Earthquakes can rattle the foundation and structures of homes, sometimes toppling entire buildings like a house of cards. It’s a fear on the mind of every homeowner who resides along fault lines across the United States. But is it necessary for homeowners to have earthquake insurance?
While most Americans think Alaska, Hawaii or California are the main states at risk of earthquakes, the United States has about 20,000 earthquakes a year and properties in as many as 42 states are considered at risk, according to the U.S. Geological Survey.
If you’re doing your research on homeowners insurance and are wondering about coverage for earthquakes, here are seven things you need to know.
1. Separate Coverage Is Necessary
Just like flooding, earthquakes aren’t covered in your standard home insurance policy in the United States. Instead, homeowners who want earthquake insurance need to buy it as a separate policy or have it added onto an existing policy through an endorsement.
While flood insurance is doled out via the federal government through the National Flood Insurance Program, earthquake insurance is available through private insurance companies. Policies are readily available via private companies such as State Farm, Allstate, Nationwide and Safeco.
It’s worth noting that if your home is destroyed in an earthquake and you don’t have earthquake insurance coverage, you’re still on the hook to pay for your mortgage on the property. You’re also solely responsible for repairs and rebuilding, paying out of pocket for these expenses.
Homeowners need to assess their risk of facing an earthquake, consider if earthquake insurance is important to have and, if so, ask for a quote.
2. What the Policy Covers (and Does Not Cover)
Earthquake insurance covers damage caused to your home resulting from a sudden trembling or shaking of the earth. The coverage refers to the physical structure of your home and its foundation — like your basic dwelling insurance — think of the four walls, electrical and plumbing, furnaces, water heaters and any built-in appliances.
Just like any other policy, the coverage is based on the replacement value of your home, not the market value. While your home’s retail value may be $500,000 because of its prime location, insurers make their calculations based on the cost of labor and materials needed to rebuild or repair the home.
Earthquakes have sparked subsequent events, such as landslides, avalanches, floods, fires and tsunamis. Earthquake insurance, however, doesn’t include any losses and damage caused by fire, explosion, flood or tidal wave triggered in the aftermath of an earthquake. So these issues would need to be addressed separately. For the most part, your basic homeowners insurance covers fire, and additional flood insurance can be purchased.
Your job is to check your home policies’ details, including any add-ons, to make sure your bases are covered when it comes to additional structures on your property or the risks pertaining to water damage, gas leaks or explosions that may occur in the fallout of an earthquake.
Your car insurance should protect your vehicle from earthquake damage, along with other catastrophes, if you have a comprehensive auto insurance policy. It’s worth double-checking, though.
3. Why This Coverage Shouldn’t Be Overlooked
Despite the U.S. Geological Survey warning that 42 states — nearly 85 percent of the country — are at risk of encountering an earthquake, only 8 percent of homeowners have earthquake insurance, according to 2016 data from the Insurance Information Institute.
The statistics suggest that residents in the West are more likely to have earthquake insurance at 14 percent, followed by the Midwest at 7 percent and the South and Northeast at 6 percent.
4. Factors That Affect Your Premium
How much you’ll pay for your earthquake insurance policy hinges on a handful of factors. For starters, where you live will make a stark difference. Regions across the U.S. are graded on a scale of one to five depending on the likelihood of an earthquake occurring. If your home happens to be situated along a fault line, you’re going to see much higher rates.
The condition of your home — its age, its materials and its make — make a world of difference too. A decades-old brick home, for example, will cost far more to insure than a new build that has state-of-the-art quake mitigation and is up to current building code standards.
And then there’s your deductible, or how much you’re willing to pay in an insurance claim before your insurance coverage kicks in. Paying a higher deductible if and when things go wrong can lower your insurance premiums.
As a general rule, when it comes to earthquake insurance, insurers calculate your deductible as a percentage of your home. Your deductible can range anywhere from 2 percent up to 20 percent of the cost to repair or rebuild your home.
If you’re in a state that’s ranked as a higher risk for earthquakes, insurers typically set the deductible at 10 percent, at least. What does that equate to? If your home was destroyed in an earthquake and it costs $100,000 to repair it, with a deductible of 10 percent, you’d be on the hook for the first $10,000, for example.
5. California Has Its Own Set of Rules
California has endured some of the country’s worst earthquakes, due to the San Andreas Fault that from the Gulf of California along the California coast. Thus earthquake insurance in the state is on a completely different playing field and is entrenched in law.
A lot of this is steeped in history: In January 1994, a magnitude 6.7 earthquake hit Northridge, a neighborhood in Los Angeles on a fault that no one knew existed, causing what’s been estimated as $25.6 billion in insured losses. Only half of that estimated damaged was covered by insurance as the industry grossly underestimated the monumental costs tied to even a moderate earthquake.
This natural disaster was a major blow to insurers’ coffers — the industry had to shell out in claims three times more than it earned in earthquake premiums in the three decades before the Northridge earthquake, according to the Insurance Information Institute. Some insurers had to shutter their doors and if they didn’t, they came uncomfortably close to insolvency.
In the aftermath, insurance companies hiked their rates and deductibles to premiums so high, the cost of earthquake insurance became unrealistic. According to some reports, deductibles skyrocketed from the standard 10 percent to 15 percent, for example. Some restricted or stopped writing earthquake policies, full stop. The state had to step in to fill the void as far too many communities were unprotected.
By 1996, authorities in California introduced the California Earthquake Authority (CEA), which describes itself on its website as a “not-for-profit, publicly managed, privately funded” organization that focuses on providing affordable, basic earthquake insurance to homeowners across California. Private insurance agents sell earthquake policies and act as the liaison with the CEA. In fact, under California law, homeowners insurance companies need to offer earthquake coverage to their policyholders. Ultimately, it’s up to homeowners to shop around with other insurers, purchase it or forgo coverage altogether.
So what does the CEA’s coverage look like? The conventional route offers a 15 percent deductible on your home’s replacement cost, covers the main home (excluding pools, patios and external additions), personal possessions up to $5,000 and costs incurred from living elsewhere to the tune of about $1,500. Keep in mind, coverage can vary depending on your home and your family’s needs.
6. Other States Are Vulnerable, Too
U.S. Geological Survey data suggests that, other than California, 15 states are also at high risk for earthquakes: Alaska, Arkansas, Hawaii, Idaho, Illinois, Kentucky, Missouri, Montana, Nevada, Oregon, South Carolina, Tennessee, Utah, Washington and Wyoming.
The survey also lists eight states that don’t have major hazard levels: Florida, Iowa, Kansas, Louisiana, Michigan, Minnesota, North Dakota and Wisconsin.
You also don’t necessarily need to live along fault lines to experience earthquakes. These days, human activities such as mining, oil production and fracking (the process of creating fractures in deep rock formations) have been tied to earthquake risk.
Urban developments are often built in seismically active areas, and as buildings age and aren’t upgraded to current building code standards, this can leave buildings and communities vulnerable to earthquake damage.
7. How to Calculate Your Risk
There is always plenty of speculation on where and when the next earthquake will strike. Seismologists have warned about the “Big One” — the earthquake of all earthquakes — for decades. The U.S. Geological Survey suggests that there’s a 70 percent probability that a 6.7magnitude or higher earthquake is slated to hit the San Francisco Bay area at some point in the next three decades. Only 14 percent of San Francisco residents purchased earthquake insurance in 2017 though, according to the California Department of Insurance.
The Department of Insurance in Missouri, which is the third largest market for earthquake insurance across the U.S., warned that fewer homeowners were taking out policies and the market had “significantly contracted” in the past 20 years. Insurers, however, were creating strict underwriting standards, making some homes ineligible for coverage, while other insurers stopped issuing policies altogether.
Carmen Chai is an award-winning Canadian journalist who has lived and reported from major cities such as Vancouver, Toronto, London and Paris. She started her career in journalism writing about crime and local news for the Toronto Star, Canada’s largest daily newspaper. After that, she covered a variety of subjects from federal politics in Ottawa to the 2015 attacks in Paris. She has also worked as senior health reporter for Global News and as now the Parliamentary Affairs Manager for UK Research and Innovation. For NewHomeSource, Carmen covers a variety of topics, including insurance, mortgages, and more.