildfires in the last few years, I upped my fire insurance by a substantial amount. This is the third time I have done that in the last ten years, as rebuilding costs have skyrocketed. I can no longer get guaranteed replacement cost. The maximum is 20 percent over the insured amount.

My house is in the hills, between two narrow canyons. If a fire starts in either canyon, depending on the direction of the wind, I think we could have a Santa Rosa type situation in which a wildfire spreads rapidly. I all too well remember the Berkeley-Oakland Hills fire of 1991, which overcame people as they tried to escape. If the winds had not died down, many more structures would have burned. My parents' house was about two blocks away from the the edge of the fire. Luckily, their property escaped damage.

These fires are devastating, but they are local, and insurance can and will cover losses. I am comfortable buying more insurance to cover my loss. A large, damaging earthquake will do tens of billions in damage, maybe more. I'm not convinced that the damage will be covered by the insurance.

 

[SnowballCamper]

We just got multiple letters from USAA urging us to accept earthquake insurance. We're going to pass, even though La Quinta is neatly tucked in between the San Andreas and San Jacinto fault lines. We would be paying $390 for insurance on a $300,000 policy with a 15% deductible - the house would need to sustain $45,000 in damage before the insurance paid it's first dollar on a $45,001 bill. We paid a bit more than three times that much when we bought it at auction in 2010. Long as we aren't crushed inside it it's destruction would have very very little effect on our lives and finances.

Hmmm, maybe reduce my coverage amount, so the deductible isn't as bad. This could offset my assessment that the probability of a total loss is very small. Then my premium is less, and coverage kicks in at lower damages.

Thanks to all the other commenters also.

As for the reinsurance problem... I don't think DW is interested in that discussion, and I suspect there will be loud calls for government support in a large event.

 

[Another Reader]

We just got multiple letters from USAA urging us to accept earthquake insurance. We're going to pass, even though La Quinta is neatly tucked in between the San Andreas and San Jacinto fault lines. We would be paying $390 for insurance on a $300,000 policy with a 15% deductible - the house would need to sustain $45,000 in damage before the insurance paid it's first dollar on a $45,001 bill. We paid a bit more than three times that much when we bought it at auction in 2010. Long as we aren't crushed inside it it's destruction would have very very little effect on our lives and finances.

IIRC, my original earthquake offer with the 15 percent deductible was $1.8k. House would have been insured based on a replacement cost of $750k. Good luck getting this house rebuilt for that with current rebuilding costs. I am paying $1.2k for the increased homeowner's insurance of $1.0M, so probably over $2k for earthquake with the increase in coverage.

 

[Another Reader]

Hmmm, maybe reduce my coverage amount, so the deductible isn't as bad. This could offset my assessment that the probability of a total loss is very small. Then my premium is less, and coverage kicks in at lower damages.

Thanks to all the other commenters also.

As for the reinsurance problem... I don't think DW is interested in that discussion, and I suspect there will be loud calls for government support in a large event.

My understanding is the earthquake insurance is tied to your homeowner's insurance cost estimate under the CEA. No idea how things work in Washington, best to ask your insurance agent.

 

[Souschef]

i also do not have EQ insurance because of the high deductible.
Sad story. One of my neighbors sold his condo in my development because we did not have earthquake insurance. He bought a condo near his brother that did have insurance.
When the Northridge quake hit, and we were 3 miles from the epicenter, his old unit did not sustain any damage. His new place was substantially damaged, and it took 2 years for the insurance to rebuild it.

 

[cathy63]

We have it through our HOA policy. It costs $1476/yr with a 20% deductible for four units/two buildings.

 

[Souschef]

We have it through our HOA policy. It costs $1476/yr with a 20% deductible for four units/two buildings.

The problem we ran into is that each building is subject to the deductible, not each unit!
For example, if each unit was worth 100K, you would have to have 40 K in damage before they would pay a cent.
In our case, our condo had clumps of buildings with 4 to 7 units.

 

[RobbieB]

It's catastrophic loss insurance. Sorta like max out of pocket medical.

Mine is like $200/yr. But I'm out in the central valley and not close to big faults.

 

[Scuba]

Most people we know in CA don’t carry EQ insurance due to high cost and deductibles plus low probability of a loss that big. Our HOA does carry it so we have it .

 

[RetireRay]

You need to find out what your house is built on top of. Is it bedrock or is it land fill? That can make a huge difference in a major earthquake.

 

[VanWinkle]

In California, I may buy it. In Illinois, I do not. I am just playing the odds and also would think there will be plenty of cheap government assistance if an area is clobbered by an earthquake. I have been wrong before

 

[Chuckanut]

For most of us our house is our most valuable assets. Many people are thinking of selling the big house and buying a smaller place to help fund their retirement. Assuming they live in an active fault area, why would they put that at risk by not having earthquake insurance?

 

[SnowballCamper]

Chuckanut, they (me) assess the likelihood that their house will be destroyed to be essentially zero. In Washington state the population centers are on the puget sound (active fault area). According to the state insurance commission only $157,629,000 of Earthquake insurance is in effect, while the general homeowner insurance is $1,827,629,000. So about 8.5% of home value is insured against earthquake damage in Washington state.

But I know I'd regret not having insurance if the big one came... it comes down to, "Is the premium worth it to offset that possible regret?" And given that the deductibles offered are generally 15-20% of the insured value, that doesn't help me to think it's worth it. It would be worth it if I planned on deriving retirement income from the house, but that isn't the case for me.

 

[SumDay]

It's a rider on my State Farm policy. Adds about $25 a year to my premium. We live near a major fault line...

 

[Spock]

location location location

Kenneth Murphy, who directs FEMA’s Region X, the division responsible for Oregon, Washington, Idaho, and Alaska, says, “Our operating assumption is that everything west of Interstate 5 will be toast.”

https://www.newyorker.com/magazine/2015/07/20/the-really-big-one

 

[Another Reader]

For most of us our house is our most valuable assets. Many people are thinking of selling the big house and buying a smaller place to help fund their retirement. Assuming they live in an active fault area, why would they put that at risk by not having earthquake insurance?

Because what the insurance will pay is not much under likely scenarios for a lot of people. If you live in a liquefaction zone in an area that is close to a fault and you anticipate a large amount of damage, it would definitely make sense to buy the product.

I have insured my house for an amount I think is likely to cover full replacement cost in a wildfire. My house is insured for $1MM, which means $1.2MM with the 20 percent overage allowed. Earthquake insurance is based on the HO coverage. 15 percent of $1MM, or $150,000, is the required deductible under CEA. The house is near a small branch fault, but not near a major fault. I am up in the hills supposedly on bedrock, and the house is bolted to the perimeter foundation. The house was almost new at the time of the Loma Prieta earthquake in 1989. I had one small hairline crack in a piece of sheet rock from that earthquake.

In a catastrophic earthquake, I would expect some significant damage, The brick fireplaces could collapse. Some walls could move and the stucco and sheet rock would likely crack. The foundation system includes piers as well as perimeter concrete, and those could shift. Mechanical systems could be damaged.

The question is how likely am I to experience damage that would cost over $150,000 to repair? If I did, the event would likely be catastrophic, and would there be enough insurance to pay all claims in a catastrophic event? If there is not enough in the pool to pay all claims, how low on the priority list would my claim be if hundreds of thousands of buildings suffer far worse damage?

After weighing all these considerations, my conclusion was that I might not have damages above the insurance threshold, and if I did, I would probably pay a lot in premiums to avoid a relatively small loss. If my loss were substantially above the threshold, the total insured losses would likely exceed the pool of money in the insurance fund, and I might not receive the compensation promised anyway. Therefore, I opted not to purchase the insurance.

If someone can make a good argument for the insurance in my situation, I will call the agent and sign up!

 

[bmcgonig]

I have it. Living in the Bay Area I felt that I didn't want to do without it. It's about $2400/yr and annoys me every time I pay the bill. I guess I've paid around 50k now over the years. I'd have to have over 250k in damage to break even. Every time I think of not renewing I'm convinced that the big one will hit the next month... And I'm not even convinced there would be enough money to cover all the damage area wide. But I'd rather get most or half of my house value back than have nothing after a quake.